PRI_10Q_6.30.2014

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 June 30, 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 July 31, 2014
Common Stock, $0.01 Par Value
 
54,298,847 shares


TABLE OF CONTENTS
 
 
Page
 
 
 
 



i
Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

PRIMERICA, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
 
June 30,
2014
 
December 31,
2013
 
(Unaudited)
 
 
 
(In thousands)
Assets
 
 
 
Investments:
 
 
 
Fixed-maturity securities available for sale, at fair value (amortized cost: $1,676,785 in 2014 and $1,663,022 in 2013)
$
1,804,163

 
$
1,755,712

Equity securities available for sale, at fair value (cost: $39,353 in 2014 and $32,592 in 2013)
50,436

 
39,894

Trading securities, at fair value (cost: $9,250 in 2014 and $13,025 in 2013)
9,236

 
12,991

Policy loans
28,378

 
26,806

Total investments
1,892,213

 
1,835,403

Cash and cash equivalents
150,621

 
149,189

Accrued investment income
17,874

 
18,127

Due from reinsurers
4,077,734

 
4,055,054

Deferred policy acquisition costs, net
1,293,974

 
1,208,466

Premiums and other receivables
175,680

 
175,789

Intangible assets, net (accumulated amortization: $67,473 in 2014 and $65,131 in 2013)
66,521

 
68,863

Income taxes
38,676

 
32,450

Other assets
298,597

 
282,780

Separate account assets
2,581,659

 
2,503,829

Total assets
$
10,593,549

 
$
10,329,950

Liabilities and Stockholders’ Equity
 
 
 
Liabilities:
 
 
 
Future policy benefits
$
5,180,013

 
$
5,063,103

Unearned premiums
1,236

 
1,802

Policy claims and other benefits payable
238,598

 
253,304

Other policyholders’ funds
336,902

 
337,977

Notes payable
374,506

 
374,481

Income taxes
137,797

 
105,885

Other liabilities
346,538

 
377,690

Payable under securities lending
93,569

 
89,852

Separate account liabilities
2,581,659

 
2,503,829

Commitments and contingent liabilities (see Commitments and Contingent Liabilities note)
 
 
 
Total liabilities
9,290,818

 
9,107,923

Stockholders’ equity:
 
 
 
Common stock ($0.01 par value; authorized 500,000 in 2014 and 2013; and issued 54,194 shares in 2014 and 54,834 shares in 2013)
542

 
548

Paid-in capital
447,949

 
472,633

Retained earnings
721,788

 
640,840

Accumulated other comprehensive income (loss), net of income tax:
 
 
 
Unrealized foreign currency translation gains (losses)
41,749

 
41,974

Net unrealized investment gains (losses):
 
 
 
Net unrealized investment gains not other-than-temporarily impaired
92,050

 
67,379

Net unrealized investment losses other-than-temporarily impaired
(1,347
)
 
(1,347
)
Total stockholders’ equity
1,302,731

 
1,222,027

Total liabilities and stockholders’ equity
$
10,593,549

 
$
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 June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands, except per-share amounts)
Revenues:
 
 
 
 
 
 
 
Direct premiums
$
576,740

 
$
568,391

 
$
1,144,945

 
$
1,129,295

Ceded premiums
(410,546
)
 
(417,450
)
 
(813,261
)
 
(828,054
)
Net premiums
166,194

 
150,941

 
331,684

 
301,241

Commissions and fees
132,039

 
117,182

 
258,970

 
229,455

Net investment income
21,681

 
21,027

 
43,280

 
44,243

Realized investment gains (losses), including other-than-temporary impairment losses
831

 
3,468

 
1,094

 
5,754

Other, net
10,385

 
10,872

 
20,430

 
21,247

Total revenues
331,130

 
303,490

 
655,458

 
601,940

Benefits and expenses:
 
 
 
 
 
 
 
Benefits and claims
72,412

 
64,322

 
147,604

 
133,138

Amortization of deferred policy acquisition costs
32,696

 
30,112

 
67,890

 
61,364

Sales commissions
67,364

 
57,638

 
132,485

 
112,686

Insurance expenses
28,192

 
26,513

 
56,694

 
52,026

Insurance commissions
3,881

 
4,132

 
7,964

 
8,354

Interest expense
8,552

 
8,793

 
17,159

 
17,588

Other operating expenses
42,293

 
45,030

 
83,089

 
90,694

Total benefits and expenses
255,390

 
236,540

 
512,885

 
475,850

Income from continuing operations before income taxes
75,740

 
66,950

 
142,573

 
126,090

Income taxes
26,469

 
23,782

 
49,816

 
44,787

Income from continuing operations
49,271

 
43,168

 
92,757

 
81,303

Income from discontinued operations, net of income taxes
—

 
322

 
1,595

 
1,032

Net income
$
49,271

 
$
43,490

 
$
94,352

 
$
82,335

 
 
 
 
 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
Continuing operations
$
0.89

 
$
0.75

 
$
1.66

 
$
1.41

Discontinued operations
—

 
0.01

 
0.03

 
0.02

Basic earnings per share
$
0.89

 
$
0.76

 
$
1.69

 
$
1.43

 
 
 
 
 
 
 
 
Diluted earnings per share:
 
 
 
 
 
 
 
Continuing operations
$
0.89

 
$
0.73

 
$
1.66

 
$
1.37

Discontinued operations
—

 
0.01

 
0.03

 
0.02

Diluted earnings per share
$
0.89

 
$
0.74

 
$
1.69

 
$
1.39

 
 
 
 
 
 
 
 
Weighted-average shares used in computing earnings per share:
 
 
 
 
 
 
 
Basic
54,927

 
56,511

 
55,075

 
56,553

Diluted
54,950

 
57,849

 
55,097

 
58,127

 
 
 
 
 
 
 
 
Supplemental disclosures:
 
 
 
 
 
 
 
Total impairment losses
$
(221
)
 
$
(5
)
 
$
(370
)
 
$
(91
)
Impairment losses recognized in other comprehensive income before income taxes
—

 
4

 
—

 
19

Net impairment losses recognized in earnings
(221
)
 
(1
)
 
(370
)
 
(72
)
Other net realized investment gains (losses)
1,052

 
3,469

 
1,464

 
5,826

Realized investment gains (losses), including other-than-temporary impairment losses
$
831

 
$
3,468

 
$
1,094

 
$
5,754

Dividends declared per share
$
0.12

 
$
0.11

 
$
0.24

 
$
0.22

See accompanying notes to condensed consolidated financial statements.


2
Table of Contents

PRIMERICA, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss) - Unaudited
 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Net income
$
49,271

 
$
43,490

 
$
94,352

 
$
82,335

Other comprehensive income (loss) before income taxes:
 
 
 
 
 
 
 
Unrealized investment gains (losses):
 
 
 
 
 
 
 
Change in unrealized holding gains (losses) on investment securities
20,792

 
(55,000
)
 
38,722

 
(57,500
)
Reclassification adjustment for realized investment (gains) losses included in net income
(578
)
 
(2,573
)
 
(766
)
 
(4,232
)
Foreign currency translation adjustments:
 
 
 
 
 
 
 
Change in unrealized foreign currency translation gains (losses)
8,444

 
(8,305
)
 
(233
)
 
(12,493
)
Total other comprehensive income (loss) before income taxes
28,658

 
(65,878
)
 
37,723

 
(74,225
)
Income tax expense (benefit) related to items of other comprehensive income (loss)
7,173

 
(20,256
)
 
13,277

 
(21,770
)
Other comprehensive income (loss), net of income taxes
21,485

 
(45,622
)
 
24,446

 
(52,455
)
Total comprehensive income (loss)
$
70,756

 
$
(2,132
)
 
$
118,798

 
$
29,880

See accompanying notes to condensed consolidated financial statements.


3
Table of Contents

PRIMERICA, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ Equity - Unaudited
 
Six months ended June 30,
 
2014
 
2013
 
(In thousands)
Common stock:
 
 
 
Balance, beginning of period
$
548

 
$
564

Repurchases of common stock
(9
)
 
(29
)
Net issuance of common stock
3

 
10

Balance, end of period
542

 
545

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

 
602,269

Share-based compensation
17,068

 
23,234

Net issuance of common stock
(3
)
 
(10
)
Repurchases of common stock
(41,150
)
 
(101,044
)
Repurchases of warrants
—

 
(68,399
)
Adjustments to paid-in capital, other
(599
)
 
—

Balance, end of period
447,949

 
456,050

Retained earnings:
 
 
 
Balance, beginning of period
640,840

 
503,173

Net income
94,352

 
82,335

Dividends
(13,404
)
 
(12,794
)
Balance, end of period
721,788

 
572,714

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 $(8) in 2014 and $(164) in 2013
(225
)
 
(12,329
)
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 $13,285 in 2014 and $(21,598) in 2013
24,671

 
(40,114
)
Change in net unrealized investment losses other-than-temporarily impaired, net of income tax expense (benefit) of $0 in 2014 and $(8) in 2013
—

 
(12
)
Balance, end of period
132,452

 
116,955

Total stockholders’ equity
$
1,302,731

 
$
1,146,264

See accompanying notes to condensed consolidated financial statements.


4
Table of Contents

PRIMERICA, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows - Unaudited
 
Six months ended June 30,
 
2014
 
2013
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income
$
94,352

 
$
82,335

Adjustments to reconcile net income to cash provided by (used in) operating activities:
 
 
 
Change in future policy benefits and other policy liabilities
107,236

 
97,129

Deferral of policy acquisition costs
(146,313
)
 
(131,042
)
Amortization of deferred policy acquisition costs
67,890

 
61,364

Change in income taxes
14,496

 
(8,079
)
Realized investment (gains) losses, including other-than-temporary impairments
(1,094
)
 
(5,754
)
Gain from sale of business, net
(1,595
)
 
—

Accretion and amortization of investments
(1,009
)
 
(1,791
)
Depreciation and amortization
5,717

 
5,339

Change in due from reinsurers
(23,511
)
 
(8,697
)
Change in premiums and other receivables
(8,873
)
 
(13,284
)
Trading securities sold, matured, or called (acquired), net
3,721

 
(4,613
)
Share-based compensation
5,836

 
7,952

Change in other operating assets and liabilities, net
(46,399
)
 
(28,355
)
Net cash provided by (used in) operating activities
70,454

 
52,504

Cash flows from investing activities:
 
 
 
Available-for-sale investments sold, matured or called:
 
 
 
Fixed-maturity securities - sold
46,163

 
78,755

Fixed-maturity securities - matured or called
163,038

 
141,854

Equity securities
188

 
2,998

Available-for-sale investments acquired:
 
 
 
Fixed-maturity securities
(220,214
)
 
(78,054
)
Equity securities
(5,403
)
 
(93
)
Purchases of property and equipment and other investing activities, net
(4,177
)
 
(15,916
)
Proceeds from sale of business
3,000

 
—

Cash collateral received (returned) on loaned securities, net
3,717

 
(53,655
)
Sales (purchases) of short-term investments using securities lending collateral, net
(3,717
)
 
53,655

Net cash provided by (used in) investing activities
(17,405
)
 
129,544

Cash flows from financing activities:
 
 
 
Dividends paid
(13,404
)
 
(12,794
)
Common stock repurchased
(41,159
)
 
(101,073
)
Warrants repurchased
—

 
(68,399
)
Excess tax benefits on share-based compensation
3,792

 
7,179

Payments of deferred financing costs
(403
)
 
—

Net cash provided by (used in) financing activities
(51,174
)
 
(175,087
)
Effect of foreign exchange rate changes on cash
(443
)
 
(1,090
)
Change in cash and cash equivalents
1,432

 
5,871

Cash and cash equivalents, beginning of period
149,189

 
112,216

Cash and cash equivalents, end of period
$
150,621

 
$
118,087

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.
In June 2014, we established Vidalia Re, Inc. ("Vidalia Re") as a special purpose financial captive insurance company and wholly owned subsidiary of Primerica Life. Vidalia Re and Primerica Life entered into a coinsurance agreement whereby Primerica Life ceded to Vidalia Re certain level premium term life insurance policies (the "Vidalia Re Coinsurance Agreement") effective July 31, 2014.
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 June 30, 2014 and December 31, 2013, the statements of income and comprehensive income (loss) for the three and six months ended June 30, 2014 and 2013, and the statements of stockholders' equity and cash flows for the six months ended June 30, 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"), liabilities for future policy benefits and unpaid policy claims, and income taxes. 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.


6
Table of Contents

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 unaudited condensed consolidated financial statements dated as of June 30, 2014.
Significant Accounting Policies. All significant accounting policies remain unchanged from the 2013 Annual Report.
New Accounting Principles. In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 clarifies the principles for recognizing revenue by establishing the core principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue that is recognized. Insurance contracts are specifically excluded from the scope of ASU 2014-09 and therefore revenue from our insurance product lines will not be affected by the new standard. The amendments in ASU 2014-09 are effective retrospectively for the Company beginning in fiscal year 2017. Early adoption is not permitted. While we are still in the process of evaluating the guidance in ASU 2014-09, we do not expect it will have a material impact on our consolidated financial statements.
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 six months ended June 30, 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 June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Total revenues from discontinued operations
$
—

 
$
8,817

 
$
—

 
$
18,812

Income from discontinued operations before income taxes
—

 
496

 
2,454

 
1,588

Provision for income taxes
—

 
174

 
859

 
556

Income from discontinued operations, net of income taxes
$
—

 
$
322

 
$
1,595

 
$
1,032

 
June 30, 2014
 
December 31, 2013
 
(In thousands)
Premiums and other receivables
$
—

 
$
6,439

Future policy benefits
—

 
5,047

Other liabilities
—

 
1,197




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Table of Contents

(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:
 
June 30,
2014
 
December 31,
2013
 
(In thousands)
Assets:
 
 
 
Term life insurance segment
$
6,984,354

 
$
6,783,194

Investment and savings products segment
2,793,243

 
2,699,000

Corporate and other distributed products segment
815,952

 
847,756

Total assets
$
10,593,549

 
$
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 $212.2 million and $195.8 million as of June 30, 2014 and December 31, 2013, respectively.
Results of continuing operations by segment were as follows:
 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Term life insurance segment
$
184,366

 
$
169,182

 
$
367,346

 
$
337,016

Investment and savings products segment
128,148

 
113,361

 
251,418

 
222,083

Corporate and other distributed products segment
18,616

 
20,947

 
36,694

 
42,841

Total revenues
$
331,130

 
$
303,490

 
$
655,458

 
$
601,940

Income (loss) from continuing operations before income taxes:
 
 
 
 
 
 
 
Term life insurance segment
$
55,070

 
$
51,897

 
$
102,274

 
$
97,023

Investment and savings products segment
36,048

 
27,488

 
70,075

 
53,841

Corporate and other distributed products segment
(15,378
)
 
(12,435
)
 
(29,776
)
 
(24,774
)
Total income from continuing operations before income taxes
$
75,740

 
$
66,950

 
$
142,573

 
$
126,090

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.


8
Table of Contents

Long-lived assets — primarily tangible assets reported in Other assets in our unaudited condensed consolidated balance sheets — and results of continuing operations by country were as follows:
 
June 30,
2014
 
December 31,
2013
 
(In thousands)
Long-lived assets by country:
 
 
 
United States
$
26,148

 
$
24,413

Canada
654

 
637

Total long-lived assets
$
26,802

 
$
25,050

 
 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Revenues by country:
 
 
 
 
 
 
 
United States
$
270,923

 
$
246,650

 
$
533,127

 
$
486,023

Canada
60,207

 
56,840

 
122,331

 
115,917

Total revenues
$
331,130

 
$
303,490

 
$
655,458

 
$
601,940

Income from continuing operations before income taxes by country:
 
 
 
 
 
 
 
United States
$
56,619

 
$
49,565

 
$
105,532

 
$
92,604

Canada
19,121

 
17,385

 
37,041

 
33,486

Total income from continuing operations before income taxes
$
75,740

 
$
66,950

 
$
142,573

 
$
126,090


(4) Investments
The period-end cost or amortized cost, gross unrealized gains and losses, and fair value of available-for-sale fixed-maturity and equity securities follow:
 
June 30, 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
$
9,733

 
$
557

 
$
(53
)
 
$
10,237

Foreign government
119,450

 
9,627

 
(1,133
)
 
127,944

States and political subdivisions
35,196

 
2,492

 
(198
)
 
37,490

Corporates
1,238,683

 
104,705

 
(3,261
)
 
1,340,127

Mortgage- and asset-backed securities
273,723

 
15,185

 
(543
)
 
288,365

Total fixed-maturity securities(1)
1,676,785

 
132,566

 
(5,188
)
 
1,804,163

Equity securities
39,353

 
11,483

 
(400
)
 
50,436

Total fixed-maturity and equity securities
$
1,716,138

 
$
144,049

 
$
(5,588
)
 
$
1,854,599

____________________
(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.


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Table of Contents

 
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 investments was as follows:
 
June 30,
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
$
138,461

 
$
99,992

Currency swaps
50

 
72

Foreign currency translation adjustment
1,032

 
1,523

Other-than-temporary impairments
2,072

 
2,072

Net unrealized investment gains excluding foreign currency translation adjustment and other-than-temporary impairments
141,615

 
103,659

Deferred income taxes
(49,565
)
 
(36,280
)
Net unrealized investment gains excluding foreign currency translation adjustment and other-than-temporary impairments, net of tax
$
92,050

 
$
67,379

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 $9.2 million and $13.0 million as of June 30, 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 $19.8 million and $18.4 million as of June 30, 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 loaned 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 $93.6 million and $89.9 million as of June 30, 2014 and December 31, 2013, respectively.


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The scheduled contractual maturity distribution of the available-for-sale fixed-maturity portfolio at June 30, 2014 follows:
 
June 30, 2014
 
Amortized cost
 
Fair value
 
(In thousands)
Due in one year or less
$
105,256

 
$
108,780

Due after one year through five years
548,289

 
606,371

Due after five years through 10 years
706,178

 
751,242

Due after 10 years
43,339

 
49,405

 
1,403,062

 
1,515,798

Mortgage- and asset-backed securities
273,723

 
288,365

Total fixed-maturity securities
$
1,676,785

 
$
1,804,163

Expected maturities may differ from scheduled contractual maturities because issuers of securities may have the right to call or prepay obligations with or without call or prepayment penalties.
Investment Income. The components of net investment income were as follows:
 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Fixed-maturity securities
$
20,454

 
$
22,648

 
$
41,486

 
$
45,858

Equity securities
471

 
292

 
856

 
564

Policy loans and other invested assets
398

 
327

 
786

 
647

Cash and cash equivalents
68

 
73

 
121

 
161

Market return on deposit asset underlying 10% coinsurance agreement
1,490

 
(1,061
)
 
2,443

 
(498
)
Gross investment income
22,881

 
22,279

 
45,692

 
46,732

Investment expenses
(1,200
)
 
(1,252
)
 
(2,412
)
 
(2,489
)
Net investment income
$
21,681

 
$
21,027

 
$
43,280

 
$
44,243

The components of net realized investment gains (losses) as well as details on gross realized investment gains and losses and proceeds from sales or other redemptions were as follows:
 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Net realized investment gains (losses):
 
 
 
 
 
 
 
Gross gains from sales
$
838

 
$
3,022

 
$
1,181

 
$
4,755

Gross losses from sales
(39
)
 
(448
)
 
(45
)
 
(451
)
Other-than-temporary impairment losses
(221
)
 
(1
)
 
(370
)
 
(72
)
Gains (losses) from bifurcated options
253

 
895

 
328

 
1,522

Net realized investment gains (losses)
$
831

 
$
3,468

 
$
1,094

 
$
5,754

Supplemental information:
 
 
 
 
 
 
 
Gross realized investment gains (losses) reclassified from accumulated other comprehensive income into earnings
$
578

 
$
2,573

 
$
766

 
$
4,232

Tax expense (benefit) associated with realized investment gains (losses) reclassified from accumulated other comprehensive income into earnings
$
202

 
$
901

 
$
268

 
$
1,481

Proceeds from sales or other redemptions
$
96,511

 
$
145,014

 
$
209,389

 
$
223,607

Other-Than-Temporary Impairment. We conduct a review each quarter to identify and evaluate impaired investments that have indications of possible other-than-temporary impairment ("OTTI"). An investment in a debt or equity security is impaired if its fair value falls below its cost. Factors considered in determining whether an unrealized loss is temporary include the length of time and extent to which fair value has been below cost, the


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financial condition and near-term prospects for the issue, and our ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery, which may be maturity for 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 $202.7 million and $454.2 million as of June 30, 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:
 
June 30, 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
$
—

 
$
—

 
—
 
$
897

 
$
(53
)
 
2
Foreign government
1,425

 
(22
)
 
5
 
24,387

 
(1,111
)
 
39
States and political subdivisions
3,296

 
(118
)
 
4
 
3,193

 
(80
)
 
3
Corporates
32,559

 
(333
)
 
37
 
71,932

 
(2,928
)
 
100
Mortgage- and asset-backed securities
40,106

 
(66
)
 
29
 
15,031

 
(477
)
 
14
Total fixed-maturity securities
77,386

 
(539
)
 

 
115,440

 
(4,649
)
 

Equity securities
1,539

 
(10
)
 
5
 
2,739

 
(390
)
 
2
Total fixed-maturity and equity securities
$
78,925

 
$
(549
)
 

 
$
118,179

 
$
(5,039
)
 

 
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:
 
June 30, 2014
 
December 31, 2013
 
Amortized cost
 
Fair value
 
Amortized cost
 
Fair value
 
(In thousands)
Fixed-maturity securities in default
$
31

 
$
292

 
$
31

 
$
267



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Impairment charges recognized in earnings on available-for-sale securities were as follows:
 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Impairments on fixed-maturity securities not in default
$
221

 
$
1

 
$
370

 
$
72

The securities noted above were considered to be other-than-temporarily impaired due to adverse credit events, such as news of an impending filing for bankruptcy; analyses of the issuer’s most recent financial statements or other information in which liquidity deficiencies, significant losses and large declines in capitalization were evident; or analyses of rating agency information for issuances with severe ratings downgrades that indicated a significant increase in the possibility of default.
As of June 30, 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.
Net impairment losses recognized in earnings were as follows:
 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
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
$
—

 
$
5

 
$
—

 
$
20

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

 
(4
)
 
—

 
(19
)
Net impairment losses recognized in earnings for securities which the Company does not intend to sell or more-likely-than-not will not be required to sell before recovery
—

 
1

 
—

 
1

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
221

 
—

 
370

 
71

Net impairment losses recognized in earnings
$
221

 
$
1

 
$
370

 
$
72

The rollforward of the credit-related losses recognized in income for all fixed-maturity securities still held follows:
 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Cumulative OTTI credit losses recognized for securities still held, beginning of period
$
14,665

 
$
14,242

 
$
14,516

 
$
14,171

Additions for OTTI securities where no credit losses were recognized prior to the beginning of the period
192

 
—

 
341

 
71

Additions for OTTI securities where credit losses have been recognized prior to the beginning of the period
29

 
1

 
29

 
1

Reductions due to sales, maturities or calls of credit impaired securities
(538
)
 
—

 
(538
)
 
—

Cumulative OTTI credit losses recognized for securities still held, end of period
$
14,348

 
$
14,243

 
$
14,348

 
$
14,243



13
Table of Contents

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 June 30, 2014 and December 31, 2013, the fair value of these bifurcated options was approximately $6.0 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 June 30, 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. 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.


14
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The estimated fair value and hierarchy classifications for assets and liabilities that are measured at fair value on a recurring basis were as follows:
 
June 30, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Fair value assets:
 
 
 
 
 
 
 
Fixed-maturity securities:
 
 
 
 
 
 
 
U.S. government and agencies
$
—

 
$
10,237

 
$
—

 
$
10,237

Foreign government
—

 
127,944

 
—

 
127,944

States and political subdivisions
—

 
37,490

 
—

 
37,490

Corporates
1,551

 
1,338,338

 
238

 
1,340,127

Mortgage- and asset-backed securities
—

 
286,899

 
1,466

 
288,365

Total fixed-maturity securities
1,551

 
1,800,908

 
1,704

 
1,804,163

Equity securities
43,942

 
6,446

 
48

 
50,436

Trading securities
—

 
9,236

 
—

 
9,236

Separate accounts
—

 
2,581,659

 
—

 
2,581,659

Total fair value assets
$
45,493

 
$
4,398,249

 
$
1,752

 
$
4,445,494

Fair value liabilities:
 
 
 
 
 
 
 
Currency swaps
$
—

 
$
173

 
$
—

 
$
173

Separate accounts
—

 
2,581,659

 
—

 
2,581,659

Total fair value liabilities
$
—

 
$
2,581,832

 
$
—

 
$
2,581,832

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


15
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documenting this information; and corroborating it by comparison to independently obtained prices and or independently developed pricing methodologies.
Furthermore, we perform internal reasonableness assessments on fair value determinations within our portfolio throughout the quarter and at quarter-end, including pricing variance analyses and comparisons to alternative pricing sources and benchmark returns. If a fair value appears unusual relative to these assessments, we will re-examine the inputs and may challenge a fair value assessment made by the pricing service. If there is a known pricing error, we will request a reassessment by the pricing service. If the pricing service is unable to perform the reassessment on a timely basis, we will determine the appropriate price by requesting a reassessment from an alternative pricing service or other qualified source as necessary. We do not adjust quotes or prices except in a rare circumstance to resolve a known error.
Because many fixed-maturity securities do not trade on a daily basis, fair value is determined using industry-standard methodologies by applying available market information through processes such as U.S. Treasury curves, benchmarking of similar securities, sector groupings, quotes from market participants and matrix pricing. Observable information is compiled and integrates relevant credit information, perceived market movements and sector news. Additionally, security prices are periodically back-tested to validate and/or refine models as conditions warrant. Market indicators and industry and economic events are also monitored as triggers to obtain additional data. For certain structured securities with limited trading activity, industry-standard pricing methodologies use adjusted market information, such as index prices or discounting expected future cash flows, to estimate fair value. If these measures are not deemed observable for a particular security, the security will be classified as Level 3 in the fair value hierarchy.
Where specific market information is unavailable for certain securities, pricing models produce estimates of fair value primarily using Level 2 inputs along with certain Level 3 inputs. These models include matrix pricing. The pricing matrix uses current treasury rates and credit spreads received from third-party sources to estimate fair value. The credit spreads incorporate the issuer’s industry- or issuer-specific credit characteristics and the security’s time to maturity, if warranted. Remaining unpriced securities are valued using an estimate of fair value based on indicative market prices that include significant unobservable inputs not based on, nor corroborated by, market information, including the utilization of non-binding broker quotes.
The roll-forward of the Level 3 assets measured at fair value on a recurring basis was as follows:
 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Level 3 assets, beginning of period
$
2,356

 
$
4,256

 
$
2,288

 
$
5,221

Net unrealized gains (losses) included in other comprehensive income
(222
)
 
(189
)
 
(102
)
 
(166
)
Net realized gains (losses) included in realized investment gains (losses), including other-than-temporary impairment losses
327

 
69

 
327

 
130

Purchases
—

 
3,906

 
—

 
4,383

Sales
—

 
(5
)
 
—

 
(15
)
Settlements
(709
)
 
(174
)
 
(761
)
 
(699
)
Transfers into Level 3
—

 
986

 
—

 
986

Transfers out of Level 3
—

 
(416
)
 
—

 
(1,407
)
Level 3 assets, end of period
$
1,752

 
$
8,433

 
$
1,752

 
$
8,433

We obtain independent pricing quotes based on observable inputs as of the end of the reporting period for all securities in Level 2. Those inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, market bids/offers, quoted prices for similar instruments in markets that are not active, and other relevant data. We monitor these inputs for market indicators, industry and economic events. We recognize transfers into new levels and out of previous levels as of the end of the reporting period, including interim reporting periods, as applicable. There were no transfers between Level 1 and Level 2 during the three and six months ended June 30, 2014 and 2013. In addition, there were no transfers between Level 1 and Level 3 during the three and six months ended June 30, 2014 and 2013.
Invested assets included in the transfer from Level 3 to Level 2 during the three and six months ended June 30, 2013 primarily were fixed-maturity investments for which we were able to obtain independent pricing quotes based


16
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on observable inputs. Invested assets included in the transfer from Level 2 to Level 3 during the three the six months ended June 30, 2013 primarily were fixed-maturity investments for which we were unable to corroborate independent broker quotes with observable market data.
The table below is a summary of the estimated fair value for financial instruments.
 
June 30, 2014
 
December 31, 2013
 
Carrying
value
 
Estimated
fair value
 
Carrying
value
 
Estimated
fair value
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Fixed-maturity securities
$
1,804,163

 
$
1,804,163

 
$
1,755,712

 
$
1,755,712

Equity securities
50,436

 
50,436

 
39,894

 
39,894

Trading securities
9,236

 
9,236

 
12,991

 
12,991

Policy loans
28,378

 
28,378

 
26,806

 
26,806

Deposit asset underlying 10% coinsurance agreement
139,057

 
139,057

 
124,413

 
124,413

Separate accounts
2,581,659

 
2,581,659

 
2,503,829

 
2,503,829

Liabilities:
 
 
 
 
 
 
 
Notes payable
$
374,506

 
$
408,232

 
$
374,481

 
$
385,161

Currency swaps
173

 
173

 
88

 
88

Separate accounts
2,581,659

 
2,581,659

 
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 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.


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Table of Contents

Details on in-force life insurance follow:
 
June 30,
2014
 
December 31,
2013
 
(Dollars in thousands)
Direct life insurance in force
$
686,283,758

 
$
679,337,825

Amounts ceded to other companies
(607,151,318
)
 
(601,309,340
)
Net life insurance in force
$
79,132,440

 
$
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:
 
June 30, 2014
 
December 31, 2013
Reinsurance
receivable
 
A.M. Best
rating
 
Reinsurance
receivable
 
A.M. Best
rating
(In thousands)
Prime Reinsurance Company(1)
$
2,602,833

 
NR
 
$
2,572,800

 
NR
SCOR Global Life Reinsurance Companies(3)
365,548

 
A
 
372,479

 
A
Financial Reassurance Company 2010, Ltd.(1)
345,032

 
NR
 
343,144

 
NR
Swiss Re Life & Health America Inc.(2)
256,228

 
A+
 
260,775

 
A+
American Health and Life Insurance Company(1)
174,520

 
A-
 
174,722

 
A-
Munich American Reassurance Company
102,693

 
A+
 
100,856

 
A+
Korean Reinsurance Company
88,767

 
A
 
89,405

 
A
RGA Reinsurance Company
76,591

 
A+
 
75,629

 
A+
Toa Reinsurance Company
18,257

 
A+
 
18,824

 
A+
Hannover Life Reassurance Company
16,901

 
A+
 
16,862

 
A+
All other reinsurers
30,364

 
—
 
29,558

 
—
Due from reinsurers
$
4,077,734

 
 
 
$
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.

(7)
Notes Payable
At June 30, 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 June 30, 2014, we were in compliance with the covenants of the Senior Notes. No events of default occurred on the Senior Notes during the six months ended June 30, 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.



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Table of Contents

(8)
Stockholders’ Equity
A reconciliation of the number of shares of our common stock follows.
 
Six months ended June 30,
 
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")
269

 
783

Common stock retired
(913
)
 
(2,942
)
Common stock, end of period
54,194

 
54,504

The above reconciliation excludes RSUs, which do not have voting rights. As the RSUs lapse, we issue common shares with voting rights. As of June 30, 2014, we had a total of approximately 1.2 million RSUs outstanding.
Our Board of Directors authorized a share repurchase program for up to $150.0 million of our outstanding common stock (the "share repurchase program"). Under the share repurchase program, we repurchased 763,902 shares of our common stock in open market transactions for an aggregate purchase price of approximately $35.0 million during the first six months of 2014. As of June 30, 2014, there is approximately $115.0 million remaining for repurchases of our outstanding common stock under the share repurchase program.

(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 earnings per share ("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 unaudited condensed consolidated statements of income.
In calculating basic EPS, we deduct any dividends and undistributed earnings allocated to unvested restricted stock and unvested RSUs from net income and then divide the result by the weighted-average number of common shares, fully vested restricted stock, and fully vested RSUs outstanding for the period.
We determine the potential dilutive effect of warrants and stock options outstanding on EPS using the treasury-stock method. Under this method, we determine the proceeds that would be received from the exercise of the warrants and stock options outstanding, which includes cash received for the exercise price, the remaining unrecognized stock option compensation expense and the resulting effect on the income tax deduction from the exercise of stock options. We then use the average market price of our common shares during the period the warrants and stock options were outstanding to determine how many shares we could repurchase with the proceeds raised from the exercise of the warrants and stock options outstanding. The net incremental share count issued represents the potential dilutive securities. We then reallocate earnings to common shares, fully vested restricted stock, and fully vested RSUs outstanding by incorporating the increased fully diluted share count to determine diluted EPS.


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Table of Contents

The calculation of basic and diluted EPS follows.
 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands, except per-share amounts)
Basic EPS
 
 
 
 
 
 
 
Numerator (continuing operations):
 
 
 
 
 
 
 
Income from continuing operations
$
49,271

 
$
43,168

 
$
92,757

 
$
81,303

Income attributable to unvested participating securities
(542
)
 
(548
)
 
(1,102
)
 
(1,582
)
Income from continuing operations used in calculating basic EPS
$
48,729