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Filed Pursuant to Rule 424(b)(3)
Registration No: 333-173271

The information in this preliminary prospectus supplement and the accompanying prospectus is not complete and may be changed. This preliminary prospectus supplement and the accompanying prospectus are not an offer to sell these securities and are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED APRIL 12, 2011

 

PROSPECTUS SUPPLEMENT

(To Prospectus Dated April 8, 2011)

12,000,000 Shares

 

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PRIMERICA, INC.

Common Stock

 


 

Citigroup Insurance Holding Corporation, a wholly owned subsidiary of Citigroup Inc., is selling 12,000,000 shares of our common stock. We will not receive any of the proceeds from the sale of shares of our common stock being offered hereby. The selling stockholder has granted the underwriters an option to purchase up to 1,800,000 additional shares of common stock to cover over-allotments.

 

Immediately following completion of this offering, Citigroup Inc. will beneficially own between approximately 20.6% and 23.1% of our outstanding common stock, depending on whether and the extent to which the underwriters exercise their over-allotment option.

 

Our common stock is listed on the New York Stock Exchange (the “NYSE”) under the trading symbol “PRI.” The last reported sale price of our common stock on the NYSE on April 11, 2011 was $24.03.

 


 

Investing in our common stock involves a high degree of risk. See the sections entitled “Risk Factors” beginning on page S-13 of this prospectus supplement and page 2 of the accompanying prospectus before you make your investment decision.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus supplement is truthful or complete. Any representation to the contrary is a criminal offense.

 


 

     Per Share

     Total

 

Public offering price

   $                $                        

Underwriting discount

   $         $     

Proceeds to the selling stockholder

   $         $     

 

The underwriters expect to deliver the shares to purchasers on or about             , 2011 through the book-entry facilities of The Depository Trust Company.

 


 

Citi

 


 

UBS Investment Bank                
    Keefe, Bruyette & Woods            
        Macquarie Capital            
            Raymond James        
                Sandler O’Neill + Partners, L.P.
                    SunTrust Robinson Humphrey

 

CastleOak Securities, L.P.                        
    Dowling & Partners Securities, LLC                
                        Guggenheim Securities                
            ING                
                Willis Capital Markets & Advisory        

Prospectus Supplement dated             , 2011


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Table of Contents

TABLE OF CONTENTS

 

Prospectus Supplement

 

     Page

 

About This Prospectus Supplement

     S-1       

Summary

     S-2       

Risk Factors

     S-13     

Cautionary Statement Concerning Forward-Looking Statements

     S-39     

Use of Proceeds

     S-41     

Price Range of Common Stock

     S-41     

Dividend Policy

     S-41     

Capitalization

     S-42     

Selected Financial Data

     S-43     

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     S-45     

Business

     S-83     

Management

     S-115   

Selling Stockholder

     S-118   

Beneficial Ownership of Common Stock

     S-119   

Shares Eligible for Future Sale

     S-121   

Certain United States Federal Tax Consequences to Holders

     S-123   

Underwriting (Conflicts of Interest)

     S-127   

Legal Matters

     S-133   

Where You Can Find More Information

     S-133   

 

Prospectus

 

     Page

 

About This Prospectus

     ii   

Summary

     1   

Risk Factors

     2   

Use of Proceeds

     2   

Ratio of Earnings to Fixed Charges

     2   

Description of Capital Stock

     3   

Description of Debt Securities

     11   

Description of Warrants

     13   

Description of Subscription Rights

     14   

Description of Purchase Contracts and Purchase Units

     15   

Selling Stockholders

     16   

Plan of Distribution (Conflicts of Interest)

     17   

Legal Matters

     21   

Experts

     21   

Cautionary Statement Regarding Forward-Looking Statements

     21   

Where You Can Find More Information

     23   

 

The states in which our insurance subsidiaries are domiciled have laws which require regulatory approval for the acquisition of “control” of insurance companies. Under these laws, there exists a presumption of “control” when an acquiring party acquires 10% or more of the voting securities of an insurance company or of a company which itself controls an insurance company. Therefore, any person acquiring 10% or more of our outstanding common stock would need the prior approval of the state insurance regulators of these states or a determination from such regulators that “control” has not been acquired.

 

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ABOUT THIS PROSPECTUS SUPPLEMENT

 

This document consists of two parts. The first part is this prospectus supplement, which describes the terms of the offering of the common stock and also adds to and updates information contained in the accompanying prospectus and the documents incorporated by reference into this prospectus supplement and the accompanying prospectus. The second part is the accompanying prospectus, which provides more general information. To the extent there is a conflict between the information contained in this prospectus supplement, on the one hand, and the information contained in the accompanying prospectus or any document incorporated herein and therein by reference, on the other hand, you should rely on the information in this prospectus supplement.

 

You should rely only on the information contained in or incorporated by reference into this prospectus supplement and the accompanying prospectus. Neither we, nor the selling stockholder or the underwriters, have authorized anyone to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. None of Primerica, the selling stockholder or the underwriters is making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted.

 

You should not assume that the information in this prospectus supplement, the accompanying prospectus or any other offering materials is accurate as of any date other than the date on the front of each document, regardless of the time of delivery of this prospectus supplement, the accompanying prospectus or any sale of securities. Our business, financial condition, results of operations and prospects may have changed since then.

 

None of Warburg Pincus & Co., Warburg Pincus LLC or any of their affiliates is making this offer, and none of them is responsible for the accuracy of any information in this prospectus supplement.

 

As used in this prospectus supplement: (i) references to “Primerica,” “we,” “us” and “our” refer to Primerica, Inc., a Delaware corporation, and its consolidated subsidiaries; (ii) references to “Citi” refer to Citigroup Inc. and its subsidiaries; and (iii) references to “Warburg Pincus” refer collectively to Warburg Pincus Private Equity X, L.P. and Warburg Pincus X Partners, L.P.

 

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SUMMARY

 

This summary description about us and our business highlights selected information contained elsewhere in this prospectus supplement, the accompanying prospectus or incorporated by reference into this prospectus supplement and the accompany prospectus. It does not contain all the information you should consider before purchasing our securities. You should read in their entirety this prospectus supplement, the accompanying prospectus and any other offering materials, together with the additional information described under the sections entitled “Where You Can Find More Information” beginning on page S-133 of this prospectus supplement and page 23 of the accompanying prospectus.

 

Our Company

 

We are a leading distributor of financial products to middle income households in the United States and Canada with approximately 95,000 licensed sales representatives at December 31, 2010. 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 insured more than 4.3 million lives and more than two million clients maintained investment accounts with us at December 31, 2010. Our distribution model uniquely positions us to reach underserved middle income consumers in a cost effective manner and has proven itself in both favorable and challenging economic environments.

 

Our mission is to serve middle income families by helping them make informed financial decisions and providing them with a strategy and means to gain financial independence. Our distribution model is designed to:

 

Address our clients’ financial needs:    Our sales representatives use our proprietary financial needs analysis (“FNA”) tool and an educational approach to demonstrate how our products can assist clients to provide financial protection for their families, save for their retirement and manage their debt. Typically, our clients are the friends, family members and personal acquaintances of our sales representatives. Meetings are generally held in informal, face-to-face settings, usually in the clients’ own homes.

 

Provide a business opportunity:    We provide an entrepreneurial business opportunity for individuals to distribute our financial products. Low entry costs and the ability to begin part-time allow our recruits to supplement their income by starting their own independent businesses without incurring significant start-up costs or leaving their current jobs. Our unique compensation structure, technology, training and back-office processing are designed to enable our sales representatives to successfully grow their independent businesses.

 

We were the largest provider of individual term life insurance in the United States in 2009 (the latest period for which information is available) based on the amount of in-force premiums collected, according to LIMRA International, an independent market research organization. In 2010, we issued new term life insurance policies with more than $74 billion of aggregate face value and sold approximately $3.62 billion of investment and savings products.

 

Our History

 

We trace our roots to A.L. Williams & Associates, Inc. (“A.L. Williams”), an insurance agency founded in 1977 to distribute term life insurance as an alternative to cash value life insurance. A.L. Williams popularized the concept of “buy term and invest the difference,” reflecting a view that we continue to share today. A.L. Williams grew rapidly from its inception and within a few years became one of the top sellers of individual life insurance in the United States. We have since added several other product lines, including mutual funds, variable annuities, segregated funds and other financial products. Predecessors of Citi acquired our principal operating entities in the late 1980s.

 

 

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In April 2010, we completed a reorganization of our business and Citi completed an initial public offering of 24,564,000 shares of our common stock and a private sale to private equity funds managed by Warburg Pincus LLC of 16,412,440 shares of our common stock and warrants to purchase from us 4,103,110 shares of our common stock at an exercise price of $18.00 per share. See the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations —The Transactions” beginning on page S-45 of this prospectus supplement.

 

Our Clients

 

Our clients are generally middle income consumers, defined by us to include households with $30,000 to $100,000 of annual income, representing approximately 50% of U.S. households. We believe that we understand the financial needs of this middle income segment well:

 

   

they have inadequate or no life insurance coverage;

 

   

they need help saving for retirement and other personal goals;

 

   

they need to reduce their consumer debt; and

 

   

they prefer to meet face-to-face when considering financial products.

 

We believe that our educational approach and distribution model best position us to address these needs profitably, which traditional financial services firms have found difficult to accomplish.

 

Our Distribution Model

 

The high fixed costs associated with in-house sales personnel and salaried career agents and the smaller-sized sales transactions typical of middle income consumers have forced many other financial services companies to focus on more affluent consumers. Product sales to affluent consumers tend to be larger, generating more sizable commissions for the selling agent, who usually works on a full-time basis. As a result, this segment has become increasingly competitive. Our distribution model — borrowing aspects from franchising, direct sales and traditional insurance agencies — is designed to reach and serve middle income consumers efficiently. Key characteristics of our unique distribution model include:

 

   

Independent entrepreneurs:    Our sales representatives are independent contractors, building and operating their own businesses. This “business-within-a-business” approach means that our sales representatives are entrepreneurs who take responsibility for selling products, recruiting sales representatives, setting their own schedules and managing and paying the expenses associated with their sales activities, including office rent and administrative overhead.

 

   

Part-time opportunity:    Our compensation approach accommodates varying degrees of individual sales representative activity, which allows us to use part-time sales representatives and gives us a variable cost structure for product sales. By offering a flexible part-time opportunity, we are able to attract a significant number of recruits who desire to earn supplemental income and generally concentrate on smaller-sized transactions typical of middle income consumers. Virtually all of our sales representatives begin selling our products on a part-time basis, which enables them to hold jobs while exploring an opportunity with us.

 

   

Incentive to build distribution:    When a sale is made, the selling representative receives a commission, as does the representative who recruited him or her, which we refer to as override compensation. Override compensation is paid through several levels of the selling representative’s recruitment and supervisory organization. This structure motivates existing sales representatives to grow our sales force by providing them with commission income from the sales completed by their recruits.

 

   

Innovative compensation system:    We have developed an innovative system for compensating our independent sales force. We advance to our representatives a significant portion of their insurance

 

 

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commissions upon their submission of an insurance application and the first month’s premium payment. In addition to being a source of motivation for our sales force, this upfront payment provides our sales force with immediate cash flow to offset costs associated with originating the business. In addition, monthly production bonuses on term life insurance sales are paid to sales representatives whose downline sales organizations meet certain sales levels. With compensation primarily tied to sales activity, our compensation approach accommodates varying degrees of individual sales representative productivity, which allows us to use a large group of part-time representatives cost effectively and gives us a variable cost structure. In addition, we incentivize our Regional Vice Presidents (“RVPs”) with equity compensation, which aligns their interests with those of our stockholders.

 

   

Large dynamic sales force:    The members of our sales force primarily target and serve their friends, family members and personal acquaintances through individually driven networking activities. We believe that this warm markets approach is an effective way to distribute our products because it facilitates face-to-face interaction initiated by a trusted acquaintance of the prospective customer, which is difficult to replicate using other distribution approaches. Due to the large size of our sales force, attrition and our active recruiting of new sales representatives, our sales force is constantly renewing itself by adding new members. By relying on a large and ever-renewing sales force that has access to and a desire to help friends, family members and personal acquaintances, we are able to reach a wide market without engaging costly media channels.

 

   

Sales force leadership:    A sales representative who has built a successful organization can achieve the sales designation of RVP and can earn higher commissions and bonuses. RVPs are independent contractors. They open and operate offices for their sales organizations and devote their full attention to their Primerica businesses. RVPs also support and monitor the part-time sales representatives on whose sales they earn override commissions in compliance with applicable regulatory requirements. RVPs’ efforts to expand their businesses are a primary driver of our success.

 

   

Motivational culture:    Through sales force recognition events and contests, we seek to create a culture that inspires our sales representatives and rewards them for their personal success. We believe this motivational environment is a major reason that many sales representatives join and achieve success in our business.

 

These attributes have enabled us to build a large sales force in North America with approximately 92,000 sales representatives licensed to sell life insurance as of April 1, 2011. Approximately 22,500 of our sales representatives were also licensed to sell mutual funds in North America as of December 31, 2010.

 

Our Segments

 

While we view the size and productivity of our sales force as the primary drivers of our product sales, the majority of our revenue is not directly correlated to our sales volume in any particular period. Rather, our revenue is principally driven by our in-force book of term life insurance policies, our sale, maintenance and administration of investment and savings products and accounts, and our investment income. The following is a summary description of our segments:

 

   

Term Life Insurance:    We earn premiums on our in-force book of term life insurance policies, which are underwritten by our three life insurance subsidiaries. The term in-force book is commonly used in the insurance industry to refer to the aggregate policies issued by an insurance company that have not lapsed or been settled. Revenues from the receipt of premium payments for any given in-force policy are recognized over the multi-year life of the policy. This segment also includes investment income on the portion of our invested asset portfolio used to meet our required statutory reserves and targeted capital.

 

 

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Investment and Savings Products:    We earn commission and fee revenues from the distribution of mutual funds in the United States and Canada, variable and fixed annuities in the United States and segregated funds in Canada and from the associated administrative services we provide. We distribute these products on behalf of third parties, although we underwrite segregated funds in Canada. In the United States, the mutual funds that we distribute are managed by third parties such as American Funds, Franklin Templeton, Invesco, Legg Mason and Pioneer. In Canada, we sell Primerica-branded Concert™ mutual funds and the funds of several other third parties. The variable and fixed annuities that we distribute are underwritten by MetLife. Revenues associated with these products are composed of commissions and fees earned at the time of sale, fees based on the asset values of client accounts and recordkeeping and custodial fees charged on a per-account basis.

 

   

Corporate and Other Distributed Products:    We also earn fees and commissions from the distribution of various third-party products, including loans, long-term care insurance, auto insurance, homeowners’ insurance, prepaid legal services and a credit information product, and from our mail-order student life insurance and short-term disability benefit insurance, which we underwrite through our New York insurance subsidiary. This segment also includes corporate income, including net investment income, and expenses not allocated to other segments, interest expense on our note payable to Citi and realized gains and losses on our invested asset portfolio.

 

Our Strengths

 

Proven excellence in building and supporting a large independent financial services sales force.    We believe success in serving middle income consumers requires generating and supporting a large distribution system, which we view as one of our core competencies. We have recruited more than 200,000 new sales representatives and assisted more than 34,000 recruits in obtaining life insurance licenses in each of the last six calendar years. Approximately 3,700 RVPs registered to attend one of our 12 regional meetings in 2010, and approximately 50,000 individuals attended our most recent convention in 2007. Our next convention is scheduled to take place in June 2011 at the Georgia Dome in Atlanta, Georgia. Our RVPs conduct thousands of meetings per month to introduce our business opportunity to new recruits. More than 500 instructors conducted approximately 5,400 classes in 2010 to help our sales representatives obtain requisite life insurance licenses and fulfill state-mandated licensing requirements. We have excelled at motivating and coordinating a large and geographically diverse, mostly part-time sales force by connecting with them through multiple channels of communication and providing innovative compensation programs and home office support.

 

Cost-effective access to middle income consumers.    We have a proven ability to reach middle income consumers in a cost-effective manner. Our back-office systems, technology and infrastructure are designed to process a high volume of transactions efficiently. Because our part-time sales representatives are supplementing their income, they are willing to pursue smaller-sized transactions typical of middle income clients. Our unique distribution model avoids the higher costs associated with advertising and media channels.

 

Exclusive distribution.    Our sales representatives sell financial products solely for us; therefore, we do not have to compete for shelf space with independent agents for the distribution of our products. We, in turn, do not distribute our principal products through alternative channels. This approach garners loyalty from our sales representatives and eliminates competition for home office resources. Having exclusive distribution helps us to price our products appropriately for our clients’ needs, establish competitive sales force compensation and maintain our profitability.

 

Scalable operating platform.    We have a compensation and administration system designed to encourage our sales representatives to build their sales organizations, which gives us the capacity to expand our sales force and increase the volume of transactions we process and administer with minimal additional investment.

 

 

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Conservative financial profile and risk management.    We manage our risk profile through conservative product design and selection and other risk-mitigating initiatives. Our life insurance products are generally limited to term life and do not include the guaranteed minimum benefits tied to asset values that have recently caused industry disruption. We further reduce and manage our life insurance risk profile by reinsuring a significant majority of the mortality risk in our newly issued life insurance products. Furthermore, our invested asset portfolio is composed primarily of highly liquid, investment-grade securities and cash equivalents.

 

Experienced management team and sales force.    We are led by a management team that has extensive experience in our business and a thorough understanding of our unique culture and business model. Our senior executives largely have grown up in the business. Our Co-Chief Executive Officers, John Addison and Rick Williams, both joined our company more than 20 years ago and were appointed Co-Chief Executive Officers in 1999. The 14 members of our senior management team have an average of 24 years of experience at Primerica. Equally important, our more successful sales representatives, who have become influential within our sales organization, also have significant longevity with us. Of our sales representatives, approximately 20,000 have been with us for at least ten years, and approximately 7,000 have been with us for at least 20 years.

 

Our Strategy

 

Our strategies are designed to leverage our core strengths to serve the vast and underserved middle income segment. These strategies include:

 

Grow our sales force.    Our strategy to grow our sales force includes:

 

   

Increasing the number of recruits.    Our existing sales representatives replenish and grow our sales force through recruiting activities that generate a high volume of new recruits. Moreover, the introduction of new recruits to our business provides us with an opportunity for product sales, both to the recruits themselves and to their friends, family members and personal acquaintances. When our Co-Chief Executive Officers were appointed in 1999, they prioritized recruiting growth. The number of recruits more than doubled to over 202,000 in 2002, the highest annual number since the company’s inception up to that time. We have continued to increase the level of recruiting, with 221,920 recruits in 2009 and 231,390 recruits in 2010. We intend to continue to focus on recruiting through a number of initiatives launched in recent years, including a reduction in the upfront entry fee charged to new recruits to join our sales force, increased use of our electronic application technology and an expansion of early-stage compensation opportunities for new recruits.

 

   

Increasing the number of licensed sales representatives.    We have launched a series of initiatives designed to increase the number of recruits who obtain life insurance licenses. Working with industry groups and trade associations, we seek to address unnecessary regulatory barriers to licensing qualified recruits. In addition, we continue to design and improve educational courses, training tools and incentives that are made available to help recruits prepare for state and provincial licensing examinations.

 

   

Growing the number of RVPs.    We had approximately 4,000 RVPs as of December 31, 2010. The number of RVPs is an important factor in our sales force growth; as RVPs build their individual sales organizations, they become the primary driver of our sales force recruiting and licensing success. We continue to provide new technology to our sales representatives to enable RVPs to reduce the time spent on administrative responsibilities associated with their sales organizations so they can devote more time to sales and recruiting activities. The new technology, coupled with our equity award program, is designed to encourage more of our sales representatives to make the commitment to become RVPs.

 

 

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Increase our use of innovative technology.    We expect to continue to invest in technology to make it easier for individuals to join our sales force, complete licensing requirements and build their own businesses. We provide our sales representatives, who are generally most active during nights and weekends and outside their own homes and offices, with access to innovative technology, including wireless communication devices and Internet record access, to facilitate straight-through-processing of the client information that they collect. In October 2010, in cooperation with Morningstar, Inc., a leading provider of independent investment research, we deployed Client Account Manager, a client portfolio management tool, to assist our sales representatives with monitoring individual client investment accounts. We expect this tool to create additional sales opportunities for our investment and savings products. We intend to continue to develop new analytical tools to help our sales representatives manage their businesses better and increase efficiency.

 

Enhance our product offerings.    We will continue to enhance and refine the basic financial products we offer with features, riders and terms that are most appropriate for the market we serve and our distribution system. We typically select products that we believe are highly valued by middle income families, making it easy for sales representatives to feel confident selling them to individuals with whom they have a personal relationship. Prior product developments have included a 35-year term life insurance policy, new mutual fund families, other protection products and our Primerica DebtWatchers product. The enhancement of our product offerings increases our sources of revenue.

 

Risk Factors

 

There are a number of risks that you should understand before making an investment decision regarding this offering. These risks are discussed more fully in the section entitled “Risk Factors” beginning on page S-13 of this prospectus supplement. These risks include, but are not limited to:

 

   

Risks related to our distribution structure, such as:

 

   

our failure to continue to attract new recruits, retain sales representatives or maintain their licenses;

 

   

determinations that laws relating to business opportunities, franchising or pyramid schemes are applicable to our distribution model;

 

   

challenges to the independent contractor status of our sales representatives; and

 

   

violation of, or non-compliance with, applicable laws and regulations by us or our sales representatives, including misconduct or failure to protect the confidentiality of our clients’ information.

 

   

Risks related to our insurance business, such as:

 

   

our estimates regarding mortality and persistency may prove to be materially inaccurate;

 

   

the occurrence of a catastrophic event;

 

   

our methodologies and estimates regarding the valuation of our investments and the determination of whether a decline in the fair value of our invested assets is other-than-temporary may prove to be incorrect;

 

   

ratings downgrades in the financial strength ratings of our insurance subsidiaries; and

 

   

the failure of our reinsurers to perform their obligations.

 

 

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Risks related to our investments and savings products business, such as:

 

   

a deterioration of the overall economic environment and savings and investment levels in the United States and Canada;

 

   

the failure of our investment and savings products to remain competitive with other investment options or the loss of our relationship with companies that offer mutual fund and variable annuity products; and

 

   

changes in laws and regulations, including heightened standards of conduct or more stringent licensing requirements, that could require us to alter our business practices.

 

   

Other risks, such as:

 

   

the loss of key personnel; and

 

   

conflicts of interest resulting from our relationships with Citi and Warburg Pincus.

 

The Transactions

 

In this prospectus supplement, we refer to the series of transactions that occurred in connection with our initial public offering, including a corporate reorganization, certain reinsurance transactions, certain concurrent transactions, and a private sale by Citi to Warburg Pincus of our common stock and warrants, as the “Transactions.” We believe the Transactions gave us the opportunity to fold our years of experience, expertise and innovation into an organization with a more streamlined balance sheet. See the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations —The Transactions” beginning on page S-45 of this prospectus supplement.

 

Our Ownership Structure

 

The following diagram depicts the ownership structure of our business immediately following the completion of this offering. Approximate percentage ownership is shown based on 73,759,838 shares of common stock outstanding as of April 1, 2011. The ownership percentages below vary depending on whether and the extent to which the underwriters exercise their over-allotment option.

 

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(1)   Does not include 4,103,110 shares of our common stock issuable upon exercise of warrants held by Warburg Pincus. These warrants have an exercise price of $18.00 per share.
(2)   Held primarily by U.S. employees and directors. Does not include 2,345,882 outstanding restricted stock units held by Canadian employees and sales force leaders.

 

 

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Conflicts of Interest

 

Immediately following completion of this offering, Citi will own between approximately 20.6% and 23.1% of our outstanding common stock, depending on whether and the extent to which the underwriters exercise their over-allotment option. Prior to this offering we have had, and after this offering we will continue to have, numerous commercial and contractual arrangements with affiliates of Citi, the selling stockholder. In addition, Citigroup Global Markets Inc., the sole book-running manager of this offering, is a wholly owned subsidiary of Citigroup Inc. The selling stockholder will receive all of the net proceeds of this offering. Because an affiliate of Citigroup Global Markets Inc. will receive more than 5% of the net proceeds of this offering, not including underwriting compensation, and it beneficially owns more than 10% of the shares prior to the closing of this offering, this offering is being conducted in compliance with Financial Industry Regulatory Authority (“FINRA”) Rule 5121 or any successor rule (“Rule 5121”). See the sections entitled “Risk Factors — Risks Related to Our Relationships with Citi and Warburg Pincus,” “Use of Proceeds” and “Underwriting” beginning on pages S-32, S-41 and S-127, respectively, of this prospectus supplement.

 

Recent Developments

 

We are currently in the process of finalizing our consolidated financial results for the three months ended March 31, 2011, and therefore our actual results for such period are not yet available. Based on our preliminary unaudited financial results for the three months ended March 31, 2011, we expect our total revenues for the first quarter of 2011 to be in the range of $266.0 million to $286.0 million, and expect our net income for such quarter to be in the range of $50.0 million to $55.0 million, or $0.65 to $0.72 per diluted share. The diluted earnings per share range reflects non-recurring income of (i) $0.07 for ceded premium recoveries as discussed in Note 6 to our consolidated and combined financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 (the “2010 Annual Report”), which is incorporated by reference into the accompanying prospectus; (ii) $0.02 for deferred policy acquisition cost (“DAC”)-related items; and (iii) $0.01 for income received from called fixed-income investments.

 

We added approximately 53,000 recruits during the first quarter of 2011, compared to approximately 58,000 recruits added during the first quarter of 2010. As of March 31, 2011, we had approximately 92,000 licensed sales representatives, compared to approximately 95,000 licensed sales representatives as of December 31, 2010. During the first quarter of 2011, we issued more than 51,000 term life insurance policies and had investment and savings product sales of approximately $1.1 billion, compared to approximately 52,000 and $970.0 million, respectively, in the prior year period.

 

The foregoing information constitutes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Please refer to the section entitled “Cautionary Statement Concerning Forward-Looking Statements” beginning on page S-39 of this prospectus supplement.

 

The preliminary financial data included above have been prepared by us, and our independent registered public accounting firm has not audited, reviewed, compiled or performed any procedures with respect to such information. Our independent registered public accounting firm is in the process of conducting its review of our financial statements for the three months ended March 31, 2011. Such review could result in changes to the preliminary estimates indicated above. No assurance is made that our actual results of operations for the three months ended March 31, 2011 will be consistent with the foregoing estimates.

 


 

Our principal executive offices are located at 3120 Breckinridge Blvd., Duluth, Georgia 30099, and our telephone number is (770) 381-1000. Our website address is www.primerica.com. This reference to our website is an inactive textual reference only and is not a hyperlink. The contents of our website are not part of this prospectus supplement, and you should not consider the contents of our website in making an investment decision with respect to our securities.

 

 

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The Offering

 

Common stock to be sold by Citi in this offering

• 12,000,000 shares (16.3% of our outstanding common stock)

 

• 13,800,000 shares (18.7% of our outstanding common stock) if the underwriters exercise their over-allotment option in full

 

Common stock to be held by Citi after this offering

• 17,002,148 shares (23.1% of our outstanding common stock)

 

  • 15,202,148 shares (20.6% of our outstanding common stock) if the underwriters exercise their over-allotment option in full

 

Common stock outstanding

73,759,838 shares

 

Use of proceeds

We will not receive any proceeds from the sale of shares of our common stock being offered hereby.

 

Stock exchange symbol

Our common stock is listed on the NYSE under the trading symbol “PRI.”

 

Throughout this prospectus supplement, unless otherwise indicated, all references to the number and percentage of shares of common stock outstanding, and percentage ownership information, assume the following:

 

   

no exercise by Warburg Pincus of warrants to purchase 4,103,110 shares of our common stock at an exercise price of $18.00 per share; and

 

   

the number of shares of common stock excludes 2,345,882 shares issuable upon the lapse of outstanding restricted stock units.

 

 

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SUMMARY FINANCIAL AND OPERATING DATA

 

The summary statements of income data for the years ended December 31, 2010, 2009 and 2008 and the summary balance sheet data as of December 31, 2010 presented below have been derived from our consolidated and combined financial statements included in the 2010 Annual Report, which is incorporated by reference into the accompanying prospectus.

 

All financial data presented in this prospectus supplement have been prepared using U.S. generally accepted accounting principles (“GAAP”). The summary statements of income data may not be indicative of the revenues and expenses that would have existed or resulted if we had operated independently of Citi. The summary financial data are not necessarily indicative of the financial position or results of operations as of any future date or for any future period.

 

The unaudited summary pro forma statement of income data for the year ended December 31, 2010 have been derived from our consolidated and combined financial statements included in the 2010 Annual Report, which is incorporated by reference into the accompanying prospectus, and give effect to the Transactions as if they had occurred on January 1, 2010. The unaudited summary pro forma statement of income data are based on available information and assumptions that we believe are reasonable. The unaudited summary pro forma statement of income data are not necessarily indicative of the results of future operations or actual results that would have been achieved had the Transactions occurred on January 1, 2010.

 

The Transactions have and will continue to result in financial performance that is materially different from that reflected in the financial data that appear elsewhere in this prospectus supplement and are incorporated by reference into this prospectus supplement and the accompanying prospectus. Due to the timing of the Transactions and their impact on our financial position and results of operations, year-over-year comparisons of our financial position and results of operations will reflect significant non-comparable accounting transactions and account balances.

 

You should read the following summary financial and operating data in conjunction with the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Selected Financial Data” beginning on pages S-45 and S-43, respectively, of this prospectus supplement and with our consolidated and combined financial statements included in the 2010 Annual Report, which is incorporated by reference into the accompanying prospectus.

 

    Pro Forma(1)

    Actual

 
    Year ended December 31,

    Year ended December 31,

 
    2010

    2010

    2009

    2008(1)

 
    (In thousands)  

Statements of income data

                               

Revenues:

                               

Direct premiums

    $2,181,074      $ 2,181,074      $ 2,112,781      $ 2,092,792   

Ceded premiums

    (1,746,695     (1,450,367     (610,754     (629,074
   


 


 


 


Net premiums

    434,379        730,707        1,502,027        1,463,718   

Net investment income

    110,376        165,111        351,326        314,035   

Commissions and fees

    382,940        382,940        335,986        466,484   

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

    34,145        34,145        (21,970     (103,480

Other, net

    48,960        48,960        53,032        56,187   
   


 


 


 


Total revenues

    1,010,800        1,361,863        2,220,401        2,196,944   

 

 

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     Pro Forma(1)

     Actual

 
     Year ended December 31,

     Year ended December 31,

 
     2010

     2010

    2009

     2008(2)

 
     (Dollars in thousands)  

Benefits and expenses:

                                  

Benefits and claims

     189,499         317,703        600,273         938,370   

Amortization of deferred policy acquisition costs

    
96,646
  
     168,035        381,291         144,490   

Insurance commissions

     18,235         19,904        34,388         23,932   

Insurance expenses

     49,420         75,503        148,760         141,331   

Sales commissions

     179,924         179,924        162,756         248,020   

Interest expense

     27,809         20,872        —           —     

Goodwill impairment

     —           —          —           194,992   

Other operating expenses

     183,855         180,779        132,978         152,773   
    


  


 


  


Total benefits and expenses

     745,388         962,720        1,460,446         1,843,908   
    


  


 


  


Income before income taxes

     265,412         399,143        759,955         353,036   

Income taxes

     94,002         141,365        265,366         185,354   
    


  


 


  


Net income

   $ 171,410       $ 257,778      $ 494,589       $ 167,682   
    


  


 


  


Segment data

                                  

Revenues:

                                  

Term Life Insurance

   $ 463,901       $ 808,568      $ 1,742,065       $ 1,673,022   

Investment and Savings Products

     361,807         361,807        300,140         386,508   

Corporate and Other Distributed Products

     185,092         191,488        178,196         137,414   

Segment income (loss) before income taxes:

                                  

Term Life Insurance

   $ 178,910       $ 299,044      $ 659,012       $ 511,819   

Investment and Savings Products

     113,530         113,530        93,404         125,164   

Corporate and Other Distributed Products

     27,028         (13,431     7,539         (283,947

Operating data

                                  

Number of new recruits

  

     231,390        221,920         235,125   

Number of newly insurance-licensed sales representatives

  

     34,488        37,629         39,383   

Average number of life-insurance licensed sales representatives during period

   

     96,840        100,569         99,361   

Number of life-insurance licensed sales representatives (end of period)

   

     94,850        99,785         100,651   

Number of term life insurance policies issued

  

     223,514        233,837         241,173   

Client asset values (end of period)

  

   $ 34,869      $ 31,303       $ 24,677   

 

     As of December 31, 2010

 
     (In thousands)  

Balance sheet data

        

Investments

   $ 2,153,584   

Cash and cash equivalents

     126,038   

Due from reinsurers

    
3,731,634
  

Deferred policy acquisition costs

     853,211   

Total assets

     9,884,306   

Future policy benefits

     4,409,183   

Note payable

     300,000   

Total liabilities

     8,452,814   

Stockholders’ equity

     1,431,492   

(1)   Unaudited
(2)   Includes a $191.7 million pre-tax charge due to a change in our deferred policy acquisition costs and reserve estimation approach implemented as of December 31, 2008.

 

 

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RISK FACTORS

 

An investment in our common stock involves a high degree of risk. Before making an investment decision, you should carefully consider the specific risks set forth below and the other information in this prospectus supplement, as well as the risks described in the 2010 Annual Report, which is incorporated by reference into the accompanying prospectus, and any risk factors set forth in our other filings with the Securities and Exchange Commission (the “SEC”) pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act. If any of these risks actually materializes, our business, financial condition and results of operations could be materially adversely affected. As a result, the trading price of our common stock could decline and you could lose part or all of your investment. These risks are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also materially affect our business, financial condition and results of operations. See the sections entitled “Where You Can Find More Information” beginning on page S-133 of this prospectus supplement and page 23 of the accompanying prospectus.

 

Risks Related to Our Distribution Structure

 

Our failure to continue to attract new recruits, retain sales representatives or maintain the licensing of our sales representatives would materially adversely affect our business.

 

New sales representatives provide us with access to new referrals, enable us to increase sales, expand our client base and provide the next generation of successful sales representatives. As is typical with insurance and distribution businesses, we experience a high rate of turnover among our part-time sales representatives, which requires us to attract, retain and motivate a large number of sales representatives. Recruiting is performed by our current sales representatives, and the effectiveness of our recruiting is generally dependent upon our reputation as a provider of a rewarding and potentially lucrative income opportunity, as well as the general competitive and economic environment. The motivation of recruits to complete their training and licensing requirements and to commit to selling our products is largely dependent upon the effectiveness of our compensation and promotional programs and the competitiveness of such programs compared with other companies, including other part-time business opportunities.

 

If our new business opportunities and products do not generate sufficient interest to attract new recruits, motivate them to become licensed sales representatives and incentivize them to sell our products and recruit other new sales representatives, our business would be materially adversely affected.

 

Furthermore, if we or any other direct sales businesses with a similar distribution structure engage in practices resulting in increased negative public attention for our business, the resulting reputational challenges could adversely affect our ability to attract new recruits. Direct sales companies such as ours can be the subject of negative commentary on website postings and other non-traditional media. This negative commentary can spread inaccurate or incomplete information about the direct sales industry in general or our company in particular, which can make our recruiting more difficult.

 

Certain of our key RVPs have large sales organizations that include thousands of downline sales representatives. These key RVPs are responsible for attracting, motivating, supporting and assisting the sales representatives in their sales organizations. The loss of one or more key RVPs, together with a substantial number of their sales representatives, for any reason, including movement to a competitor, or any other event that causes the departure of a large number of sales representatives, could materially adversely affect our financial results and could impair our ability to attract new sales representatives.

 

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There are a number of laws and regulations that could apply to our distribution model, which subject us to the risk that we may have to modify our distribution structure.

 

In the past, certain direct sales distribution models have been subject to challenge under various laws, including laws relating to business opportunities, franchising, pyramid schemes and unfair or deceptive trade practices.

 

In general, state business opportunity and franchise laws in the United States prohibit sales of business opportunities or franchises unless the seller provides potential purchasers with a pre-sale disclosure document that has first been filed with a designated state agency and grants purchasers certain legal recourse against sellers of business opportunities and franchises. In Canada, the provinces of Alberta, Ontario, New Brunswick and Prince Edward Island have enacted legislation dealing with franchising, which typically requires mandatory disclosure to prospective franchisees.

 

We have not been, and are not currently, subject to business opportunity laws because the amounts paid by our new representatives to us (i) are less than the minimum thresholds set by many state statutes and (ii) are not fees paid for the right to participate in a business, but rather are for bona fide expenses such as state-required insurance examinations and pre-licensing training. We have not been, and are not currently, subject to franchise laws for similar reasons. However, there is a risk that a governmental agency or court could disagree with our assessment or that these laws and regulations could change. In addition, the Federal Trade Commission (the “FTC”) is in the process of promulgating a revised Business Opportunity Rule. If enacted in the form of the current proposal as recommended by the FTC staff, we do not believe the revised rule would apply to our company. However, it could be broadened prior to enactment or interpreted after enactment in a manner inconsistent with our interpretation. Becoming subject to business opportunity or franchise laws or regulations could require us to provide certain disclosures and regulate the manner in which we recruit our sales representatives that may increase the expense of, or adversely impact our success in, recruiting new sales representatives and make it more difficult for us to successfully attract and recruit new sales representatives.

 

There are various laws and regulations that prohibit fraudulent or deceptive schemes known as pyramid schemes. In general, a pyramid scheme is defined as an arrangement in which new participants are required to pay a fee to participate in the organization and then receive compensation primarily for recruiting other persons to participate, either directly or through sales of goods or services that are merely disguised payments for recruiting others. The application of these laws and regulations to a given set of business practices is inherently fact-based and, therefore, is subject to interpretation by applicable enforcement authorities. Our representatives are paid by commissions based on sales of our products and services to bona fide purchasers, and for this and other reasons we do not believe that we are subject to laws regulating pyramid schemes. Moreover, our representatives are not required to purchase any of the products marketed by us. However, even though we believe that our distribution practices are currently in compliance with, or exempt from, these laws and regulations, there is a risk that a governmental agency or court could disagree with our assessment or that these laws and regulations could change, which may require us to cease our operations in certain jurisdictions or result in other costs or fines.

 

There are also federal, state and provincial laws of general application, such as the Federal Trade Commission Act (the “FTC Act”), and state or provincial unfair and deceptive trade practices laws that could potentially be invoked to challenge aspects of our recruiting of sales representatives and compensation practices. In particular, our recruiting efforts include promotional materials for recruits that describe the potential opportunity available to them if they join our sales force. These materials, as well as our other recruiting efforts and those of our sales representatives, are subject to scrutiny by the FTC and state and provincial enforcement authorities with respect to misleading statements, including misleading earnings claims made to convince potential new recruits to join our sales force. If claims made by us or by our sales representatives are deemed to be misleading, it could result in violations of the FTC Act or comparable state and provincial statutes prohibiting unfair or deceptive trade practices or result in reputational harm.

 

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Being subject to, or out of compliance with, the aforementioned laws and regulations could require us to change our distribution structure, which could materially adversely affect our business, financial condition and results of operations.

 

There may be adverse tax and employment law consequences if the independent contractor status of our sales representatives is successfully challenged.

 

Our sales representatives are independent contractors who operate their own businesses. In the past, we have been successful in defending our company in various contexts before courts and administrative agencies against claims that our sales representatives should be treated like employees. Although we believe that we have properly classified our representatives as independent contractors, there is nevertheless a risk that the Internal Revenue Service (“IRS”) or another authority will take a different view. Furthermore, the tests governing the determination of whether an individual is considered to be an independent contractor or an employee are typically fact sensitive and vary from jurisdiction to jurisdiction. Laws and regulations that govern the status and misclassification of independent sales representatives are subject to change or interpretation by various authorities.

 

In September 2010, legislation was introduced in Congress known as the Fair Playing Field Act of 2010 (the “Fair Playing Field Act”), which, if enacted, would require the Department of the Treasury to prospectively eliminate Section 530 of the Revenue Act of 1978 (“Section 530”). Section 530 currently prevents the IRS from reclassifying independent contractors as employees if the company has consistently treated the workers as independent contractors and has a reasonable basis (such as an IRS ruling or judicial precedent) for its independent contractor classification. The proposed legislation would also require businesses that use independent contractors on a regular and ongoing basis to provide workers with a written notice informing them of their federal tax obligations, of the employment laws that do not apply to them, and of their right to seek a determination of their employment status from the IRS. The White House budget proposal includes provisions similar to those in the Fair Playing Field Act and allocates $25 million to the Department of Labor (“DOL”) for additional enforcement relating to the misclassification of workers as independent contractors. Neither the White House Budget proposal nor the proposed Fair Playing Field Act expressly changes the standard for distinguishing between employees and independent contractors.

 

If a federal, state or provincial authority or court enacts legislation or adopts regulations that change the manner in which employees and independent contractors are classified or makes any adverse determination with respect to some or all of our independent contractors, we could incur significant costs in complying with such laws and regulations, including, in respect of tax withholding, social security payments and recordkeeping, or we may be required to modify our business model, any of which could have a material adverse effect on our business, financial condition and results of operations. In addition, there is the risk that we may be subject to significant monetary liabilities arising from fines or judgments as a result of any such actual or alleged non-compliance with federal, state, or provincial tax or employment laws or with respect to any applicable employee benefit plan.

 

Our or our sales representatives’ violation of or non-compliance with laws and regulations and the related claims and proceedings could expose us to material liabilities.

 

Extensive federal, state, provincial and local laws regulate our products and our relationships with our clients, imposing certain requirements that our sales representatives must follow. The laws and regulations applicable to our business include those promulgated by FINRA; the SEC; the Municipal Securities Rulemaking Board (the “MSRB”); the FTC; and state insurance, lending and securities regulatory agencies in the United States. In Canada, the following Canadian regulatory authorities have responsibility for us: the Office of the Superintendent of Financial Institutions Canada (“OSFI”); the Financial Transactions and Reports Analysis Centre of Canada (“FINTRAC”); the Financial Consumer Agency of Canada (“FCAC”); the Mutual Fund

 

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Dealers Association of Canada (the “MFDA”); and provincial and territorial insurance regulators and provincial and territorial securities regulators. At any given time, we may have pending state, federal or provincial examinations or inquiries of our investment and savings products, insurance or loan businesses. In addition to imposing requirements that representatives must follow in their dealings with clients, these laws and rules generally require us to maintain a system of supervision to attempt to ensure that our sales representatives comply with these requirements. We have developed policies and procedures to comply with these laws. However, despite these compliance and supervisory efforts, the breadth of our operations and the broad regulatory requirements could result in oversight failures and instances of non-compliance or misconduct on the part of our sales representatives.

 

From time to time, we are subject to private litigation as a result of alleged misconduct by our sales representatives. Examples include claims that a sales representative’s failure to disclose underwriting-related information regarding the insured on an insurance application resulted in the denial of a life insurance policy claim, and with respect to investment and savings products sales, errors or omissions that a representative made in connection with an account. Non-compliance or misconduct by our sales representatives could result in adverse findings in either examinations or litigation and could subject us to sanctions, significant monetary liabilities, restrictions on or the loss of the operation of our business, claims against us or reputational harm, any of which could have a material adverse effect on our business, financial condition and results of operations.

 

Any failure to protect the confidentiality of client information could adversely affect our reputation and have a material adverse effect on our business, financial condition and results of operations.

 

Pursuant to federal laws, various federal regulatory and law enforcement agencies have established rules protecting the privacy and security of personal information. In addition, most states and some provinces have enacted laws, which vary significantly from jurisdiction to jurisdiction, to safeguard the privacy and security of personal information. Many of our sales representatives and employees have access to and routinely process personal information of clients through a variety of media, including the Internet and software applications. We rely on various internal processes and controls to protect the confidentiality of client information that is accessible to, or in the possession of, our company, our employees and our sales representatives. We have a significant number of sales representatives and employees, and it is possible that a sales representative or employee could, intentionally or unintentionally, disclose or misappropriate confidential client information. If we fail to maintain adequate internal controls, including any failure to implement newly required additional controls, or if our sales representatives or employees fail to comply with our policies and procedures, misappropriation or intentional or unintentional inappropriate disclosure or misuse of client information could occur. Such internal control inadequacies or non-compliance could materially damage our reputation or lead to civil or criminal penalties, which, in turn, could have a material adverse effect on our business, financial condition and results of operations.

 

Risks Related to Our Insurance Business and Reinsurance

 

We may face significant losses if our actual experience differs from our expectations regarding mortality or persistency.

 

We set prices for life insurance policies based upon expected claim payment patterns derived from assumptions we make about the mortality rates, or likelihood of death, of our policyholders in any given year. The long-term profitability of these products depends upon how our actual mortality rates compare to our pricing assumptions. For example, if mortality rates are higher than those assumed in our pricing assumptions, we could be required to make more death benefit payments under our life insurance policies or to make such payments sooner than we had projected, which may decrease the profitability of our term life insurance products and result in an increase in the cost of our subsequent reinsurance transactions.

 

The prices and expected future profitability of our life insurance products are also based, in part, upon assumptions related to persistency, which is the probability that a policy will remain in force from one period to

 

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the next. Actual persistency that is lower than our persistency assumptions could have an adverse effect on profitability, especially in the early years of a policy, primarily because we would be required to accelerate the amortization of expenses we deferred in connection with the acquisition of the policy. Actual persistency that is higher than our persistency assumptions could have an adverse effect on profitability in the later years of a block of policies because the anticipated claims experience is higher in these later years. If actual persistency is significantly different from that assumed in our pricing assumptions, our reserves for future policy benefits may prove to be inadequate. We are precluded from adjusting premiums on our in-force business during the initial term of the policies, and our ability to adjust premiums on in-force business after the initial policy term is limited by our insurance policy forms to the maximum premium rates in the policy.

 

Our assumptions and estimates regarding persistency and mortality require us to make numerous judgments and, therefore, are inherently uncertain. We cannot determine with precision the actual persistency or ultimate amounts that we will pay for actual claim payments on a block of policies, the timing of those payments, or whether the assets supporting these contingent future payment obligations will increase to the levels we estimate before payment of claims. If we conclude that our reserves, together with future premiums, are insufficient to cover actual or expected claims payments and the scheduled amortization of our DAC assets, we would be required to first accelerate our amortization of the DAC assets and then increase our reserves and incur income statement charges for the period in which we make the determination, which could materially adversely affect our business, financial condition and results of operations.

 

The occurrence of a catastrophic event could materially adversely affect our business, financial condition and results of operations.

 

Our insurance operations are exposed to the risk of catastrophic events, which could cause a large number of premature deaths of our insureds. Catastrophic events include wars and other military actions, terrorist attacks, natural or man-made disasters and pandemics or other widespread health crises. Catastrophic events are not contemplated in our actuarial mortality models. A catastrophic event could also cause significant volatility in global financial markets and disrupt the economy. Although we have ceded a significant majority of our mortality risk to reinsurers since the mid-1990s, a catastrophic event could cause a material adverse effect on our business, financial condition and results of operations. Claims resulting from a catastrophic event could cause substantial volatility in our financial results for any quarter or year and could also materially harm the financial condition of our reinsurers, which would increase the probability of default on reinsurance recoveries. Our ability to write new business could also be adversely affected.

 

In addition, most of the jurisdictions in which our insurance subsidiaries are admitted to transact business require life insurers doing business within the jurisdiction to participate in guaranty associations, which raise funds to pay contractual benefits owed pursuant to insurance policies issued by impaired, insolvent or failed issuers. It is possible that a catastrophic event could require extraordinary assessments on our insurance companies, which may have a material adverse effect on our business, financial condition and results of operations.

 

Our insurance business is highly regulated, and statutory and regulatory changes may materially adversely affect our business, financial condition and results of operations.

 

Life insurance statutes and regulations are generally designed to protect the interests of the public and policyholders. Those interests may conflict with your interests as a stockholder. Currently, in the United States, the power to regulate insurance resides almost exclusively with the states. Much of this state regulation follows model statutes or regulations developed or amended by the National Association of Insurance Commissioners (the “NAIC”), which is composed of the insurance commissioners of each U.S. jurisdiction. The NAIC re-examines and amends existing model laws and regulations (including holding company regulations) in addition to determining whether new ones are needed.

 

 

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The laws of the various U.S. jurisdictions grant insurance departments broad powers to regulate almost all aspects of our insurance business. The U.S. Congress continues to examine the current condition of U.S. state-based insurance regulation to determine whether to impose federal regulation and to allow optional federal insurance company incorporation. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) created an Office of Federal Insurance Reform that will, among other things, study methods to modernize and improve insurance regulation, including uniformity and the feasibility of federal regulation. We cannot predict with certainty whether, or in what form, reforms will be enacted and, if so, whether the enacted reforms will materially affect our business. Changes in federal statutes, including the Gramm-Leach-Bliley Act and the McCarran-Ferguson Act, financial services regulation and federal taxation, in addition to changes to state statutes and regulations, may be more restrictive than current requirements or may result in higher costs, and could materially adversely affect the insurance industry and our business, financial condition and results of operations.

 

Provincial and federal insurance laws regulate many aspects of our Canadian insurance business. Changes to provincial or federal statutes and regulations may be more restrictive than current requirements or may result in higher costs, which could materially adversely affect the insurance industry and our business, financial condition and results of operations. We have also entered into an undertaking agreement with OSFI in connection with our initial public offering and the Transactions pursuant to which we have agreed to provide OSFI certain information, including advance notice, where practicable, of certain corporate actions. If we fail to comply with our undertaking to OSFI or if OSFI determines that our corporate actions do not comply with applicable Canadian law, Primerica Life Insurance Company of Canada (“Primerica Life Canada”), our Canadian life insurance company, could face sanctions or fines, and Primerica Life Canada could be subject to increased capital requirements or other requirements deemed appropriate by OSFI.

 

We received approval from the Minister of Finance (Canada) under the Insurance Companies Act (Canada) in connection with our indirect acquisition of Primerica Life Canada. The Minister expects that a person controlling a federal insurance company will provide ongoing financial, managerial or operational support to its subsidiary should such support prove necessary, and has required us to sign a support principle letter to that effect. This ongoing support may take the form of additional capital, the provision of managerial expertise or the provision of support in such areas as risk management, internal control systems and training. However, the letter does not create a legal obligation on the part of the person to provide the support. In the event that OSFI determines Primerica Life Canada is not receiving adequate support from us under applicable Canadian law, Primerica Life Canada may be subject to increased capital requirements or other requirements deemed appropriate by OSFI.

 

If there were to be extraordinary changes to statutory or regulatory requirements, we may be unable to fully comply with or maintain all required insurance licenses and approvals. Regulatory authorities have relatively broad discretion to grant, renew and revoke licenses and approvals. If we do not have all requisite licenses and approvals, or do not comply with applicable statutory and regulatory requirements, the regulatory authorities could preclude or temporarily suspend us from carrying on some or all of our insurance activities or monetarily penalize us, which could materially adversely affect our business, financial condition and results of operations. We cannot predict with certainty the effect any proposed or future legislation or regulatory initiatives may have on the conduct of our business. See the section entitled “Business — Regulation — Regulation of Insurance Products” beginning on page S-106 of this prospectus supplement.

 

A decline in risk-based capital of our insurance subsidiaries could result in increased scrutiny by insurance regulators and ratings agencies and have a material adverse effect on our business, financial condition and results of operations.

 

Each of our insurance subsidiaries is subject to risk-based capital (“RBC”) standards and other minimum statutory capital and surplus requirements (in Canada, minimum continuing capital and surplus requirements (“MCCSR”), and Tier 1 capital ratio requirements) imposed under the laws of its respective jurisdiction of

 

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domicile. The RBC formula for U.S. life insurance companies generally establishes capital requirements relating to insurance, business, asset and interest rate risks. Our U.S. insurance subsidiaries are required to report their results of RBC calculations annually to the applicable state department of insurance and the NAIC. Our Canadian insurance subsidiary is required to provide its MCCSR and Tier 1 capital ratio calculations to the Canadian regulators. The capitalization of our life insurance subsidiaries is maintained at levels in excess of the effective minimum requirements of the NAIC in the United States and OSFI in Canada. These minimum standards are 100% of the Company Action Level of RBC for our U.S. insurance subsidiaries and, for our Canadian insurance subsidiary, MCCSR of 150% and a Tier 1 capital ratio of 105%. The capital required is the same for both the MCCSR and Tier 1 ratios, however the capital available for the Tier 1 ratio excludes certain assets as prescribed by OSFI. To comply with RBC levels prescribed by the regulators of our insurance subsidiaries, our initial capitalization levels were based on our estimates and assumptions regarding our business. In any particular year, statutory capital and surplus amounts and RBC and MCCSR ratios may increase or decrease depending on a variety of factors, including the amount of statutory income or losses generated by our insurance subsidiaries (which is sensitive to equity and credit market conditions), the amount of additional capital our insurance subsidiaries must hold to support business growth, changes in their reserve requirements, the value of certain fixed-income and equity securities in their investment portfolios, the credit ratings of investments held in their portfolios, the value of certain derivative instruments, changes in interest rates, credit market volatility, changes in consumer behavior, as well as changes to the NAIC’s RBC formula or the MCCSR calculation of OSFI. Many of these factors are outside of our control.

 

Our financial strength and credit ratings are significantly influenced by the statutory surplus amounts and RBC and MCCSR ratios of our insurance company subsidiaries. Ratings agencies may change their internal models, effectively increasing or decreasing the amount of statutory capital we must hold to maintain our current ratings. In addition, ratings agencies may downgrade the invested assets held in our portfolio, which could result in a reduction of our capital and surplus by means of other-than-temporary impairments. Changes in statutory accounting principles could also adversely impact our ability to meet minimum RBC, MCCSR and statutory capital and surplus requirements. Furthermore, during the initial years of operation after the reinsurance transactions, which we entered into in March 2010 in connection with our initial public offering (the “Citi reinsurance transactions”), our statutory capital and surplus may prove to be insufficient and we may incur ongoing statutory losses as a result of the high amounts of upfront commissions that are paid to our sales force in connection with the issuance of term life insurance policies. The statutory capital and surplus strain associated with payment of these commissions will be of greater impact during the initial years of our operations as a public company, as the in-force book of business, net of the Citi reinsurance transactions, grows. There is no assurance that our insurance subsidiaries will not need additional capital or that we will be able to provide it to maintain the targeted RBC and MCCSR levels to support their business operations. For a description of the Citi reinsurance transactions, see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — The Transactions” beginning on page S-45 of this prospectus supplement.

 

The failure of any of our insurance subsidiaries to meet its applicable RBC and MCCSR requirements or minimum capital and surplus requirements could subject it to further examination or corrective action imposed by insurance regulators, including limitations on its ability to write additional business, supervision by regulators or seizure or liquidation. Any corrective action imposed could have a material adverse effect on our business, financial condition and results of operations. A decline in RBC or MCCSR also limits our ability to take dividends or distributions out of the insurance subsidiary and could be a factor in causing ratings agencies to downgrade the financial strength ratings of all our insurance subsidiaries. Such downgrades would have an adverse effect on our ability to write new insurance business and, therefore, could have a material adverse effect on our business, financial condition and results of operations.

 

A ratings downgrade by a ratings organization could materially adversely affect our business, financial condition and results of operations.

 

We have three insurance subsidiaries. Primerica Life Insurance Company (“Primerica Life”), our Massachusetts domiciled life insurance company; National Benefit Life Insurance Company (“NBLIC”), our

 

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New York life insurance company; and Primerica Life Canada, our Canadian life insurance company, have each been assigned a financial strength rating of A+ (superior; second highest of 16 ratings) by A.M. Best Co. (“A.M. Best”) with a negative outlook. Primerica Life currently also has an insurer financial strength rating of AA- (very strong; fourth highest of 22 ratings) from Standard & Poor’s with a stable outlook. NBLIC and Primerica Life Canada are not rated by Standard & Poor’s.

 

Financial strength ratings are an important factor in establishing the competitive position of insurance companies. Such ratings are important to maintaining public confidence in us and our ability to market our insurance products. Ratings organizations review the financial performance and financial conditions of insurance companies, including our three insurance subsidiaries, and provide opinions regarding financial strength, operating performance and ability to meet obligations to policyholders. A downgrade in the financial strength ratings of our insurance subsidiaries, or the announced potential for a downgrade, could have a material adverse effect on our business, financial condition and results of operations, including by:

 

   

reducing sales of insurance products;

 

   

adversely affecting our relationships with our sales representatives;

 

   

materially increasing the amount of policy cancellations by our policyholders;

 

   

requiring us to reduce prices to remain competitive; and

 

   

adversely affecting our ability to obtain reinsurance at reasonable prices or at all.

 

The financial strength ratings of our insurance subsidiaries are subject to periodic review using, among other things, the ratings agencies’ proprietary capital adequacy models, and are subject to revision or withdrawal at any time. Insurance financial strength ratings are directed toward the concerns of policyholders and are not intended for the protection of investors or as a recommendation to buy, hold or sell securities. Our financial strength ratings will affect our competitive position relative to other insurance companies. If the financial strength ratings of our insurance subsidiaries fall below certain levels, some of our policyholders may move their business to our competitors.

 

In addition, the standards used by ratings agencies in determining financial strength are different from capital requirements set by insurance regulators. We may need to take actions in response to changing standards set by any of the ratings agencies, as well as statutory capital requirements, which could have a material adverse effect on our business, financial condition and results of operations.

 

Credit deterioration in, and the effects of interest rate fluctuations on, our invested asset portfolio could materially adversely affect our business, financial condition and results of operations.

 

A large percentage of our invested asset portfolio is invested in fixed-income securities; as a result, credit deterioration and interest rate fluctuations could materially affect the value and earnings of our invested asset portfolio. Fixed-income securities decline in value if there is no active trading market for the securities or the market’s impression of, or the ratings agencies’ views on, the credit quality of an issuer worsens. During periods of declining market interest rates, any interest income we receive on variable interest rate investments would decrease. In addition, during such periods, we would be forced to reinvest the cash we receive as interest or return of principal on our investments in lower-yielding high-grade instruments or in lower-credit instruments to maintain comparable returns. Issuers of fixed-income securities could also decide to prepay their obligations to borrow at lower market rates, which would increase the percentage of our portfolio that we would have to reinvest in lower-yielding investments of comparable credit quality or in lower quality investments offering similar yields. If interest rates generally increase, the market value of our fixed rate income portfolio decreases. Additionally, if the market value of any security in our invested asset portfolio decreases, we may realize losses if we deem the value of the security to be other-than-temporarily impaired. To the extent that any fluctuations in fair value are significant or we recognize impairments that are material, it could have a material adverse effect on our business, financial condition and results of operations.

 

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Valuation of our investments and the determination of whether a decline in the fair value of our invested assets is other-than-temporary are based on methodologies and estimates that may prove to be incorrect.

 

GAAP requires that when the fair value of any of our invested assets declines and such decline is deemed to be other-than-temporary, we recognize a loss in either accumulated other comprehensive income or on our statement of income based on certain criteria in the period that such determination is made. Determining the fair value of certain invested assets, particularly those that do not trade on a regular basis, requires an assessment of available data and the use of assumptions and estimates. Once it is determined that the fair value of an asset is below its carrying value, we must determine whether the decline in fair value is other-than-temporary, which is based on subjective factors and involves a variety of assumptions and estimates. For information on our valuation methodology, see Notes 1 and 4 to our consolidated and combined financial statements included in the 2010 Annual Report, which is incorporated by reference into the accompanying prospectus, and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates — Invested Assets” beginning on page S-53 of this prospectus supplement.

 

There are certain risks and uncertainties associated with determining whether declines in market value are other-than-temporary. These include significant changes in general economic conditions and business markets, trends in certain industry segments, interest rate fluctuations, rating agency actions, changes in significant accounting estimates and assumptions and legislative actions. In the case of mortgage- and asset-backed securities, there is added uncertainty as to the performance of the underlying collateral assets. To the extent that we are incorrect in our determination of the fair value of our investment securities or our determination that a decline in their value is other-than-temporary, we may realize losses that never actually materialize or may fail to recognize losses within the appropriate reporting period.

 

The failure by any of our reinsurers to perform its obligations to us could have a material adverse effect on our business, financial condition and results of operations.

 

We extensively use reinsurance in the United States to diversify our risk and to manage our loss exposure to mortality risk. Reinsurance does not relieve us of our direct liability to our policyholders, even when the reinsurer is liable to us. We, as the insurer, are required to pay the full amount of death benefits even in circumstances where we are entitled to receive payments from the reinsurer. Due to factors such as insolvency, adverse underwriting results or inadequate investment returns, our reinsurers may not be able to pay the reinsurance recoverables they owe to us on a timely basis or at all. Reinsurers might refuse or fail to pay losses that we cede to them or might delay payment. Since death benefit claims may be paid long after a policy is issued, we bear credit risk with respect to our reinsurers. The creditworthiness of our reinsurers may change before we can recover amounts to which we are entitled.

 

No assurance is given that our reinsurers will pay the reinsurance recoverables owed to us now or in the future or that they will pay these recoverables on a timely basis. Any such failure to pay by our reinsurers could have a material adverse effect on our business, financial condition and results of operations.

 

The failure by the affiliates of Citi who are parties to the Citi reinsurance transactions to perform their obligations to us under our coinsurance agreements could have a material adverse effect on our business, financial condition and results of operations.

 

Immediately prior to our initial public offering, we entered into four coinsurance agreements with three reinsurer affiliates of Citi pursuant to which we ceded between 80% and 90% of the risks and rewards of our term life insurance policies that were in force at year-end 2009. Under this arrangement, our current third-party reinsurance agreements remain in place. The largest of these transactions involved two coinsurance agreements between Primerica Life and Prime Reinsurance Company, Inc. (“Prime Re”), then a wholly owned subsidiary of Primerica Life. Pursuant to these reinsurance agreements, we distributed to Citi all of the issued and outstanding common stock of Prime Re. Prime Re was formed solely for the purpose of entering into these reinsurance transactions, has no operating history and does not possess a financial strength rating from any rating agency. The other transactions were between (1) Primerica Life Canada and Financial Reassurance Company 2010 Ltd., a Bermuda reinsurer formed solely for the purpose of reinsuring Citi-related risks and is a wholly owned

 

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subsidiary of Citi, and (2) NBLIC and American Health and Life Insurance Company (“AHL”), a wholly owned insurance subsidiary of Citi that has a financial strength rating of “A” by A.M. Best. Each of the three reinsurers entered into trust agreements with our respective insurance subsidiaries and a trustee pursuant to which the reinsurer placed assets (primarily treasury and fixed-income securities) in trust for such subsidiary’s benefit to secure the reinsurer’s obligations to such subsidiary. Each such coinsurance agreement requires each reinsurer to maintain assets in trust sufficient to give the subsidiary full credit for regulatory purposes for the insurance, which amount will not be less than the amount of the reserves for the reinsured liabilities. In addition, in the case of the reinsurance transactions between Prime Re and Primerica Life, Citi has agreed in a capital maintenance agreement to maintain Prime Re’s RBC above a specified minimum level, subject to a maximum amount of $512 million being contributed by Citi. After the first five years of the capital maintenance agreement, the maximum amount payable will be an aggregate amount equal to the lesser of $512 million or 15% of statutory reserves. In the case of the reinsurance transaction between NBLIC and AHL, Citi has agreed to over-collateralize the assets in the trust for NBLIC by 15% for the life of the coinsurance agreement between NBLIC and AHL. Furthermore, our insurance subsidiaries have the right to recapture the business upon the occurrence of an event of default under their respective coinsurance agreement with the Citi affiliates subject to any applicable cure periods. An event of default includes (1) a reinsurer insolvency, (2) failure through the fault of the reinsurer to provide full statutory financial statement credit for the reinsurance ceded, (3) a material breach of any covenant, representation or warranty by the reinsurer, (4) failure by the reinsurer to fund the trust account required to be established under the coinsurance agreements in any material respects, or (5) in connection with the coinsurance agreements with Prime Re, failure by Citi to maintain sufficient capital in the reinsurer, pursuant to the capital maintenance agreement between Citi and the reinsurer within 45 calendar days of any demand for payment by or on behalf of Primerica Life, and any 45-day extension thereof as consented to by Primerica Life, which consent may not be unreasonably conditioned, delayed or withheld, for a total of not more than 90 days to obtain such consent; provided that Primerica Life is not required to consent to extend such period beyond an additional 45 days. While any such recapture would be at no cost to us, such recapture would result in a substantial increase in our insurance exposure and require us to be fully responsible for the management of the assets set aside to support statutory reserves. The type of assets we might obtain as a result of a recapture may not be as highly liquid as our current invested asset portfolio and could result in an unfavorable impact on our risk profile.

 

We cannot provide assurance that the relevant Citi reinsurer will pay the reinsurance obligations owed to us now or in the future or that it will pay these obligations on a timely basis. Notwithstanding the capital maintenance agreement between Prime Re and Citi and the initial over-collateralization of assets in trust for the benefit of our insurance companies, if any of our reinsurers affiliated with Citi becomes insolvent, the amount in the trust account to support the obligations of such reinsurer is insufficient to pay such reinsurer’s obligations to us and we fail to enforce our right to recapture the business, it could have a material adverse effect on our business, financial condition and results of operations.

 

Yearly renewable term reinsurance may not be available or affordable in the future to limit our mortality risk exposure.

 

We have historically used yearly renewable term (“YRT”) reinsurance to manage our loss exposure to mortality risks. It is our current intention to continue our practice of purchasing mortality reinsurance in the future consistent with our past practice. While YRT reinsurance agreements generally bind the reinsurers for the life of the business reinsured at generally fixed pricing, market conditions beyond our control determine the availability and cost of the reinsurance protection for new business. We may not be able to maintain our current YRT reinsurance agreements in adequate amounts and at favorable rates. Any decrease in the amount of YRT reinsurance will increase our exposure to mortality risks.

 

Changes in accounting for deferred policy acquisition costs of insurance entities will accelerate the recognition for certain acquisition costs not deemed to be directly related to the successful acquisition of new insurance contracts.

 

In October 2010, the Financial Accounting Standards Board, or FASB, issued ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts (ASU 201-26). The update revises the

 

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definition of deferred policy acquisition costs to reflect incremental costs directly related to the successful acquisition of new and renewed insurance contracts. The update creates a more limited definition than the current guidance, which defines deferred policy acquisition costs as those that vary with, and primarily relate to, the acquisition of insurance contracts. The revised definition materially increases the portion of acquisition costs being expensed as incurred rather than deferred and amortized over the lives of the underlying policies. The update allows either prospective or retrospective adoption and is required to be adopted for our fiscal year beginning January 1, 2012. While we are currently unable to quantify the impact of implementation, we expect this update to have a material adverse effect on our results of operations, as we will be required to accelerate the recognition of certain expenses associated with acquiring life insurance business.

 

Changes in accounting standards can be difficult to predict and could adversely impact how we record and report our financial condition and results of operations.

 

Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. U.S. GAAP continues to evolve and as a result, may change the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be hard to anticipate and implement and can materially impact how we record and report our financial condition and results of operations. For example, the FASB’s current insurance contracts project could, among other things, significantly change the way we measure insurance liabilities on our balance sheet and the way we present earnings on our statement of income. This project, in addition to a related proposal to modify International Financial Reporting Standards on accounting for insurance contracts, could adversely impact both our financial condition and results of operations as reported on a U.S. GAAP basis as well as our statutory capital calculations.

 

Risks Related to Our Investments and Savings Products Business

 

Our investment and savings products segment is heavily dependent on mutual fund and annuity products offered by a relatively small number of companies and if these products fail to remain competitive with other investment options or we lose our relationship with one or more of these fund companies or with the source of our annuity products, our business, financial condition and results of operations may be materially adversely affected.

 

We earn a significant portion of our earnings through our relationships with a small group of mutual fund companies, including Legg Mason, Invesco and American Funds, and with MetLife, which provides our annuity products. A decision by one or more of these companies to alter or discontinue their current arrangements with us could materially adversely affect our business, financial condition and results of operations. In addition, if any of our investment and savings products fail to achieve satisfactory investment performance, our clients may seek higher yielding alternative investment products. If any of our investment and savings products fail to achieve satisfactory investment performance for an extended period of time, we may experience higher redemption rates. In such circumstances, we may also experience re-allocations of existing client assets and increased allocations of new assets to investment and savings products with higher investment returns, which ultimately results in changes in our mix of business. Since different investment and savings products have different revenue and expense characteristics, such changes may have significant negative consequences for us.

 

In recent years there has been an increase in the popularity of alternative investments, which we do not currently offer, principally index funds and exchange traded funds. These investment options typically have low fee structures and provide some of the attributes of mutual funds, such as risk diversification. If these products continue to gain traction among our client base as viable alternatives to mutual fund investments, our investment and savings products revenues may decline.

 

In addition to sales commissions and asset-based compensation, a significant portion of our earnings from investment and savings products comes from recordkeeping services that we provide to Invesco, Legg Mason and Pioneer Investments and from fees earned for custodial services we provide to clients with retirement plan accounts in the funds of these mutual fund companies. We also receive revenue sharing payments from each of

 

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these mutual fund companies. A decision by one or more of these fund companies to alter or discontinue their current arrangements with us would materially adversely affect our business, financial condition and results of operations.

 

Our or our securities-licensed sales representatives violations of, or non-compliance with, laws and regulations could expose us to material liabilities.

 

Our subsidiary broker-dealer, PFS Investments Inc. (“PFS Investments”), is subject to federal and state regulation of its securities business, including sales practices, trade suitability, supervision of registered representatives, recordkeeping, the conduct and qualification of officers and employees, the rules and regulations of the MSRB and state blue sky regulation. Our subsidiary, Primerica Shareholder Services, Inc. (“PSS”), is a registered transfer agent engaged in the recordkeeping business and is subject to SEC regulation. Violations of laws or regulations applicable to the activities of PFS Investments or PSS or violations by a third party with which PFS Investments or PSS contracts which improperly performs its task could subject us to disciplinary actions and could result in the imposition of cease and desist orders, fines or censures, restitution to clients, disciplinary actions, including the potential suspension or revocation of its license by the SEC, or the suspension or expulsion from FINRA and reputational damage, which could materially adversely affect our business, financial condition and results of operations.

 

Our Canadian dealer subsidiary, PFSL Investments Canada Ltd. (“PFSL Investments Canada”) and its sales representatives are subject to the securities laws of the provinces and territories of Canada in which we sell our mutual fund products and those of third parties and to the rules of the MFDA, the self-regulatory organization governing mutual fund dealers. PFSL Investments Canada is subject to periodic review by both the MFDA and the provincial and territorial securities commissions to assess its compliance with, among other things, applicable capital requirements and sales practices and procedures. These regulators have broad administrative powers, including the power to limit or restrict the conduct of our business for failure to comply with applicable laws or regulations. Possible sanctions that may be imposed include the suspension of individual sales representatives, limitations on the activities in which the dealer may engage, suspension or revocation of the dealer registration, censure or fines, any of which could materially adversely affect our business, financial condition and results of operations.

 

If heightened standards of conduct or more stringent licensing requirements, such as those recently proposed by the SEC and the DOL, are imposed on us or our sales representatives or selling compensation is reduced as a result of new legislation or regulations, it could have a material adverse effect on our business, financial condition and results of operations.

 

Our sales representatives are subject to federal and state regulation as well as state licensing requirements. PFS Investments, which is regulated as a broker-dealer, and our U.S. sales representatives are currently subject to general anti-fraud limitations under the Exchange Act and SEC rules and regulations, as well as other conduct standards prescribed by FINRA. These standards generally require that broker-dealers and their sales representatives disclose conflicts of interest that might affect the advice or recommendations they provide and require them to make suitable investment recommendations to their customers. The Dodd-Frank Act, which gives the SEC the power to impose on broker-dealers a heightened standard of conduct that is currently applicable only to investment advisors, requires the SEC to conduct a study to evaluate the effectiveness of the current legal standards of conduct for those that provide personalized investment advice regarding securities to retail customers. The SEC staff recently submitted a report to Congress in which it recommends that the SEC adopt a uniform fiduciary standard of conduct.

 

Additionally, the DOL has published a proposed rule (the “DOL Proposed Rule”) that would more broadly define the circumstances under which a person or entity may be considered a fiduciary for purposes of the prohibited transaction rules of Internal Revenue Code Section 4975 (“Section 4975”), under which certain types of compensation paid by third parties with respect to transactions involving assets in qualified accounts, including IRAs, may be prohibited. If PFS Investments and its securities-licensed representatives are

 

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deemed to be fiduciaries under the DOL Proposed Rule, our ability to receive and retain certain types of compensation paid by third parties with respect to both new and existing assets in qualified accounts could be significantly limited, and our licensed representatives could be required to obtain additional securities licenses, which they may not be willing or able to obtain.

 

IRAs and other qualified accounts are a core component of the Investment and Savings Products segment of our business and accounted for a significant portion of the total revenue of this segment for the year ended December 31, 2010. Thus, if the DOL Proposed Rule is adopted in its present form, we would expect to substantially restructure our current business model for qualified accounts. Such restructuring could make it significantly more difficult for us and our representatives to profitably serve the middle-income market and could result in a significant reduction in the number of IRAs and qualified accounts that we serve, which could materially adversely affect the amount of revenue that we generate from this line of business and ultimately could result in a decline in the number of our securities-licensed representatives.

 

The DOL Proposed Rule has generated substantial public comment, including significant opposition from participants in the securities industry, and, as a result, the form, substance and timing of any final rule are unknown at this time. It is also possible that the rule could be adopted in a form that does not materially adversely affect us. If adopted in the form proposed, however, the DOL Proposed Rule could have a materially adverse affect on our business, financial condition and results of operations.

 

Heightened standards of conduct as a result of either of the above proposals or another similar proposed rule or regulation could also increase the compliance and regulatory burdens on our representatives, lead to increased litigation and regulatory risks, changes to our business model, a decrease in the number of our securities-licensed representatives and a reduction in the products we offer to our clients, which could have a material adverse effect on our business, financial condition and results of operations.

 

Our suitability policies and procedures could be deemed inadequate.

 

We review account applications for our investment or savings product received by us for suitability. While we believe that our policies and procedures implemented to help our sales representatives assist clients in making appropriate and suitable investment choices are reasonably designed to achieve compliance with applicable securities laws and regulations, it is possible that FINRA and MFDA may not agree. In that event, we could be subject to regulatory actions or civil litigation, which could materially adversely affect our business, financial condition and results of operations.

 

Our sales force support tools may fail to appropriately identify suitable investment products.

 

Our support tools are designed to educate clients, help identify their financial needs, illustrate the potential benefits of our products and allow a sales representative to show them how the sales representative’s recommendations may help them. There is a risk that the assumptions and methods of analyses embedded in our support tools could be successfully challenged and subject us to regulatory actions or civil litigation, which could materially adversely affect our business, financial condition and results of operations.

 

Non-compliance with applicable regulations could lead to revocation of our subsidiary’s status as a non-bank custodian.

 

PFS Investments is a non-bank custodian of retirement accounts, as permitted under Treasury Regulation 1.408-2. A non-bank custodian is an entity that is not a bank and that is permitted by the IRS to act as a custodian for retirement plan account assets of our clients. The IRS retains authority to revoke or suspend that status if it finds that PFS Investments is unwilling or unable to administer retirement accounts in a manner consistent with the requirements of the regulations. Revocation of PFS Investments’ non-bank custodian status would affect its ability to earn revenue for providing such services and, consequently, could materially adversely affect our business, financial condition and results of operations.

 

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Risks Related to Our Loan Business

 

The current economic environment and stringent credit policies may continue to negatively affect our loan production.

 

Beginning in 2008, in response to economic conditions and consistent with steps taken by other mortgage lenders generally, our mortgage lenders implemented more rigorous credit standards, including more restrictive loan-to-value limitations and more restrictive underwriting criteria, which adversely affected our loan business. We anticipate that these credit restrictions will be ongoing, and it is possible that further restrictive underwriting criteria may be imposed by our mortgage lenders in reaction to changes in the economic environment or by new legislative or regulatory requirements, including the Dodd-Frank Act, affecting mortgage lending generally. Heightened credit standards have materially reduced the volume of our loan sales. Beginning in March 2010, we modified the mortgage product to make it a conforming loan product that is saleable by Citicorp Trust Bank, fsb (“CTB”), the lender and a subsidiary of Citi, to government-sponsored enterprises, Fannie Mae and Freddie Mac. This modification reduced the compensation that we and our sales force earn upon the origination of a mortgage loan in the United States.

 

While mortgage origination historically has not accounted for a significant portion of our earnings, sourcing of mortgage loans historically has provided an opportunity for new sales representatives to receive commissions before they have completed the licensing process that is required to sell life insurance and certain other products. Additionally, some of our sales representatives use loan product sales efforts as a gateway to establish an ongoing relationship with clients. Consequently, the reduction in the scale of our loan product distribution business and the related commission compensation to our sales force may cause us to have fewer sales representatives and impede our overall growth.

 

New licensing requirements will continue to significantly reduce the size of our loan sales force.

 

The number of our sales representatives who are authorized to sell loan products in the United States has significantly decreased due to the implementation of individual licensing requirements mandated by the Federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (the “SAFE Act”). The SAFE Act required all states to enact and implement laws that require our U.S. sales representatives to be individually licensed if they engage in offering mortgage loan products. Prior to the enactment of the SAFE Act, our sales representatives were not required to be individually licensed or registered to sell mortgage loan products in the majority of states. Due to the enactment and implementation by the states of the SAFE Act, to offer mortgage loan products, our sales representatives must be individually licensed as mortgage loan originators (and in some states as both mortgage brokers and mortgage loan originators) by the states in which they do business. These licensing requirements include enrollment in the Nationwide Mortgage Licensing System, application to state regulators for individual licenses, a minimum of 20 hours of pre-licensing education, an annual minimum of eight hours of continuing education and the successful completion of both national and state exams. Compliance with these licensing regimes (including background checks) have proven to be a barrier in terms of cost or time for a large number of our sales representatives. In addition, the exams have proven to be challenging for our sales representatives to pass. The SAFE Act licensing requirements have caused, and are expected to continue to cause, a significant reduction in the scale of our loan product distribution business, which could materially adversely affect our loan product sales.

 

The reduction of the number of sales representatives participating in the loan business has adversely impacted, and is expected to continue to adversely impact, the ability of Primerica Financial Services Home Mortgages, Inc. (“Primerica Mortgages”), our loan broker company, to maintain and obtain corporate mortgage broker (or equivalent) licenses in certain states where no sales representatives are individually licensed. If Primerica Mortgages does not obtain or maintain corporate mortgage broker licenses in the various states, then representatives who want to become individually licensed will be unable to do so due to the lack of a sponsoring licensed mortgage broker or may seek another sponsoring licensed mortgage broker. Unless both individual representatives and Primerica Mortgages are licensed, neither can offer mortgage loans in a state. In addition, our inability to source mortgage loans impacts the compensation paid to our sales representatives and our ability to assist our clients with their needs.

 

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Our loan business is subject to various federal laws, changes in which could affect the cost or our ability to distribute our products and could materially adversely affect our business, financial condition and results of operations.

 

Our U.S. loan business is subject to various federal laws, including the Truth In Lending Act and its implementing regulation, Regulation Z, the Equal Credit Opportunity Act and its implementing regulation, Regulation B, the Fair Housing Act and the Home Ownership Equity Protection Act. We are also subject to the Real Estate Settlement Procedures Act (“RESPA”) and its implementing regulation, Regulation X, which requires timely disclosures related to the nature and costs of real estate settlement amounts and limits those costs and compensation to amounts reasonably related to the services performed.

 

We are also subject to the Dodd-Frank Act and any regulations that will be issued under that Act. The Dodd-Frank Act created a new consumer protection agency, the Bureau of Consumer Financial Protection, which will have the authority to examine, supervise and enforce federal consumer financial laws, including those impacting Primerica Mortgages’ business. Additionally, the Dodd-Frank Act imposed restrictions on the manner and amount of mortgage originator compensation and establishes a federal ability to repay standard for all mortgage loans. Other restrictions contained in the Dodd-Frank Act could have the effect of limiting the availability of certain loan products in the market and adversely impact the range of products offered and the volume of loan business.

 

Additionally, we must comply with various state and local laws and policies concerning our lenders, the provision of consumer disclosures, net branching, predatory lending and high cost loans and recordkeeping. In the state of California, the law provides that since Primerica Mortgages is a licensed as California Finance Lender authorized to act as a mortgage broker, Primerica Mortgages is restricted to brokering loans only to another lender who is licensed as a California Finance Lender. Currently, our lender, Citicorp Trust Bank, fsb, is licensed as a California Finance Lender, but should CTB elect to transfer the lending business to either CitiMortgage, Inc. or Citibank N.A., neither of which are currently licensed as California Finance Lenders, Primerica Mortgages ability to source loans in California could be adversely impacted. Differing interpretations of, changes in, or violations of, any of these laws or regulations could subject us to damages, fines or sanctions and could affect the cost or our ability to distribute our products, which could materially adversely affect our business, financial condition and results of operations.

 

Other Risks Related to Our Business

 

A further delay in the recovery of the United States’ and Canadian economies could materially adversely affect our business, financial condition and results of operations.

 

Our business, financial condition and results of operations have been materially adversely affected by the economic downturn in the United States and Canada and the slow recovery that has occurred since the last half of 2009. During this period, we have observed increased volatility in the availability and cost of credit, shrinking mortgage markets, fluctuating equity values and falling consumer confidence and general instability of financial and other institutions. This economic downturn, which has been characterized by higher unemployment, lower family income, lower valuation of retirement savings accounts, lower corporate earnings, lower business investment and lower consumer spending, has adversely affected the demand for the term life insurance, investment and other financial products that we sell. A continuation of these effects could severely affect new sales and cause clients to liquidate mutual funds and other investments sold by our sales representatives. This could cause a decrease in the asset value of client accounts, reduce our trailing commission revenues and result in other-than-temporary-impairments in our invested asset portfolio. In addition, we may experience an elevated incidence of lapses or surrenders of insurance policies, and some of our policyholders may choose to defer paying insurance premiums or stop paying insurance premiums altogether. Continuing volatility in equity markets or downturns could discourage purchases of the investment products that we sell for third parties. Moreover, if the economic recovery in the United States and Canada is delayed further, it will likely have an adverse effect on our business, including our ability to recruit and retain sales representatives. If credit markets remain tight for a prolonged period, our liquidity will be more limited than it otherwise would have been, and our business, financial condition and results of operations may be materially adversely affected.

 

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We are subject to various federal laws and regulations in the United States and Canada, changes in which or violations of which may require us to alter our business practices and could materially adversely affect our business, financial condition and results of operations.

 

In the United States, we are subject to the Right to Financial Privacy Act and its implementing regulation, Regulation S-P, the Fair Credit Reporting Act, the Gramm-Leach-Bliley Act, the McCarran-Ferguson Act, the Foreign Corrupt Practices Act, the Sarbanes-Oxley Act, the Telemarketing and Consumer Fraud and Abuse Prevention Act, the Telephone Consumer Protection Act, the FTC Act, the Unfair Trade Practices Act, the Electronic Funds Transfer Act, the Bank Holding Company Act Amendments of 1970 and anti-tying restrictions. We are also subject to anti-money laundering laws and regulations, including the Bank Secrecy Act, as amended by the Patriot Act, which requires us to develop and implement customer identification and risk-based anti-money laundering programs, report suspicious activity and maintain certain records. We are also required to follow certain economic and trade sanctions programs that are administered by the Office of Foreign Asset Control that prohibit or restrict transactions with suspected countries, their governments, and in certain circumstances, their nationals.

 

In Canada, we are subject to provincial and territorial consumer protection legislation that pertains to unfair and misleading business practices, provincial and territorial credit reporting legislation that provides requirements in respect of obtaining credit bureau reports and providing notices of decline, the Personal Information Protection and Electronic Documents Act, the Competition Act, the Corruption of Foreign Public Officials Act, the Telecommunications Act and certain Canadian Radio-television and Telecommunications Commission Telecom Decisions in respect of unsolicited telecommunications. We are also subject to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and its accompanying regulations, which require us to develop and implement money laundering policies and procedures relating to customer indemnification, reporting and recordkeeping, develop and maintain ongoing training programs for employees, perform a risk assessment on our business and clients and institute and document a review of our anti-money laundering program at least once every two years. We are also required to follow certain economic and trade sanctions and legislation that prohibit us from, among other things, engaging in transactions with, and providing services to, persons on lists created under various federal statutes and regulations and blocked persons and foreign countries and territories subject to Canadian sanctions administered by Foreign Affairs and International Trade Canada and the Department of Public Safety Canada.

 

Changes in, or violations of, any of these laws or regulations may require additional compliance procedures, or result in enforcement proceedings, sanctions or penalties, which could have a material adverse effect on our business, financial condition and results of operations.

 

Litigation and regulatory investigations and actions may result in financial losses and harm our reputation.

 

We face a risk of litigation and regulatory investigations and actions in the ordinary course of operating our businesses. From time to time, we are subject to private litigation and regulatory investigations as a result of sales representative misconduct. See the section entitled “ — Risks Related to Our Distribution Structure — Our or our sales representatives’ violation of or non-compliance with laws and regulations and the related claims and proceedings could expose us to material liabilities” beginning on page S-15 of this prospectus supplement. In addition, we may become subject to lawsuits alleging, among other things, issues relating to sales or underwriting practices, payment of improper sales commissions, claims payments and payment procedures, product design, product disclosure, administration, additional premium charges for premiums paid on a periodic basis, denial or delay of benefits, recommending unsuitable sales of products to clients and our pricing structures. Life insurance companies have historically been subject to substantial litigation resulting from policy disputes and other matters. For example, they have faced extensive claims alleging improper life insurance sales practices. If we become subject to similar litigation, any judgment or settlement of such claims could have a material adverse effect on our business, financial condition and results of operations.

 

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In addition, we are subject to litigation arising out of our general business activities. For example, we have a large sales force, and we could face claims by some of our sales representatives arising out of their relationship with us, including claims involving contract terminations, commission disputes, transfers of sales representatives from one sales organization to another, agreements among sales representatives or between us and a sales representative or any of our other dealings with, or policies regarding, sales representatives. We are also subject to various regulatory inquiries, such as information requests, subpoenas and books and record examinations, from state, provincial and federal regulators and other authorities. A substantial legal liability or a significant regulatory action against us could have a material adverse effect on our business, financial condition and results of operations.

 

Moreover, even if we ultimately prevail in any such litigation, regulatory action or investigation, we could suffer significant reputational harm, which could have a material adverse effect on our business, financial condition and results of operations. In addition, increased regulatory scrutiny and any resulting investigations or proceedings could result in new legal precedents and industry-wide regulations or practices that could materially adversely affect our business, financial condition and results of operations.

 

The current legislative and regulatory climate with regard to financial services may adversely affect our operations.

 

The volume of legislative and regulatory activity relating to financial services has increased substantially in recent years. The Dodd-Frank Act could cause sweeping changes in the consumer financial services industry, and impact us. As a result, these changes may include holding our sales representatives to a heightened fiduciary standard previously inapplicable to them and limiting or eliminating the use of mandatory pre-dispute arbitration. The SEC also introduced a proposal in July 2010 to restructure and limit the payment of 12b-1 (distribution) fees by mutual fund and variable annuity issuers to selling broker-dealers. The FTC and the federal banking regulatory agencies also have promulgated or proposed new regulations relating to financial services, and we expect more regulations to be proposed. We also anticipate that the level of enforcement actions and investigations by federal regulators will increase in the foreseeable future. The same factors that have contributed to legislative, regulatory and enforcement activity at the federal level are likely to contribute to heightened legislative, regulatory and enforcement activity relating to financial services at the state and provincial level as well. If we or our sales representatives become subject to new requirements or regulations, it could result in increased litigation, regulatory risks, changes to our business model, a decrease in the number of our securities licensed representatives or a reduction in the products we offer to our clients or the profits we earn, which could have a material adverse effect on our business, financial condition and results of operations.

 

The inability of our subsidiaries to pay dividends or make distributions or other payments to us in sufficient amounts, including due to bankruptcy or insolvency, would impede our ability to meet our obligations.

 

We are a holding company, and we have no significant operations. Our primary asset is the capital stock of our subsidiaries, and our primary liability is a $300.0 million note payable due March 31, 2015 bearing interest at an annual rate of 5.5% (the “Citi note”), which we issued to a wholly owned subsidiary of Citi in a corporate reorganization that occurred in connection with our initial public offering. For a description of the Citi note and the corporate reorganization, see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — The Transactions” beginning on page S-45 of this prospectus supplement.

 

We rely primarily on dividends and other payments from our subsidiaries to meet our operating costs and other corporate expenses, as well as to pay dividends to our stockholders. The ability of our subsidiaries to pay dividends to us depends on their earnings, covenants contained in future financing or other agreements and on regulatory restrictions. The ability of our insurance subsidiaries to pay dividends will further depend on their statutory surplus. If the cash we receive from our subsidiaries pursuant to dividend payments and tax sharing arrangements is insufficient for us to fund our obligations, including the Citi note, or if a subsidiary is unable to pay dividends to us, we may be required to raise cash through the incurrence of debt, the issuance of equity or the sale of assets. However, given the recent volatility in the capital markets, there is no assurance that we would be able to raise cash by these means.

 

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The payment of dividends and other distributions to us by our insurance subsidiaries is regulated by insurance laws and regulations. The jurisdictions in which our insurance subsidiaries are domiciled impose certain restrictions on their ability to pay dividends to us. In the United States, these restrictions are based, in part, on the prior year’s statutory income and surplus. In general, dividends up to specified levels are considered ordinary and may be paid without prior approval. For example, in Massachusetts the ordinary dividend capacity for Primerica Life is based on the greater of (1) 10% of the previous year-end statutory capital and surplus or (2) the previous year’s statutory net gain from operations. Dividends in larger amounts are subject to approval by the insurance commissioner of the state of domicile. In Canada, dividends can be paid, subject to the paying insurance company continuing to meet the regulatory requirements for capital adequacy and liquidity and upon 15 days’ minimum notice to OSFI. No assurance is given that more stringent restrictions will not be adopted from time to time by jurisdictions in which our insurance subsidiaries are domiciled, and such restrictions could have the effect, under certain circumstances, of significantly reducing dividends or other amounts payable to us by our subsidiaries without prior approval by regulatory authorities. In addition, in the future, we may become subject to debt instruments or other agreements that limit our ability to pay dividends. The ability of our insurance subsidiaries to pay dividends to us is also limited by our need to maintain the financial strength ratings assigned to us by the ratings agencies.

 

If any of our subsidiaries were to become insolvent, liquidate or otherwise reorganize, we, as sole stockholder, will have no right to proceed against the assets of that subsidiary. Furthermore, with respect to our insurance subsidiaries, we, as sole stockholder, will have no right to cause the liquidation, bankruptcy or winding-up of the subsidiary under the applicable liquidation, bankruptcy or winding-up laws, although, in Canada, we could apply for permission to cause liquidation. The applicable insurance laws of the jurisdictions in which each of our insurance subsidiaries is domiciled would govern any proceedings relating to that subsidiary. The insurance authority of that jurisdiction would act as a liquidator or rehabilitator for the subsidiary. Both creditors of the subsidiary and policyholders (if an insurance subsidiary) would be entitled to payment in full from the subsidiary’s assets before we, as the sole stockholder, would be entitled to receive any distribution from the subsidiary, which could adversely affect our ability to pay our operating costs and other corporate expenses.

 

If the ability of our insurance or non-insurance subsidiaries to pay dividends or make other distributions or payments to us is materially restricted by regulatory requirements, bankruptcy or insolvency, or our need to maintain our financial strength ratings, or is limited due to operating results or other factors, it could materially adversely affect our ability to pay our operating costs and other corporate expenses.

 

We may incur debt or issue equity to meet our operating and regulatory capital requirements or for other purposes.

 

Historically, we have funded our new business capital needs from cash flows provided by premiums paid on our in-force book of term life insurance policies. As a result of the Citi reinsurance transactions, the net cash flow we retain from our existing block of term life insurance policies was reduced proportionately to the size of our retained interest. As we grow our term life insurance business by issuing new policies, we will need to fund all of the upfront cash requirements of issuing new term life policies (such as commissions payable to the sales force and underwriting expenses), which costs generally exceed premiums collected in the first year after a policy is sold. In light of these anticipated net cash outflows, there will be significant demands on our liquidity in the near- to intermediate-term as we grow the size of our retained block of term life insurance policies. Therefore, to meet our operating and regulatory requirements, we may incur debt or issue equity to fund working capital and capital expenditures or to make acquisitions and other investments. If we raise funds through the issuance of debt securities or preferred equity securities, any such debt securities or preferred equity securities issued will have liquidation rights, preferences and privileges senior to those of the holders of our common stock. If we raise funds through the issuance of equity securities, the issuance will dilute your ownership interest in us. There is no assurance that debt or equity financing will be available to us on acceptable terms, if at all. If we are not able to obtain sufficient financing, we may be unable to maintain or grow our business.

 

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Our inability to achieve an investment-grade rating from rating agencies could restrict our ability to refinance the Citi note with terms that are acceptable.

 

Prior to the completion of our initial public offering, we issued to Citi the $300.0 million Citi note. This note matures on March 31, 2015, and we are obligated under the terms of the note to use commercially reasonable efforts to refinance the note at certain mutually agreeable dates, based on certain conditions. If we are unable to achieve an investment-grade rating, or are otherwise unable to refinance the note on reasonable economic terms, we may incur significantly higher interest expense or be unable to repay the Citi note in full upon maturity. See the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Liquidity and Capital Resources — Citi Note” beginning on page S-80 of this prospectus supplement for a description of the terms of the Citi note.

 

A significant change in the competitive environment in which we operate could negatively affect our ability to maintain or increase our market share and profitability.

 

We face competition in all of our business lines. Our competitors include financial services companies, mutual fund companies, banks, investment management firms, broker-dealers, insurance companies and direct sales companies. In many of our product lines, we face competition from competitors that have greater market share or breadth of distribution, offer a broader range of products, services or features, assume a greater level of risk, have lower profitability expectations or have higher financial strength ratings than we do. A significant change in this competitive environment could materially adversely affect our ability to maintain or increase our market share and profitability.

 

The loss of key personnel could negatively affect our financial results and impair our ability to implement our business strategy.

 

Our success substantially depends on our ability to attract and retain key members of our senior management team. The efforts, personality and leadership of our senior management team have been, and will continue to be, critical to our success. The loss of service of our senior management team due to disability, death, retirement or some other cause could reduce our ability to successfully motivate our sales representatives and implement our business plan and have a material adverse effect on our business, financial condition and results of operations. John Addison and Rick Williams, our Co-Chief Executive Officers, are well regarded by our sales representatives and have substantial experience in our business and, therefore, are particularly important to our company. Although both Messrs. Addison and Williams, as well as our other senior executives, have entered into employment agreements with us, there is no assurance that they will complete the term of their employment agreements or renew them upon expiration.

 

In addition, the loss of key RVPs for any reason could negatively affect our financial results and could impair our ability to attract new sales representatives. See “— Risks Related to Our Distribution Structure — Our failure to continue to attract new recruits, retain sales representatives or maintain the licensing of our sales representatives would materially adversely affect our business” beginning on page S-13 of this prospectus supplement.

 

If one of our significant information technology systems fails or if its security is compromised, our business, financial condition and results of operations may be materially adversely affected.

 

Our business is highly dependent upon the effective operation of our information technology systems, which are centered on a mainframe platform supported by servers housed at our Duluth and Roswell, Georgia sites. We rely on these systems throughout our business for a variety of functions. Our information technology systems run a variety of third-party and proprietary software, including Primerica Online (our website portal to our sales force), our insurance administration system, Virtual Base Shop (our paperless office for RVPs), TurboApps (our point-of-sale data collection tool for product/recruiting applications), our licensing decision and support system and our compensation system.

 

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Despite the implementation of security and back-up measures, our information technology systems may be vulnerable to physical or electronic intrusions, viruses or other attacks, programming errors and similar disruptions. The failure of any one of these systems for any reason could cause significant interruptions to our operations, which could have a material adverse effect on our business, financial condition and results of operations. We retain confidential information in our information technology systems, and we rely on industry standard commercial technologies to maintain the security of those systems. Anyone who is able to circumvent our security measures and penetrate our information technology systems could access, view, misappropriate, alter, or delete information in the systems, including personally identifiable client information and proprietary business information. In addition, an increasing number of jurisdictions require that clients be notified if a security breach results in the disclosure of personally identifiable client information. Any compromise of the security of our information technology systems that results in inappropriate disclosure or use of personally identifiable client information could damage our reputation in the marketplace, deter people from purchasing our products, subject us to significant civil and criminal liability and require us to incur significant technical, legal and other expenses.

 

In the event of a disaster, our business continuity plan may not be sufficient, which could have a material adverse effect on our business, financial condition and results of operations.

 

Our infrastructure supports a combination of local and remote recovery solutions for business resumption in the event of a disaster. In the event of either a campus-wide destruction of all buildings or the inability to access our main campus in Duluth, Georgia, our business recovery plan provides for our employees to perform their work functions via a dedicated business recovery site located 25 miles from our main campus, by remote access from an employee’s home or by relocation of employees to our New York or Ontario offices. However, in the event of a full scale local or regional disaster, our business recovery plan may be inadequate, and our employees and sales representatives may be unable to carry out their work, which could have a material adverse effect on our business, financial condition and results of operations.

 

We may be materially adversely affected by currency fluctuations in the United States dollar versus the Canadian dollar.

 

In recent periods, exchange rate fluctuations have been significant. A weaker Canadian dollar relative to the U.S. dollar would result in lower levels of reported revenues, net income, assets, liabilities and accumulated other comprehensive income in our U.S. dollar financial statements. We have not historically hedged against this exposure. Significant exchange rate fluctuations between the U.S. dollar and Canadian dollar could have a material adverse effect on our financial condition and results of operations.

 

Risks Related to Our Relationships with Citi and Warburg Pincus

 

Citi’s continuing significant interest may result in conflicts of interest.

 

As of April 1, 2011, Citi owned approximately 39.3% of our outstanding common stock. Citi has agreed to limit its representation on our board of directors to one member. For so long as Citi owns a significant portion of our common stock, Citi may be able to influence the outcome of all corporate actions requiring stockholder approval, including the election of directors. Citi has agreed to vote its shares of our common stock in favor of directors nominated by Warburg Pincus for so long as Warburg Pincus has rights to nominate one or two directors pursuant to the terms of the Securities Purchase Agreement, by and among Citi, Primerica and private equity funds managed by Warburg Pincus LLC, dated as of February 8, 2010 (the “Securities Purchase Agreement”), whereby Citi sold to Warburg Pincus 16,412,440 share of our common stock and warrants to purchase 4,103,110 additional shares of our common stock. For a description of the private sale, see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — The Transactions” beginning on page S-45 of this prospectus supplement.

 

Under the provisions of our certificate of incorporation and the Intercompany Agreement we entered into with Citi in connection with our initial public offering (the “Intercompany Agreement”), the prior consent of Citi will be required in connection with specified corporate actions until Citi ceases to beneficially own shares of our

 

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common stock representing 20% or more of the votes entitled to be cast by the holders of our then outstanding common stock. For a description of the Intercompany Agreement, see “Related Party Transactions — Transactions with Citi in Connection with Our Initial Public Offering — Intercompany Agreement” included in our Proxy Statement on Schedule 14A, filed with the SEC on March 31, 2011 (the “2011 Proxy Statement”), which is incorporated by reference into the accompanying prospectus.

 

Because Citi’s interests may differ from those of other stockholders, actions that Citi may take with respect to us may not be as favorable to you as they are to Citi. Conflicts of interest may arise between us and Citi in a number of areas relating to our past and ongoing relationships.

 

Citi and its directors and officers will have limited liability for breach of fiduciary duty.

 

Our certificate of incorporation provides that, subject to any contractual provision to the contrary (including the Intercompany Agreement), Citi has no obligation to refrain from:

 

   

engaging in the same or similar business activities or lines of business as we do;

 

   

doing business with any of our clients or consumers; or

 

   

employing or otherwise engaging any of our officers or employees.

 

Under our certificate of incorporation, neither Citi nor any officer or director of Citi, except as provided in our certificate of incorporation, will be liable to us or to our stockholders for breach of any fiduciary duty by reason of any of these activities.

 

If Citi engages in the same type of business we conduct, our ability to successfully operate and expand our business may be hampered.

 

Because Citi may engage in the same activities in which we engage (subject to the terms of the Intercompany Agreement), there is a risk that we may be in direct competition with respect to insurance underwriting or distribution activities. To address these potential conflicts, we have adopted a corporate opportunity policy which is incorporated into our certificate of incorporation.

 

Due to Citi’s significant resources, including financial resources and name recognition, Citi could have a significant competitive advantage over us should it decide to engage in the type of business we conduct, which may cause our business to be materially adversely affected.

 

Our actual and pro forma financial data are not necessarily representative of the results we would have achieved as a stand-alone company and may not be a reliable indicator of our future results.

 

Our actual financial data do not reflect the financial condition, results of operations or cash flows we would have achieved as a stand-alone company during the periods presented or those we will achieve in the future. This is primarily the result of the following factors:

 

   

our actual financial data for dates as of or for periods ending on or before March 31, 2010 do not reflect the Transactions;

 

   

for dates as of or periods ending on or before March 31, 2010, our actual financial data reflect allocations of corporate expenses from Citi associated with information technology support, treasury, financial reporting, tax administration, human resources administration, legal, procurement and other services that may be lower than the comparable expenses we would have actually incurred as a stand-alone company;

 

   

our cost of debt and our capitalization may be different from that reflected in our actual financial statements for dates as of or for periods ending on or before March 31, 2010;

 

   

we are incurring significant costs as a result of becoming a public company, including costs related to public company reporting, investor relations and compliance with the Sarbanes-Oxley Act of 2002; and

 

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the initial public offering may materially affect our client and other business relationships, including supplier relationships, and may result in the loss of preferred pricing available by virtue of our relationship with Citi.

 

Our financial condition and future results of operations will be materially different from amounts reflected in certain of our financial statements that appear elsewhere in this prospectus supplement. As a result of the Transactions, it may be difficult for investors to compare our future results to actual results or to evaluate our relative performance or trends in our business. For an understanding of pro forma financial statements that give effect to, among other things, the Transactions, see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — 2010 Compared to 2009 — Primerica, Inc. Pro Forma Results” beginning on page S-61 of this prospectus supplement.

 

If Citi or Warburg Pincus sells significant equity interests in our company to a third party in a private transaction, our stockholders may not realize any change-of-control premium on shares of our common stock that such party may receive, and we may become subject to the control of a presently unknown third party.

 

Each of Citi and Warburg Pincus owns a significant equity interest in our company. Each of Citi and Warburg Pincus has the ability, should it choose to do so, to sell some or all of its shares of our common stock in a privately negotiated transaction, which, if sufficient in size, could result in a change of control of our company. The ability of each of Citi and Warburg Pincus to privately sell its shares of our common stock, with no requirement for a concurrent offer to be made to acquire all of the shares of our common stock, could prevent our other stockholders from realizing any change-of-control premium on their shares of our common stock that may otherwise accrue to Citi or Warburg Pincus, as the case may be, upon its private sale of our common stock. Additionally, if Citi or Warburg Pincus privately sells its significant equity interest in our company, we may become subject to the control of a presently unknown third party. Such third party may have conflicts of interest with those of other stockholders. Citi has indicated that it intends to divest its remaining interest in us as soon as is practicable, subject to market and other conditions. Subject to exceptions set forth in the Securities Purchase Agreement, Warburg Pincus has agreed not to transfer pursuant to a public sale the common stock or warrants that it acquired in the private sale or shares of our common stock issued upon exercise of such warrants until the earlier of October 7, 2011 or the reduction of Citi’s beneficial ownership in our outstanding common stock to less than 10%.

 

We are subject to banking regulations that may limit our business activities.

 

Citi’s relationship and good standing with its regulators are important to the conduct of our business. Citi is a bank holding company and a financial holding company regulated by the Board of Governors of the Federal Reserve System (the “FRB”) under the Bank Holding Company Act of 1956 (the “BHC Act”). The BHC Act imposes regulations and requirements on Citi and on any company that the FRB deems to be controlled by Citi. The regulation of Citi and its controlled companies under applicable banking laws is intended primarily for the protection of Citi’s banking subsidiaries, their depositors, the Deposit Insurance Fund of the Federal Deposit Insurance Corporation, and the banking system as a whole, rather than for the protection of stockholders or creditors of Citi or us. Because Citi owns a significant amount of our outstanding common stock, we are currently subject to regulation, supervision, examination and potential enforcement action by the FRB. So long as we are deemed to be controlled by Citi for bank regulatory purposes, we will be subject to regulation by the FRB and to most banking laws, regulations and orders that apply to Citi.

 

The ownership level at which the FRB would consider us no longer controlled by Citi will depend on the circumstances at that time (such as the extent of our relationships with Citi) and could be less than 5%. For so long as we are subject to the BHC Act, we generally may conduct only activities that are authorized for a financial holding company under the BHC Act, which in some cases are more restrictive than those available to us under applicable insurance regulatory requirements. There are limits on the ability of bank subsidiaries of Citi to extend credit to, or conduct other transactions with, us.

 

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Citi and its subsidiaries are also subject to examination by various banking regulators, which results in examination reports and ratings that may adversely impact the conduct and growth of our businesses. In the United States, Citi is regulated by the Federal Reserve, Office of the Comptroller of the Currency, Office of Thrift Supervision and Federal Deposit Insurance Corporation, and we are regulated by the Federal Reserve. In Canada, we are regulated by OSFI, FINTRAC and FCAC. The FRB has broad enforcement authority over us, including the power to prohibit us from conducting any activity that, in the FRB’s opinion, is unauthorized or constitutes an unsafe or unsound practice in conducting our business. The FRB may also impose substantial fines and other penalties for violations of applicable banking laws, regulations and orders. Pursuant to the Intercompany Agreement we entered into with Citi, we agreed not to take any action or fail to take any action that would result in Citi being in non-compliance with the BHC Act or any other applicable bank regulatory law, rule, regulation, guidance, order or directive.

 

In addition, our business in Canada is subject to Bank Act restrictions for so long as Citi has control of us (in fact or in law). In general, these restrictions permit Citi to carry on in Canada those businesses that Canadian banks are permitted to conduct, and permit Citi to control (including by way of control in fact), or to hold a “substantial investment” in (i.e., more than 25% of the equity or, for a corporation, more than 10% of the voting power), those types of Canadian entities that Canadian banks are permitted to control or in which they are permitted to make substantial investments. Such permitted businesses and investments include most, but not all, financial service businesses, certain related businesses and, subject to limits as to size, scope and length of time held, other businesses. Implementing such business ventures may be subject to a requirement to obtain prior regulatory approval, and are subject to regulatory oversight. We may also be subject to other foreign banking laws and supervision that could affect our business, financial condition and results of operations.

 

Warburg Pincus may be able to exert significant influence over us, which may result in conflicts of interest with us.

 

As of April 1, 2011, Warburg Pincus owned approximately 22.3% of our outstanding common stock and has rights to acquire additional shares of our common stock pursuant to its exercise of warrants. Pursuant to and subject to the limitations of the Securities Purchase Agreement, including the ownership limitations, Warburg Pincus has a limited right of first offer to purchase shares of our common stock sold by Citi in the future. Warburg Pincus has agreed to waive its right to purchase the shares sold by Citi in this offering. Warburg Pincus is entitled to nominate two directors to serve on our board, which could be reduced or lost if Warburg Pincus’ ownership interest in us declines. Citi has agreed to vote its shares of our common stock in favor of the election of Warburg Pincus’ nominees to our board of directors. Furthermore, for as long as Warburg Pincus owns a significant amount of our common stock, Warburg Pincus may be able to influence the outcome of all corporate actions requiring stockholder approval, including the election of directors.

 

Under the provisions of the Securities Purchase Agreement, the prior consent of Warburg Pincus will be required in connection with specified corporate actions by us. In addition, for so long as it owns a significant amount of our common stock, Warburg Pincus will be entitled to preemptive type rights to purchase equity securities issued or proposed to be issued by us, which may limit our ability to access capital from other sources in a timely manner.

 

Because Warburg Pincus’ interests may differ from yours, actions that Warburg Pincus may take with respect to us may not be as favorable to you as they are to Warburg Pincus.

 

Risks Related to this Offering and Ownership of Our Common Stock

 

We expect that the price of our common stock will fluctuate substantially.

 

You should consider an investment in our common stock to be risky, and you should invest in our common stock only if you can withstand a significant loss and wide fluctuations in the market value of your investment. Some factors that may cause the market price of our common stock to fluctuate, in addition to the other risks mentioned in this section of the prospectus supplement, are:

 

   

our announcements or our competitors’ announcements regarding new products or services; product or service enhancements; significant contracts; acquisitions or strategic investments;

 

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changes in earnings estimates or recommendations by securities analysts, if any, who cover our common stock;

 

   

fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;

 

   

changes in our capital structure, such as future issuances of securities or the exercise of warrants; sales of large blocks of common stock by our stockholders, including Citi and Warburg Pincus; or our incurrence of additional debt;

 

   

reputational issues;

 

   

changes in general economic and market conditions in the United States and Canada;

 

   

changes in industry conditions or perceptions; and

 

   

changes in applicable laws, rules or regulations and other dynamics.

 

In addition, if the market for stocks in our industry, or the stock market in general, experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition and results of operations. If any of the foregoing occurs, it could cause our stock price to fall and may expose us to lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management.

 

Future sales of our common stock, or the perception that such sales may occur, could depress our common stock price.

 

To raise additional capital, we may in the future offer additional shares of our common stock or other securities convertible into, or exchangeable for, our common stock at prices that may not be the same as the price per share in this offering. We have a shelf registration statement from which additional shares of common stock and other securities can be offered. Sales by us of a substantial number of shares of common stock or other securities after this offering, or a perception that such sales could occur, could significantly reduce the market price of our common stock.

 

Upon completion of this offering, Citi will own between 20.6% and 23.1% of our outstanding common stock. Citi has indicated its intention to divest its remaining interest in us as soon as is practicable, subject to market and other conditions. Our shelf registration statement will permit Citi to publicly resell its remaining shares of our common stock. We are unable to predict with certainty whether or when Citi will sell its remaining shares of our common stock after this offering. Sales by Citi of a substantial number of shares after this offering, or a perception that such sales could occur, could significantly reduce the market price of our common stock. Upon completion of this offering, except as otherwise described herein, all shares that are being offered hereby will be freely tradable without restriction, assuming they are not held by our affiliates.

 

We, our executive officers and directors and the selling stockholder have agreed with the underwriters that, without the prior written consent of Citigroup Global Markets Inc., we and they will not, subject to certain exceptions and extensions, during the period ending 90 days after the date of this prospectus supplement, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of directly or indirectly, or enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of shares of our common stock or any securities convertible into or exercisable or exchangeable for shares of our common stock. Citigroup Global Markets Inc. may, in its sole discretion and at any time without notice, release all or any portion of the shares of our common stock subject to the lock-up. See the section entitled “Shares Eligible for Future Sale — Lock-Up Agreements” beginning on page S-122 of this prospectus supplement.

 

As of April 1, 2011, Warburg Pincus owned approximately 22.3% of our outstanding common stock. Future sales of these shares in the public market will be subject to the volume and other restrictions of Rule 144 under the

 

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Securities Act for so long as Warburg Pincus is deemed to be our affiliate, unless the sale of such shares are registered under the Securities Act or are sold pursuant to another exemption under the Securities Act. We have filed a registration statement with the SEC for the public resale of shares of our common stock owned by Warburg Pincus and certain of its permitted transferees. However, subject to exceptions, Warburg Pincus has agreed not to transfer pursuant to a public sale any shares of our capital stock or warrants acquired in a private sale from Citi or shares of our common stock issued upon exercise of such warrants until the earlier of October 7, 2011 or the reduction of Citi’s beneficial ownership interest in our outstanding common stock to less than 10%. After such date, we are unable to predict with certainty whether, when or in what amounts Warburg Pincus may sell shares of our common stock. Sales by Warburg Pincus of a substantial number of shares, or a perception that such sales could occur, could significantly reduce the market price of our common stock.

 

We have filed a registration statement registering under the Securities Act the shares of common stock reserved for issuance in respect of certain incentive awards to our officers, employees and sales representatives. If any of these holders causes a large number of securities to be sold in the public market, the sales could reduce the trading price of our common stock. These sales also could impede our ability to raise future capital. See the section entitled “Shares Eligible for Future Sale” beginning on page S-121 of this prospectus supplement for a more detailed description of the shares of our common stock that will be available for future sales.

 

Provisions in our certificate of incorporation and bylaws, of Delaware corporate law and of state and Canadian insurance law may prevent or delay an acquisition of us, which could decrease the trading price of our common stock.

 

Our certificate of incorporation and bylaws contain provisions that are intended to deter coercive takeover practices and inadequate takeover bids and to encourage prospective acquirers to negotiate with our board of directors rather than to attempt a hostile takeover. These provisions include:

 

   

a board of directors that is divided into three classes with staggered terms;

 

   

action by written consent of stockholders may only be taken by holders of all our shares of common stock;

 

   

rules regarding how our stockholders may present proposals or nominate directors for election at stockholder meetings;

 

   

the right of our board of directors to issue preferred stock without stockholder approval; and

 

   

limitations on the right of stockholders to remove directors.

 

Delaware law also imposes some restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock. For more information, read the section entitled “Description of Capital Stock — Anti-Takeover Effects of Provisions of Our Certificate of Incorporation and Bylaws, and of Delaware Law” beginning on page 3 of the accompany prospectus. We believe that these provisions protect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers to negotiate with our board of directors and by providing our board of directors with more time to assess any acquisition proposal. These provisions are not intended to make us immune from takeovers. However, these provisions apply even if the offer may be considered beneficial by some stockholders and could delay or prevent an acquisition that our board of directors determines is not in our best interests and that of our stockholders. We have agreed with Warburg Pincus in the Securities Purchase Agreement to exempt Warburg Pincus, and any permitted transferee that receives at least 10% of our outstanding common stock, from the anti-takeover provisions of Delaware law, to the extent of our ability to do so. We also have agreed not to institute a stockholder rights plan that limits the ability of Warburg Pincus, or of any permitted transferee that receives at least 10% of our outstanding common stock, from acquiring additional shares of our common stock other than the ownership limits described in “Related Party Transactions — Transactions with Warburg Pincus in Connection with the Securities Purchase Agreement — Standstill” included in the 2011 Proxy Statement, which is incorporated by reference into the accompanying prospectus.

 

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The insurance laws and regulations of Massachusetts, the jurisdiction in which our principal insurance subsidiary, Primerica Life, is organized, may delay or impede a business combination involving us. The Massachusetts Insurance Law prohibits any person from acquiring control of us, and thus indirect control of Primerica Life, without the prior approval of the Massachusetts Commissioner of Insurance. That law presumes that control exists where any person, directly or indirectly, owns, controls, holds the power to vote or holds proxies representing 10% or more of our outstanding voting stock, unless the Massachusetts Commissioner, upon application, determines otherwise. Even persons who do not acquire beneficial ownership of more than 10% of the outstanding shares of our common stock may be deemed to have acquired such control, if the Massachusetts Commissioner determines that such persons, directly or indirectly, exercise a controlling influence over our management or our policies. Therefore, any person seeking to acquire a controlling interest in us would face regulatory obstacles which may delay, deter or prevent an acquisition that stockholders might consider in their best interests. New York, the domiciliary jurisdiction of NBLIC, has similar insurance laws regarding a change of control. Moreover, under Canadian federal insurance law, the consent of the Minister of Finance is required in order for anyone to acquire direct or indirect control, including control in fact, of our Canadian insurance subsidiary, Primerica Life Canada, or to acquire, directly or through any controlled entity or entities, a significant interest (i.e., more than 10%) of any class of its shares. These laws could also delay or impede a business combination involving us that some or all of our stockholders might consider to be desirable.

 

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

 

Investors are cautioned that certain statements contained in this prospectus supplement and the accompanying prospectus are “forward-looking” statements. Forward-looking statements include, without limitation, any statement that may project, indicate or imply future results, events, performance or achievements, and may contain the words “expect,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “will be,” “will continue,” “will likely result,” and similar expressions, or future conditional verbs such as “may,” “will,” “should,” “would,” and “could.” In addition, any statement concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects, and possible actions taken by us or our subsidiaries are also forward-looking statements. These forward-looking statements contained in this prospectus supplement are based upon information available to us on the date of this prospectus supplement. These forward-looking statements involve external risks and uncertainties, including, but not limited to, those described in the section entitled “Risk Factors” beginning on page S-13 of this prospectus supplement and elsewhere in this prospectus supplement, the accompanying prospectus, our reports filed from time to time with the SEC, which are incorporated by reference into this prospectus supplement, as the same may be amended, supplemented or superseded from time to time by our filings under the Exchange Act, or any other prospectus supplement.

 

Forward-looking statements are based on current expectations and projections about future events and are inherently subject to a variety of risks and uncertainties, many of which are beyond the control of our management team. All forward-looking statements in this prospectus supplement, the accompanying prospectus, the documents incorporated by reference into this prospectus supplement and the accompanying prospectus, and subsequent written and oral forward-looking statements attributable to us, or to persons acting on our behalf, are expressly qualified in their entirety by these risks and uncertainties. These risks and uncertainties include, among others:

 

   

our failure to continue to attract new recruits, retain sales representatives, or maintain the licensing of our sales representatives;

 

   

changes to the independent contractor status of our sales representatives;

 

   

our or our sales representatives’ violation of or non-compliance with laws and regulations;

 

   

our failure to protect the confidentiality of client information;

 

   

differences between our actual experience and our expectations regarding mortality, persistency, expenses and investment yields as reflected in the pricing for our insurance policies;

 

   

the occurrence of a catastrophic event that causes a large number of premature deaths of our insureds;

 

   

changes in, or non-compliance with, federal and state legislation and regulation, including the Dodd-Frank Act and other legislation or regulation that affects our insurance, investment product and loan businesses;

 

   

our failure to meet RBC standards or other minimum capital and surplus requirements;

 

   

a downgrade or potential downgrade in our insurance subsidiaries’ financial strength ratings;

 

   

the effects of credit deterioration and interest rate fluctuations on our invested asset portfolio;

 

   

incorrectly valuing our investments;

 

   

inadequate or unaffordable reinsurance or the failure of our reinsurers to perform their obligations;

 

   

recent changes in accounting for deferred policy acquisition costs of insurance entities and other changes in accounting standards;

 

   

the failure of our investment products to remain competitive with other investment options;

 

   

heightened standards of conduct or more stringent licensing requirements for our sales representatives;

 

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inadequate policies and procedures regarding suitability review of client transactions;

 

   

the failure of, or legal challenges to, the support tools we provide to our sales force;

 

   

the inability of our subsidiaries to pay dividends or make distributions;

 

   

the effects of a delay in the recovery of the U.S. and Canadian economies;

 

   

our ability to generate and maintain a sufficient amount of capital;

 

   

our non-compliance with the covenants of the Citi Note;

 

   

legal and regulatory investigations and actions concerning us or our sales representatives;

 

   

the competitive environment;

 

   

the loss of key personnel;

 

   

the failure of our information technology systems, breach of our information security or failure of our business continuity plan;

 

   

fluctuations in Canadian currency exchange rates;

 

   

conflicts of interests due to Citi’s significant interest in us, Warburg Pincus’ significant interest in us and the limited liability of Citi’s directors and officers for breach of fiduciary duty;

 

   

engagement by Citi in the same type of businesses that we conduct; and

 

   

substantial fluctuation in the price of our common stock, the future sale of our common stock or the perception that such a sale could occur.

 

Developments in any of these areas could cause actual results to differ materially from those anticipated or projected or cause a significant reduction in the market price of our common stock.

 

We caution you that the foregoing list of risks and uncertainties may not contain all of the risks and uncertainties that are important to you. In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this prospectus supplement and the accompanying prospectus may not in fact occur. Accordingly, you should not place undue reliance on these statements. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

 

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USE OF PROCEEDS

 

We will not receive any proceeds from the sale of shares of our common stock being offered hereby. All of the net proceeds from this offering will be received by Citi.

 

PRICE RANGE OF COMMON STOCK

 

Our common stock is principally traded on the NYSE under the trading symbol “PRI.” The quarterly high and low sales prices for our common stock, as reported on the NYSE for the periods since our initial public offering on April 1, 2010, as well as dividends paid per quarter were as follows:

 

     High

     Low

     Dividends

 

2011


                    

2nd quarter (through April 11, 2011)

   $ 25.64       $ 23.74         *   

1st quarter

     26.20         24.18       $ 0.01   

2010


                    

4th quarter

   $ 25.48       $ 20.30       $ 0.01   

3rd quarter

     23.78         19.74         0.01   

2nd quarter

     25.89         18.61         n/a   

*   Not yet declared.

 

On April 11, 2011, the last reported sale price of our common stock on the NYSE was $24.03 per share. As of March 31, 2011, we had 35 holders of record of our common stock.

 

DIVIDEND POLICY

 

In connection with the Transactions, we paid dividends to Citi of $3.49 billion in 2010. Prior to completion of our initial public offering, we distributed all of the issued and outstanding capital stock of Prime Re to Citi. Following our initial public offering, we also paid quarterly dividends to stockholders (including Citi and Warburg Pincus) of approximately $1.5 million in 2010. During 2009, we declared dividends to Citi of $205.4 million.

 

We currently expect to continue to pay quarterly cash dividends to holders of our common stock, subject to the discretion of our board of directors and dependent on a variety of factors, including our financial condition, earnings, legal requirements and other factors that the board of directors deems relevant. Our payment of cash dividends is at the discretion of our board of directors in accordance with applicable law after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs and plans for growth. Under Delaware law, we can only pay dividends either out of surplus, which is defined as total assets at fair market value minus total liabilities, minus the aggregate par value of our outstanding stock, or out of the current or the immediately preceding year’s earnings. Therefore, no assurance is given that we will continue to pay any dividends to our common stockholders or as to the amount of any such dividends.

 

We are a holding company, and we have no operations. Our primary asset is the capital stock of our operating subsidiaries, and our primary liability is the $300.0 million promissory note held by Citi. The states in which our U.S. insurance subsidiaries are domiciled impose certain restrictions on our insurance subsidiaries’ ability to pay dividends to us. These restrictions are based in part on the prior year’s statutory income and surplus. In general, dividends up to specified levels are considered ordinary and may be paid without prior approval. Dividends in larger amounts are considered extraordinary and are subject to approval by the insurance commissioner of the state of domicile. Our Canadian subsidiary can pay dividends subject to meeting regulatory requirements for capital adequacy and liquidity with appropriate minimum notice to OSFI. No assurance is given that more stringent restrictions will not be adopted from time to time by states in which our insurance subsidiaries are domiciled, and such restrictions could have the effect, under certain circumstances, of significantly reducing dividends or other amounts payable to us by our subsidiaries without affirmative prior approval by state regulatory authorities. In addition, in the future, we may become subject to debt instruments or other agreements that limit our ability to pay dividends. See the section entitled “Business — Regulation — Regulation of Insurance Products — Insurance Holding Company Regulation; Limitations on Dividends” beginning on page S-106 of this prospectus supplement.

 

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CAPITALIZATION

 

The information presented below should be read in conjunction with the sections entitled “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on pages S-43 and S-45, respectively, of this prospectus supplement and with our consolidated and combined financial statements and related notes included in the 2010 Annual Report, which is incorporated by reference into the accompanying prospectus. Set forth below are our cash and cash equivalents and our capitalization as of December 31, 2010.

 

     As of
December 31, 2010


 
     (In thousands)  

Cash and cash equivalents

   $ 126,038   
    


Long–term debt:

        

Note payable

   $ 300,000   

Stockholders’ equity:

        

Common stock, par value $0.01 per share. Authorized — 500,000 shares; issued and outstanding — 72,843 shares

     728   

Paid-in capital

     883,168   

Retained earnings

     395,057   

Accumulated other comprehensive income

     152,539   
    


Total stockholders’ equity

     1,431,492   
    


Total capitalization

   $ 1,731,492   
    


 

 

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SELECTED FINANCIAL DATA

 

The selected financial data should be read in conjunction with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page S-45 of this prospectus supplement and with our consolidated and combined financial statements and related notes included in the 2010 Annual Report, which is incorporated by reference into the accompanying prospectus.

 

The selected statements of income data may not be indicative of the revenues and expenses that would have existed or resulted if we had operated independently of Citi. Similarly, the selected balance sheet data as of and prior to December 31, 2009 may not be indicative of the assets and liabilities that would have existed or resulted if we had operated independently of Citi. The selected financial data are not necessarily indicative of the financial position or results of operations as of any future date or for any future period.

 

The Transactions have and will continue to result in financial performance that is materially different from that reflected in the financial data that appear elsewhere in this prospectus supplement and are incorporated by reference into this prospectus supplement and the accompanying prospectus. Due to the timing of the Transactions and their impact on our financial position and results of operations, year-over-year comparisons of our financial position and results of operations will reflect significant non-comparable accounting transactions and account balances. For a description of the Transactions and the timing of their implementation, see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — The Transactions” beginning on page S-45 of this prospectus supplement.

 

    Year ended December 31,

 
    2010

    2009

    2008 (1)

    2007

    2006

 
    (In thousands, except per-share amounts)  

Statements of income data

                                       

Revenues:

                                       

Direct premiums

  $ 2,181,074      $ 2,112,781      $ 2,092,792      $ 2,003,595      $ 1,898,419   

Ceded premiums

    (1,450,367     (610,754     (629,074     (535,833     (496,061
   


 


 


 


 


Net premiums

    730,707        1,502,027        1,463,718        1,467,762        1,402,358   

Net investment income

    165,111        351,326        314,035        328,609        318,853   

Commissions and fees

    382,940        335,986        466,484        545,584        486,145   

Realized investment gains (losses), including OTTI

    34,145        (21,970     (103,480     6,527        8,746   

Other, net

    48,960        53,032        56,187        41,856        37,962   
   


 


 


 


 


Total revenues

    1,361,863        2,220,401        2,196,944        2,390,338        2,254,064   

Benefits and expenses:

                                       

Benefits and claims

    317,703        600,273        938,370        557,422        544,556   

Amortization of deferred policy acquisition costs

    168,035        381,291        144,490        321,060        284,787   

Insurance commissions

    19,904        34,388        23,932        28,003        26,171   

Insurance expenses

    75,503        148,760        141,331        137,526        126,843   

Sales commissions

    179,924        162,756        248,020        296,521        265,662   

Interest expense

    20,872        —          —          —          —     

Goodwill impairment

    —          —          194,992        —          —     

Other operating expenses

    180,779        132,978        152,773        136,634        127,849   
   


 


 


 


 


Total benefits and expenses

    962,720        1,460,446        1,843,908        1,477,166        1,375,868   
   


 


 


 


 


Income before income taxes

    399,143        759,955        353,036        913,172        878,196   

Income taxes

    141,365        265,366        185,354        319,538        276,244   
   


 


 


 


 


Net income

  $ 257,778      $ 494,589      $ 167,682      $ 593,634      $ 601,952   
   


 


 


 


 


Earnings per share — basic (2)

  $ 3.43        n/a        n/a        n/a        n/a   
   


 


 


 


 


Earnings per share — diluted (2)

  $ 3.40        n/a        n/a        n/a        n/a   
   


 


 


 


 


Dividends per common share

  $ .02        n/a        n/a        n/a        n/a   
   


 


 


 


 


 

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     December 31,

 
     2010

     2009(3)

     2008(1)(3)

     2007(3)

     2006(3)

 
     (In thousands)  

Balance sheet data

                                            

Investments

   $ 2,153,584       $ 6,471,448       $ 5,355,458       $ 5,494,495       $ 5,583,813   

Cash and cash equivalents

     126,038         602,522         302,354         625,350         239,103   

Due from reinsurers

     3,731,634         867,242         838,906         831,942         825,031   

Deferred policy acquisition cost

     853,211         2,789,905         2,727,422         2,510,045         2,408,444   

Total assets

     9,884,306         13,715,144         11,515,027         13,015,411         11,604,421   

Future policy benefits

     4,409,183         4,197,454         4,023,009         3,650,192         3,616,930   

Note payable

     300,000         —           —           —           —     

Total liabilities

     8,452,814         8,771,371         7,403,041         8,235,446         7,120,956   

Stockholders’ equity

     1,431,492         4,943,773         4,111,986         4,779,965         4,483,465   

(1)   Includes a $191.7 million pre-tax charge due to a change in our deferred policy acquisition costs and reserve estimation approach implemented as of December 31, 2008.
(2)   Calculated on a pro forma basis using weighted-average shares, including the shares following our April 1, 2010 corporate reorganization as though they had been issued and outstanding on January 1, 2010.
(3)   Total assets and total liabilities have been adjusted to reflect the immaterial error correction relating to our securities lending program.

 

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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, the “Company”) for the three-year period ended December 31, 2010. As a result, the following discussion should be read in conjunction with the audited consolidated and combined financial statements and notes that are included herein. This discussion contains forward-looking statements that constitute our plans, estimates and beliefs. These forward-looking statements involve numerous risks and uncertainties, including those discussed in the section entitled “Risk Factors” beginning on page S-13 of this prospectus supplement. Actual results may differ materially from those contained in any forward-looking statements.

 

This MD&A is divided into the following sections:

 

   

The Transactions

 

   

Business Trends and Conditions

 

   

Factors Affecting Our Results

 

   

Critical Accounting Estimates

 

   

Results of Operations

 

   

Financial Condition

 

   

Liquidity and Capital Resources

 

The Transactions

 

We refer to the corporate reorganization, the reinsurance transactions, the concurrent transactions and the private sale described below collectively as the “Transactions.” We believe the Transactions gave us the opportunity to fold our years of experience, expertise and innovation into an organization with a more streamlined balance sheet.

 

The corporate reorganization.    We were incorporated in Delaware in October 2009 by Citi to serve as a holding company for the life insurance and financial product distribution businesses that we have operated for more than 30 years. At such time, we issued 100 shares of common stock to Citi. These businesses, which prior to April 1, 2010, were wholly owned indirect subsidiaries of Citi, were transferred to us in a reorganization pursuant to which we issued to a wholly owned subsidiary of Citi (i) 74,999,900 shares of our common stock (of which 24,564,000 shares of common stock were subsequently sold by Citi in our initial public offering completed in April 2010; 16,412,440 shares of common stock were subsequently sold by Citi in mid-April 2010 to private equity funds managed by Warburg Pincus LLC for a purchase price of $230.0 million in a private sale; and 5,021,412 shares of common stock were immediately contributed back to us for equity awards granted to our employees and sales force leaders in connection with our initial public offering), (ii) warrants to purchase from us an aggregate of 4,103,110 shares of our common stock (which were transferred by Citi to Warburg Pincus pursuant to the private sale), and (iii) the Citi note, a $300.0 million note payable due on March 31, 2015 bearing interest at an annual rate of 5.5%. Prior to April 1, 2010, we had no material assets or liabilities. Upon completion of the Transactions, our primary asset is the capital stock of our operating subsidiaries and our primary liability is the Citi note.

 

The reinsurance transactions.    In March 2010, we entered into coinsurance agreements (the “Citi reinsurance agreements”) with two affiliates of Citi and Prime Re, then a wholly owned subsidiary of Primerica

 

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Life (collectively the “Citi reinsurers”). We refer to the execution of these agreements as the “Citi reinsurance transactions.” Under these agreements, we 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 also transferred to the Citi reinsurers the account balances in respect of the coinsured policies and approximately $4.0 billion of assets to support the statutory liabilities assumed by the Citi reinsurers, and we distributed to Citi all of the issued and outstanding common stock of Prime Re. As a result, the Citi reinsurance transactions reduced the amount of our capital and substantially reduced our insurance exposure. We retained our operating platform and infrastructure and continue to administer all policies subject to these coinsurance agreements.

 

The concurrent transactions.    During the first quarter of 2010, we declared distributions to Citi of approximately $703 million. We also recognized the income attributable to the policies underlying the Citi reinsurance transactions as well as the income earned on the invested assets backing the reinsurance balances and the extraordinary dividends declared in the first quarter. These items were reflected in the statement of income for the three months ended March 31, 2010. Furthermore, because the Citi reinsurance transactions were given retroactive effect back to January 1, 2010, we recognized a return of capital on our balance sheet for the income earned on the reinsured policies during the three months ended March 31, 2010.

 

In April 2010, we completed the following additional concurrent transactions:

 

   

we completed an initial public offering of our common stock by Citi pursuant to the Securities Act and our stock began trading under the trading symbol “PRI” on the NYSE;

 

   

we issued equity awards for 5,021,412 shares of our common stock to certain of our employees, including our officers, and certain of our sales force leaders, including 221,412 shares which were issued upon conversion of existing equity awards in Citi shares that had not yet fully vested; and

 

   

Citi accelerated vesting of certain existing Citi equity awards triggered by our initial public offering and the private sale.

 

Additionally, we made elections with an effective date of April 1, 2010 under Section 338(h)(10) of the Internal Revenue Code of 1986, as amended (the “Code”), which resulted in reductions to stockholders’ equity of $172.5 million and corresponding adjustments to deferred tax balances.

 

During the first quarter of 2010, our federal income tax return was included as part of Citi’s consolidated federal income tax return. On March 30, 2010, in anticipation of our corporate reorganization, we entered into a tax separation agreement with Citi. In accordance with the tax separation agreement, Citi will be responsible for and shall indemnify and hold the Company harmless from and against any consolidated, combined, affiliated, unitary or similar federal, state or local income tax liability with respect to the Company for any taxable period ending on or before April 7, 2010, the closing date of our initial public offering.

 

The private sale.    In February 2010, Citi entered into the Securities Purchase Agreement pursuant to which, in mid-April 2010, Citi sold to Warburg Pincus 16,412,440 shares of our common stock and warrants to purchase from us 4,103,110 additional shares of our common stock. The warrants have a seven-year term and an exercise price of $18.00 per share.

 

Period-over-period comparability.    Due to the timing of these transactions and their impact on our financial position and results of operations, period-over-period comparisons of our financial position and results of operations will reflect significant non-comparable accounting transactions and account balances. The most significant accounting transaction was the reinsurance transactions described above, which affected both the size and composition of our balance sheet and statement of income. Additionally, the corporate reorganization and the concurrent transactions had a significant impact on the composition of our balance sheet. As a result, our December 31, 2010 balance sheet was significantly smaller than our December 31, 2009 balance sheet and our statement of income for the year ended December 31, 2010 presents income that is significantly lower than in 2009 and 2008.

 

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From a balance sheet perspective, the Transactions impacted investments, cash and cash equivalents, accrued investment income, premiums and other receivables, due from reinsurers, due from affiliates, DAC, deferred tax assets, note payable, deferred tax liabilities, other liabilities, common stock, paid-in capital, retained earnings and accumulated other comprehensive income.

 

From a statement of income perspective, the Transactions impacted ceded premiums, net premiums, net investment income, benefits and claims, amortization of DAC, insurance commissions, insurance expenses, interest expense and income taxes. Actual results for periods ended prior to April 1, 2010 will not be indicative of or comparable to future actual results. Furthermore, actual results for the year ended December 31, 2010 will not be comparable to results in future years as they are affected by the inclusion of three months of operations prior to the Transactions. Actual results for the years ended December 31, 2009 and 2008, will not be comparable to results in future years as they reflect operations prior to the Transactions.

 

Business Trends and Conditions

 

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 high unemployment levels and low levels of consumer confidence, influence investment and spending decisions by middle income consumers, who are generally our primary clients. These conditions and factors also impact prospective recruits’ perceptions of the business opportunity that becoming a Primerica sales representative offers, which can drive or dampen recruiting. Consumer spending and borrowing levels remain under pressure, as consumers take a more conservative financial posture including reevaluating their savings and debt management plans. As overall market and economic conditions have improved from the lows experienced during the recent economic downturn, sales and the value of consumer investment products across a wide spectrum of asset classes have improved. The effects of these trends and conditions on our 2010 operations are summarized below.

 

Recruiting and Sales Representatives.    For the year ended December 31, 2010, recruiting increased to 231,390 new recruits from 221,920 in 2009, largely due to the recruiting boost we experienced in the second quarter of 2010 as a result of enthusiasm generated by our initial public offering. The size of our life-licensed sales force declined to 94,850 sales representatives as of December 31, 2010 from 99,785 sales representatives at December 31, 2009 as licensing and non-renewals experienced downward pressure in the difficult economic environment.

 

Term Life Insurance Product Sales.    Sales of our term life insurance products have declined in line with term life insurance industry trends and with the year-over-year decline in the size of our sales force noted above. We issued 223,514 new policies in 2010, compared with 233,837 new policies in 2009.

 

Term Life Insurance Face Amount In Force.    Total face amount in force increased to $656.79 billion as of December 31, 2010, compared with $650.20 billion a year ago. Persistency has improved versus prior years, but is still below historical norms. The average face amount for newly issued policies was $267,000 in 2010, compared with $282,100 in 2009. The increase in total face in force was largely due to the stronger Canadian dollar and improved persistency. These drivers were partially offset by a decline in the average face amount of our newly issued policies.

 

Investment and Savings Product Sales.    Investment and savings products sales were higher in 2010, totaling $3.62 billion, compared with $3.01 billion in 2009. We believe the increase in sales reflects the demand for our products as a result of improving financial market conditions.

 

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Asset Values in Client Accounts.    The assets in our clients’ accounts are invested in diversified funds consisting mainly of U.S. and Canadian equity and fixed-income securities. The average value of assets in client accounts in 2010 increased to $31.91 billion, from $26.85 billion in 2009 primarily as a result of general market conditions, which have continued to improve since the second half of 2009, and client demand for our products during 2010.

 

Invested Asset Portfolio Size and Yields.    Our portfolio continues to reflect strong market value gains as interest rates and spreads continue to remain below recent historical levels. As of December 31, 2010, our invested assets, excluding policy loans and cash, had a cost or amortized cost basis of $1.95 billion and a net unrealized gain of $157.4 million, compared with $6.20 billion at cost or amortized cost and net unrealized gain of $243.5 million at December 31, 2009. Our portfolio during the last nine months of 2010 was substantially smaller than our December 31, 2009 portfolio and was composed of a different mix of invested assets primarily due to our corporate reorganization (see the section entitled “— The Transactions,” the section entitled “— Financial Condition - Investments” and Note 4 to our consolidated and combined financial statements included in the 2010 Annual Report, which is incorporated by reference into the accompanying prospectus). Net investment income was $165.1 million in 2010, compared with $351.3 million in 2009. On a pro forma basis, after giving effect to the Transactions, net investment income declined to $110.4 million in 2010, from $118.3 in 2009 largely due to a lower interest rate environment in 2010 (see the section entitled “— Results of Operations — 2010 Compared to 2009 — Primerica, Inc. Pro Forma Results” beginning on page S-61 of this prospectus supplement).

 

Factors Affecting Our Results

 

Term Life Insurance Segment

 

Our Term Life Insurance segment results are primarily driven by sales, accuracy of our pricing assumptions, 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 acquisition expenses are generally 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 any given fiscal periods may vary based on a variety of factors, the productivity of our individual sales representatives remains within a relatively narrow range and, consequently, our sales volume over the longer term generally correlates to the size of our sales force.

 

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

 

     Year ended December 31,

 
     2010

     2009

     2008

 

Average number of life-licensed insurance sales representatives

     96,840         100,569         99,361   

Number of new policies issued

     223,514         233,837         241,173   

Average monthly rate of new policies issued per licensed sales representative

     0.19x         0.19x         0.20x   

 

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Our ability to increase the size of our sales force is largely based on the success of our recruiting efforts and our ability to train and motivate recruits to obtain licenses to sell life insurance. We believe that recruitment levels are an important advance indicator of sales force trends, and growth in recruiting is usually indicative of future growth in the overall size of the sales force. However, because new recruits may not obtain the requisite licenses, recruiting results do not always result in proportionate increases in the size of our licensed sales force.

 

Pricing assumptions.    Our pricing methodology is intended to provide us with appropriate profit margins for the risks we assume. We determine pricing classifications based on the coverage sought, such as the size and term of the policy, and certain policyholder attributes, such as age and health. In addition, we utilize unisex rates for our term life insurance policies. The pricing assumptions that underlie our rates are based upon our best estimates of mortality, persistency and investment yield rates 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.    We use historical experience to estimate pricing assumptions for persistency rates. Persistency is a measure of how long our insurance policies stay in force. As a general matter, persistency that is lower than our pricing assumptions adversely affects our results over the long term because we lose the recurring revenue stream associated with the policies that lapse. Determining the near- term effects of changes in persistency is more complicated. When persistency is lower than our pricing assumptions, we must accelerate the amortization of DAC. The resultant increase in amortization expense is offset by a corresponding release of reserves associated with lapsed policies, which causes a reduction in benefits and claims expense. The reserves associated with any given policy will change over the term of such policy. As a general matter, reserves are lowest at the inception of a policy term and rise steadily to a peak before declining to zero at the expiration of the policy term. Accordingly, depending on when the lapse occurs in relation to the overall policy term, the reduction in benefits and claims expense may be greater or less than the increase in amortization expense and, consequently, the effects on earnings for a given period could be positive or negative. Persistency levels are meaningful to our results to the extent actual experience deviates from the persistency assumptions used to price our products.

 

   

Mortality.    We use historical experience to estimate pricing assumptions for mortality. Our profitability is affected to the extent actual mortality rates differ from those used in our pricing assumptions. We mitigate a significant portion of our mortality exposure through reinsurance. Variances between actual mortality experience and the assumptions and estimates used by our reinsurers affect the cost and potentially the availability of reinsurance.

 

   

Investment Yields.    We generally use a level investment yield rate which reflects yields currently available. Both the DAC asset and the reserve liability increase with the assumed investment yield rate. Since the DAC asset is higher than the reserve liability in the early years of a policy, a lower assumed investment yield will result in lower profits. In the later years, when the reserve liability is higher than the DAC asset, a lower assumed investment yield will result in higher profits. Actual investment yields will impact the net investment income allocated to the Term Life Insurance segment, but will not impact the DAC asset or reserve liability.

 

Reinsurance.    We use reinsurance extensively, which has a significant effect on our results of operations. In evaluating our comparative results, it is important to understand and consider the relative levels and mix of reinsurance treaties in effect during each of the comparative periods. As of December 31, 2010, the percentage of reinsured life insurance in force was 90.7%, compared with 64.5% a year ago. The significant increase in reinsured life insurance was primarily a result of the Citi reinsurance transactions.

 

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 YRT basis. We have not generally reinsured the mortality risk on Canadian term life insurance polices. YRT reinsurance permits us to fix future mortality exposure at contractual rates by policy

 

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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.

 

On March 31, 2010, we entered into various reinsurance agreements with the Citi reinsurers to reinsure our term life insurance policies that were in force at year-end 2009 as part of our corporate reorganization.

 

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 expect to continue to use YRT reinsurance at or near historical levels.

 

The effect of our reinsurance arrangements on ceded premiums and benefits and claims 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.

 

   

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

 

   

Acquisition and operating expenses.     Acquisition and operating expenses are reduced by the allowances received from coinsurance, including the business reinsured with Citi.

 

We presently intend to continue ceding approximately 90% of our U.S. mortality risk other than the Citi reinsurance transactions.

 

Allocated net investment income.    Term Life Insurance segment net investment income is composed of two elements: allocated net investment income and the market return associated with the deposit asset underlying the 10% reinsurance agreement we executed in connection with the Transactions. We allocate net investment income based on the book value of the invested assets allocated to the Term Life Insurance segment compared to the book value of the Company’s total invested assets. Net investment income is also impacted by the performance of our invested asset portfolio and the market return on the deposit asset which can be affected by interest rates, credit spreads and the mix of invested assets.

 

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

 

Investment and Savings Products Segment

 

Our Investment and Savings Products segment results are primarily driven by sales, the value of assets in client accounts for which we earn ongoing 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 products and annuities. Sales of investment and savings products are influenced by

 

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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 the 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 that 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, annuity and segregated funds products based on asset values in client accounts. Our investment and savings products primarily consist of funds composed of equity securities. Asset values are influenced by new product sales, ongoing contributions to existing accounts, redemptions and changes in equity markets, net of expenses.

 

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

 

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

 

   

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

 

   

sales of variable 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 segregated funds, no upfront revenues;

 

   

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

 

   

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

 

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The product sales that generate sales-based revenues, average account values of accounts that generate account-based revenue and the average number of fee-generating accounts that generate account-based revenues were as follows:

 

     Year ended December 31,

 
     2010

       2009

       2008

 
     (Dollars in millions and accounts in thousands)  

Product sales:

                              

Mutual funds

   $ 2,140.9         $ 1,821.0         $ 2,809.0   

Annuities and other

     1,169.2           922.6           1,157.4   
    


    


    


Total sales-based revenue generating product sales

     3,310.1           2,743.6           3,966.4   
    


    


    


Segregated funds

     313.5           263.1           492.0   
    


    


    


Total product sales(1)

   $ 3,623.6         $ 3,006.6         $ 4,458.4   
    


    


    


Average asset values in client accounts:

                              

Mutual funds

   $ 22,614         $ 19,329         $ 24,301   

Annuities and other

     7,095           5,727           6,492   

Segregated funds

     2,199           1,790           1,970   
    


    


    


Total average asset values in client accounts(1)

   $ 31,908         $ 26,845         $ 32,763   
    


    


    


Average number of fee-generating accounts:

                              

Recordkeeping accounts

     2,728           2,838           3,083   

Custodial accounts

     1,990           2,057           2,224   

(1)   Totals may not add due to rounding.

 

Sales commissions.    Results are also affected by the compensation our sales representatives receive for the sale of sales-based products and for asset values in their clients’ accounts.

 

The production noted above translated into commissions and fees revenue as follows:

 

     Year ended December 31,

 
     2010

       2009

       2008

 
     (In thousands)  

Commissions and fees revenue:

                              

Sales-based

   $ 142,605         $ 118,798         $ 168,614   

Asset-based

     167,473           127,581           158,934   

Account-based

     41,690           43,247           47,243   
    


    


    


Total commissions and fees

   $ 351,768         $ 289,626         $ 374,791   
    


    


    


 

Corporate and Other Distributed Products Segment

 

We earn revenues and pay commissions and referral fees from the distribution of loan products, various other insurance products, prepaid legal services and other products, all of which are originated by third parties. Our New York life insurance subsidiary, NBLIC, also underwrites a mail-order student life policy and a short-term disability benefit policy, neither of which is distributed by our sales force, and also has in-force policies from several discontinued lines of insurance.

 

The Corporate and Other Distributed Products segment is affected by corporate income and expenses not allocated to our other segments, net investment income (other than net investment income allocated to our Term Life Insurance segment), general and administrative expenses (other than expenses that are allocated to our Term Life Insurance or Investment and Savings Products segments), management equity awards, equity awards granted

 

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to our sales force leaders at the time of our initial public offering, interest expense on the Citi note and realized gains and losses on our invested asset portfolio.

 

Critical Accounting Estimates

 

We prepare our financial statements in accordance with GAAP. These principles are established primarily by the Financial Accounting Standards Board. The preparation of financial statements in conformity with 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 to our consolidated and combined financial statements included in the 2010 Annual Report, which is incorporated by reference into the accompanying prospectus. The most significant items on the balance sheet are based on fair value determinations, accounting estimates and actuarial determinations which are susceptible to changes in future periods and which affect our results of operations and financial position.

 

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

 

Invested Assets

 

We hold fixed-maturity securities, including bonds and redeemable preferred stocks, and equity securities, including common and non-redeemable preferred stock and certain other financial instruments. These invested assets are classified as available-for-sale, except for the securities of our U.S. broker-dealer subsidiary, which are classified as trading securities. All of these securities are carried at fair value.

 

Fair value.    Fair value is the price that would be received to sell 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. All invested assets are classified and disclosed in one of the following three categories:

 

   

Level 1. Quoted prices for identical instruments in active markets.

 

   

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 3. Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

 

As of each reporting period, all invested assets are classified in their entirety based on the lowest level of input 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 fair value and hierarchy classifications of our invested asset portfolio were as follows:

 

     December 31, 2010

 
     $

         %    

 
     (Dollars in thousands)  

Level 1

   $ 15,110         *   

Level 2

     2,087,233         98

Level 3

     24,998         1
    


        

Total

   $ 2,127,341         100
    


        

 

  *   Less than 1%

 

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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 private 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 data inputs come from observable data 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.

 

We perform internal reasonableness assessments on fair value determinations within our portfolio. If a fair value appears unusual, 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 corroborating with 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.

 

For additional information, see Notes 1 and 4 to our consolidated and combined financial statements included in the 2010 Annual Report, which is incorporated by reference into the accompanying prospectus.

 

Other-than-temporary impairments.    We recognize unrealized gains and losses on our available-for-sale portfolio as a separate component of accumulated other comprehensive income. The determination of whether a decline in fair value below amortized cost is other-than-temporary is both objective and subjective. Furthermore, this determination can involve a variety of assumptions and estimates, particularly for invested assets that are not actively traded in established markets. We evaluate a number of factors when determining the impairment status of individual securities. These factors include the economic condition of various industry segments and geographic locations and other areas of identified risk.

 

For available-for-sale securities in an unrealized loss position that we intend to sell or would more-likely-than-not be required to sell before the expected recovery of the amortized cost basis, we recognize an impairment charge for the difference between amortized cost and fair value as a realized investment loss in our statements of income. For available-for-sale securities in an unrealized loss position for which we have no intent to sell and believe that it is more-likely-than-not that we will not be required to sell before the expected recovery of the amortized cost basis, only the credit loss component of the difference between cost and fair value is recognized in earnings, while the remainder is recognized in accumulated other comprehensive income. The credit loss component recognized in earnings is identified as the amount of principal cash flows not expected to be received over the remaining term of the security.

 

For certain securitized financial assets with contractual cash flows, including asset-backed securities, we periodically update our best estimate of cash flows over the life of the security. Securities that are in an unrealized loss position are reviewed at least quarterly for other-than-temporary impairment. If the fair value of a securitized financial asset is less than its cost or amortized cost and there has been a decrease in the present value of the estimated cash flows since the last revised estimate, considering both timing and amount, an other-than-temporary impairment charge is recognized. Estimating future cash flows is a quantitative and qualitative process that incorporates information received from third-party sources along with certain assumptions and judgments regarding the future performance of the underlying collateral. Projections of expected future cash flows may change based upon new information regarding the performance of the underlying collateral.

 

Other categories of fixed-income securities that are in an unrealized loss position are also reviewed at least quarterly to determine if an other-than-temporary impairment is present based on certain quantitative and qualitative factors. We consider a number of factors in determining whether the impairment is other-than-temporary. These include: (1) actions taken by rating agencies, (2) default by the issuer, (3) the significance of the decline, (4) the intent to sell and the ability to hold the investment until recovery of the amortized cost basis, as noted above, (5) the time period during which the decline has occurred, (6) an economic analysis of the issuer, (7) the financial strength, liquidity, and recoverability of the issuer, and (8) an analysis of the underlying

 

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collateral. Although no set formula is used in this process, the investment performance, collateral position, and continued viability of the issuer are significant measures that are considered.

 

The other-than-temporary impairment analysis that we perform on our equity securities primarily focuses on the severity of the unrealized loss as well as the length of time the security’s fair value has been below amortized cost.

 

The other-than-temporary impairments that we recognized as a charge to earnings were as follows:

 

     Year ended December 31,

 
     2010

       2009

       2008

 
     (In thousands)  

Other-than-temporary impairments

   $ 12,158         $ 61,394         $ 114,022   

 

For additional information, see Notes 1 and 4 to our consolidated and combined financial statements included in the 2010 Annual Report, which is incorporated by reference into the accompanying prospectus.

 

Reinsurance

 

We use reinsurance extensively. We determine if a contract provides indemnification against loss or liability in relation to the amount of insurance risk to which the reinsurer is subject. We review all contractual terms, particularly those that may limit the amount of insurance risk to which the reinsurer is subject that may delay the timely reimbursement of claims. If we determine that the possibility of a significant loss from insurance risk will occur only under remote circumstances, we record the contract under the deposit method of accounting with the net amount receivable reflected in other assets on our consolidated and combined balance sheets. The reinsurance contracts in effect at December 31, 2010, including the Citi reinsurance agreements, meet GAAP risk transfer provisions, except as noted below. Ceded policy reserves and claims liabilities relating to insurance ceded under these contracts are shown as due from reinsurers in our consolidated and combined balance sheets. We believe that one of the Citi reinsurance transactions (a 10% YRT transaction with an experience refund provision) will have limited transfer of insurance risk and that there will be only a remote chance of loss under the contract. As such, we have accounted for this agreement under the deposit method of accounting.

 

Ceded premiums are treated as a reduction of direct premiums and are recognized when due to the assuming company. Ceded claims are treated as a reduction of direct benefits and are recognized when the claim is incurred on a direct basis. Ceded policy reserve changes are also treated as a reduction of benefits and are recognized during the applicable financial reporting period. Under YRT arrangements, the ceded reserve is determined by recognizing the cost of reinsurance as a level percentage of the direct premium collected. The expected reinsurance cost is the expected reinsurance premium collected less expected reinsurance claims. Ceded future policy benefit reserves for coinsurance are determined in the same manner as direct policy reserves.

 

Claim liabilities and policy benefits are calculated consistently for all policies, regardless of whether or not the policy is reinsured. Once the direct claim liabilities are estimated, the amounts attributable to the reinsurers are estimated. Liabilities for unpaid reinsurance claims are produced from claims and reinsurance system records, which contain the relevant terms of the individual reinsurance contracts. We monitor claims due from reinsurers to ensure that balances are settled on a timely basis. Incurred but not reported claims are reviewed to ensure that appropriate amounts are ceded. We analyze and monitor the creditworthiness of each of our reinsurers to minimize collection issues. For reinsurance contracts with unauthorized reinsurers, we require collateral such as letters of credit.

 

For additional information on reinsurance, see Notes 1 and 6 to our consolidated and combined financial statements included in the 2010 Annual Report, which is incorporated by reference into the accompanying prospectus.

 

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Deferred Policy Acquisition Costs

 

The costs of acquiring new business are deferred to the extent that they vary with, and are primarily related to, the acquisition of such new business. These costs mainly include commissions and policy issue expenses. The recovery of such costs is dependent on the future profitability of the related policies, which, in turn, is dependent principally upon investment returns, mortality, persistency and the expense of administering the business, as well as upon certain economic variables, such as inflation. Deferred policy acquisition costs are subject to recoverability testing on an annual basis or when circumstances indicate that recoverability is uncertain. We make certain assumptions regarding persistency, expenses, interest rates and claims. The assumptions for these types of products may not be modified, or unlocked, unless recoverability testing deems them to be inadequate. Assumptions are updated for new business to reflect the most recent experience.

 

Deferrable term life insurance policy acquisition costs are amortized over the premium-paying period of the related policies in proportion to premium income. If actual lapses or withdrawals are different from pricing assumptions for a particular period, the deferred policy acquisition cost amortization will be affected. If the number of policies that lapse are 1% higher than the number of policies that we expected to lapse in our pricing assumptions, approximately 1% more of the existing deferred policy acquisition cost balance will be amortized, which would have been equal to approximately $8.0 million as of December 31, 2010 (assuming such lapses were distributed proportionately among policies of all durations). We believe that a lapse rate in the number of policies that is 1% higher than the rate assumed in our pricing assumptions is a reasonably possible variation. Higher lapses in the early durations would have a greater effect on deferred policy acquisition cost amortization since the deferred policy acquisition cost balances are higher at the earlier durations. Differences in actual mortality rates compared to our pricing assumptions will not have a material effect on deferred policy acquisition cost amortization. Due to the inherent uncertainties in making assumptions about future events, materially different experience from expected results in persistency or mortality could result in a material increase or decrease of deferred acquisition cost amortization in a particular period.

 

Deferrable acquisition costs for Canadian segregated funds are amortized over the life of the policies in relation to estimated gross profits before amortization.

 

For additional information on DAC, see Notes 1 and 7 to our consolidated and combined financial statements included in the 2010 Annual Report, which is incorporated by reference into the accompanying prospectus.

 

Future Policy Benefit Reserves

 

We calculate and maintain reserves for the estimated future payment of claims to our policyholders based on actuarial assumptions and in accordance with industry practice and GAAP. Liabilities for future policy benefits on our term life insurance products have been computed using a net level method, including assumptions as to investment yields, mortality, persistency, and other assumptions based on our experience. Many factors can affect these reserves, including mortality trends, investment yields and persistency. Similar to the DAC discussion above, the assumptions used to establish reserves cannot be modified over the policy term unless recoverability testing deems them to be inadequate. Therefore, the reserves we establish are based on estimates, assumptions and our analysis of historical experience. Our results depend significantly upon the extent to which our actual claims experience is consistent with the assumptions we used in determining our reserves and pricing our products. Our reserve assumptions and estimates require significant judgment and, therefore, are inherently uncertain. If actual lapses are different from pricing assumptions for a particular period, the change in the future policy benefit reserves, which is reflected in benefits and claims in our statements of income, will be affected.

 

If the number of policies that lapse are 1% higher than the number of policies that we expected to lapse in our pricing assumptions, approximately 1% more of the future policy benefit reserves will be released, which would have been equal to approximately $43.5 million as of December 31, 2010 (assuming such lapses were distributed proportionately among policies of all durations). The future policy benefit reserves released from the

 

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additional lapses would have been offset by the release of the corresponding reinsurance reserves of approximately $34.6 million as of December 31, 2010. Higher lapses in later durations would have a greater effect on the release of future policy benefit reserves since the future policy benefit reserves are higher at the later durations. Differences in actual mortality rates compared to our pricing assumptions will not have a material effect on future policy benefit reserves. We cannot determine with precision the ultimate amounts that we will pay for actual claims or the timing of those payments.

 

For additional information on future policy benefit reserves, see Notes 1 and 10 to our consolidated and combined financial statements included in the 2010 Annual Report, which is incorporated by reference into the accompanying prospectus.

 

Income Taxes

 

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to (i) differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and (ii) operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are recognized subject to management’s judgment that realization is more likely than not applicable to the periods in which we expect the temporary difference will reverse.

 

For additional information on income taxes, see Notes 1 and 12 to our consolidated and combined financial statements included in the 2010 Annual Report, which is incorporated by reference into the accompanying prospectus.

 

Results of Operations

 

Revenues

 

Our revenues consist of the following:

 

   

Net premiums.    Reflects direct premiums payable by our policyholders on our in-force insurance policies, primarily term life insurance, net of reinsurance premiums that we pay to third-party reinsurers.

 

   

Net investment income.    Represents income, net of investment related expenses, generated by our invested asset portfolio, which consists primarily of interest income earned on fixed-maturity investments. Investment income earned on assets supporting our statutory reserves and targeted capital is allocated to our Term Life Insurance segment, with the balance included in our Corporate and Other Distributed Products segment.

 

   

Commissions and fees.    Consists primarily of dealer re-allowances earned on the sales of investment and savings products, trail commissions based on the asset values of client accounts, marketing and support fees from product originators, custodial fees for services rendered in our capacity as nominee on client retirement accounts funded by mutual funds on our servicing platform, recordkeeping fees for mutual funds on our servicing platform and fees associated with the sale of other distributed products.

 

   

Realized investment gains (losses), including other-than-temporary impairments (“OTTI”).    Reflects the difference between amortized cost and amounts realized on the sale of investment securities, as well as OTTI charges.

 

   

Other, net.    Reflects revenues generated from the fees charged for access to our sales force website, printing revenues from the sale of printed materials to sales representatives, incentive fees and reimbursements from product originators, Canadian licensing fees, sales of merchandise to sales

 

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representatives, mutual fund customer service fees, fees charged to sales representatives related to life insurance processing responsibilities, and interest charges received from or paid to reinsurers on late payments.

 

Benefits and Expenses

 

Our operating expenses consist of the following:

 

   

Benefits and claims.    Reflects the benefits and claims payable on insurance policies, as well as changes in our reserves for future policy claims and reserves for other benefits payable, net of reinsurance.

 

   

Amortization of DAC.    Represents the amortization of capitalized costs associated with the sale of an insurance policy or segregated fund, including sales commissions, medical examination and other underwriting costs, and other acquisition-related costs.

 

   

Insurance commissions.    Reflects sales commissions in respect of insurance products that are not eligible for deferral.

 

   

Insurance expenses.    Reflects non-capitalized insurance expenses, including staff compensation, technology and communications, insurance sales force-related costs, printing, postage and distribution of insurance sales materials, outsourcing and professional fees, premium taxes, amortization of certain intangibles and other corporate and administrative fees and expenses related to our insurance operations.

 

   

Sales commissions.    Represents commissions to our sales representatives in connection with the sale of investment and savings products and products other than insurance products.

 

   

Interest expense.    Reflects interest on the Citi note as well as interest incurred in connection with the Citi reinsurance transactions.

 

   

Other operating expenses.    Consists primarily of expenses that are unrelated to the distribution of insurance products, including staff compensation, technology and communications, various sales force-related costs, printing, postage and distribution of sales materials, outsourcing and professional fees, amortization of certain intangibles and other corporate and administrative fees and expenses.

 

We allocate certain operating expenses associated with our sales representatives, including supervision, training and legal, to our two primary operating segments generally based on the average number of licensed representatives in each segment for a given period. We also allocate technology and occupancy costs based on usage. Costs that are not allocated to our two primary segments are included in our Corporate and Other Distributed Products segment.

 

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2010 Compared to 2009

 

Primerica, Inc. Actual Results

 

We executed the Transactions in March and April of 2010. As such, actual results will not be comparable due to the initial and ongoing effects and recognition of the Citi reinsurance and reorganization transactions. We believe the pro forma results presented in the next section provide meaningful additional information for the evaluation of our financial results. Our statements of income were as follows:

 

     Year ended December 31,

    Change

 
     2010

    2009

    $

    %

 
     (Dollars in thousands)  

Revenues:

                                

Direct premiums

   $ 2,181,074      $ 2,112,781      $ 68,293        3

Ceded premiums

     (1,450,367     (610,754     (839,613     137

Net premiums

     730,707        1,502,027        (771,320     -51

Net investment income

     165,111        351,326        (186,215     -53

Commissions and fees

     382,940        335,986        46,954        14

Realized investment (losses) gains , including OTTI

     34,145        (21,970     56,115        *   

Other, net

     48,960        53,032        (4,072     -8
    


 


 


       

Total revenues

     1,361,863        2,220,401        (858,538     -39

Benefits and expenses:

                                

Benefits and claims

     317,703        600,273        (282,570     -47

Amortization of DAC

     168,035        381,291        (213,256     -56

Insurance commissions

     19,904        34,388        (14,484     -42

Insurance expenses

     75,503        148,760        (73,257     -49

Sales commissions

     179,924        162,756        17,168        11

Interest expenses

     20,872        —          20,872        *   

Other operating expenses

     180,779        132,978        47,801        36
    


 


 


       

Total benefits and expenses

     962,720        1,460,446        (497,726     -34
    


 


 


       

Income before income taxes

     399,143        759,955        (360,812     -47

Income taxes

     141,365        265,366        (124,001     -47
    


 


 


       

Net income

   $ 257,778      $ 494,589      $ (236,811)        -48
    


 


 


       

*   Less than 1%, or not meaningful

 

Net premiums.    Net premiums were lower in 2010 primarily as a result of the significant increase in ceded premiums associated with the Citi reinsurance agreements executed on March 31, 2010. The effect of these agreements on net premiums is reflected in the Term Life Insurance segment.

 

Net investment income.    Net investment income declined during 2010 primarily as a result of the impact on our invested asset base of the asset transfers that we executed in connection with our corporate reorganization in 2010. On March 31, 2010, we transferred approximately $4.0 billion of assets to support the statutory liabilities assumed by the Citi reinsurers and in April 2010, we paid dividends to Citi of approximately $675.7 million. Lower yields on invested assets also negatively impacted net investment income during 2010.

 

Commissions and fees.    The increase in commissions and fees in 2010 was primarily driven by activity in our Investment and Savings Product segment as a result of improved market conditions and increased demand for our products, partially offset by declines in our lending business as reflected in our Corporate and Other Distributed Products segment results.

 

Total benefits and expenses.    The decrease in total benefits and expenses in 2010 primarily reflects lower benefits and claims, lower amortization of DAC and lower insurance expenses largely as a result of the Citi

 

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reinsurance agreements. These declines were partially offset by an increase in interest expense as a result of the Citi note and other operating expenses as a result of initial and one-time expenses incurred in connection with our initial public offering, including equity award expenses. The changes associated with the Citi reinsurance agreements impacted the Term Life Insurance segment, while the changes in interest and other operating expenses primarily impacted the Corporate and Other Distributed Products segment.

 

Income taxes.    Our effective income tax rate was 35.4% in 2010 and 34.9% in 2009.

 

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Primerica, Inc. Pro Forma Results

 

The following pro forma condensed consolidated statement of income is intended to provide information about how the Transactions would have affected our financial statements if they had been consummated as of January 1, 2010. Because the Transactions were concluded during 2010, pro forma adjustment to our balance sheet was not necessary as of December 31, 2010. Based on the timing of the Transactions, pro forma adjustments to our condensed consolidated statement of income were necessary for the first three months of 2010. The pro forma condensed consolidated statement of income does not necessarily reflect the results of operations that would have resulted had the Transactions occurred as of January 1, 2010, nor should it be taken as indicative of our future results of operations. Our pro forma condensed consolidated statement of income is set forth below.

 

Pro Forma Condensed Consolidated Statement of Income

 

Year ended December 31, 2010

(Unaudited)

 

     Actual (1)

    Adjustments
for the
Citi reinsurance
transactions (2)


    Adjustment
for the
reorganization
and other
concurrent
transactions (3)


    Pro forma

 
     (In thousands, except per-share amounts)  

Revenues:

                                

Direct premiums

   $ 2,181,074      $ —        $ —        $ 2,181,074   

Ceded premiums

     (1,450,367     (296,328 )(A)      —          (1,746,695
    


 


 


 


Net premiums

     730,707        (296,328     —          434,379   

Net investment income

     165,111        (47,566 )(B)      (7,169 )(H)      110,376   

Commissions and fees

     382,940        —          —          382,940   

Realized investment gains, including OTTI

     34,145        —          —          34,145   

Other, net

     48,960        —          —          48,960   
    


 


 


 


Total revenues

     1,361,863        (343,894     (7,169     1,010,800   
    


 


 


 


Benefits and Expenses:

                                

Benefits and claims

     317,703        (128,204 )(C)      —          189,499   

Amortization of DAC

     168,035        (71,389 )(D)      —          96,646   

Insurance commissions

     19,904        (1,669 )(E)      —          18,235   

Insurance expenses

     75,503        (26,083 )(E)      —          49,420   

Sales commissions

     179,924        —          —          179,924   

Interest expense

     20,872        2,812  (F)      4,125  (I)      27,809   

Other operating expenses

     180,779        —          3,076  (J)      183,855   
    


 


 


 


Total benefits and expenses

     962,720        (224,533     7,201        745,388   
    


 


 


 


Income before income taxes

     399,143        (119,361     (14,370     265,412   

Income taxes

     141,365        (42,274 )(G)      (5,089 )(G)      94,002   
    


 


 


 


Net income

   $ 257,778      $ (77,087   $ (9,281   $ 171,410   
    


 


 


 


Earnings per share:

                                

Basic

   $ 3.43                      $ 2.28   

Diluted

   $ 3.40                      $ 2.26   

Weighted-average shares:

                                

Basic

     72,099                        72,099   

Diluted

     72,882                        72,882   

 

See accompanying notes to the pro forma condensed consolidated statement of income.

 

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Notes to the Pro Forma Condensed Consolidated Statement of Income — Unaudited

 

(1) The actual statement of income included income attributable to the underlying policies that were reinsured to Citi on March 31, 2010 as well as net investment income earned on the invested assets backing the reinsurance balances and the distributions to Citi made as part of our corporate reorganization.

 

(2) Adjustments for the Citi reinsurance transactions.

 

Concurrent with the reorganization of our business and prior to completion of our initial public offering, we formed a new subsidiary, Prime Re, and we made an initial capital contribution to it. We also entered into a series of coinsurance agreements with Prime Re and with other Citi subsidiaries. Under these agreements, we ceded between 80% and 90% of the risks and rewards of our term life insurance policies that were in force at December 31, 2009. Concurrent with signing these agreements, we transferred the corresponding account balances in respect of the coinsured policies along with the assets to support the statutory liabilities assumed by Prime Re and the other Citi subsidiaries.

 

We believe that three of the Citi coinsurance agreements, which we refer to as the risk transfer agreements, satisfy GAAP risk transfer rules. Under the risk transfer agreements, we ceded between 80% and 90% of our term life future policy benefit reserves, and we transferred a corresponding amount of invested assets to the Citi reinsurers. These transactions did not and will not impact our future policy benefit reserves, and we recorded an asset for the same amount of risk transferred in due from reinsurers. We also reduced deferred acquisition costs by between 80% and 90%, which will reduce future amortization expenses. In addition, we will transfer between 80% and 90% of all future premiums and benefits and claims associated with these policies to the corresponding reinsurance entities. We will receive ongoing ceding allowances as a reduction to insurance expenses to cover policy and claims administration expenses under each of these reinsurance contracts. One coinsurance agreement, which we refer to as the deposit agreement, relates to a 10% reinsurance transaction that includes an experience refund provision and does not satisfy GAAP risk transfer rules. We account for this contract under the deposit method. Under deposit method accounting, the amount we pay to the reinsurer will be treated as a deposit and is reported on the balance sheet as an asset in other assets. The Citi coinsurance agreements did not generate any deferred gain or loss upon their execution because these transactions were part of a business reorganization among entities under common control. The net impact of these transactions was reflected as an increase in paid-in capital. Prior to the completion of our initial public offering, we effected a reorganization in which we transferred all of the issued and outstanding capital stock of Prime Re to Citi. Each of the assets and liabilities, including the invested assets and the distribution of Prime Re, was transferred at book value with no gain or loss recorded on our income statement.

 

For the year ended December 31, 2010, the pro forma condensed consolidated statement of income assumes the reinsurance transactions were effected as of January 1, 2010 for policies in force as of year-end 2009.

 

(A) Reflects premiums ceded to the Citi reinsurers for the specific policies covered under the risk transfer agreements.

 

(B) Reflects net investment income on a pro-rata share of invested assets transferred to the Citi reinsurers. The net investment income was estimated by multiplying the actual investment income by the ratio of the amount of assets transferred to our total portfolio of invested assets. The amount also includes the change in fair value of the deposit asset related to the 10% reinsurance agreement being accounted for under the deposit method.

 

(C) Reflects benefits and claims ceded to the Citi reinsurers for the specific policies covered under the risk transfer agreements.

 

(D) Reflects the DAC amortization ceded to the Citi reinsurers for the specific policies covered under the risk transfer agreements.

 

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(E) Reflects the non-deferred expense allowance received from the Citi reinsurers under the risk transfer agreements.

 

(F) Reflects a finance charge payable to the Citi reinsurer in respect of the deposit agreement. The annual finance charge is 3% of our excess reserves. Excess reserves are equal to the difference between our required statutory reserves and our economic reserves, which is the amount we determine is necessary to satisfy obligations under our in-force policies.

 

(G) Reflects income tax at the respective period’s effective tax rate.

 

(3) Adjustments for the reorganization and other concurrent transactions. The pro forma statement of income for the year ended December 31, 2010 assumes the reorganization transactions were executed as of January 1, 2010.

 

(H) Reflects a pro-rata reduction of net investment income on assets distributed to Citi as an extraordinary distribution.

 

(I) Reflects interest expense on a $300.0 million, 5.5% interest note payable issued to Citi.

 

(J) Reflects expense associated with equity awards granted on April 1, 2010 in connection with our initial public offering. The $3.1 million expense reflects one quarter of vesting related to management awards that continue to vest over three years. These expenses are reflected in actual results for periods following our initial public offering.

 

For more detailed commentary on the drivers of our revenues and expenses, see the section entitled “— Results of Operations — 2010 Compared to 2009 — Segment Results” beginning on page S-64 of this prospectus supplement.

 

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Segment Results

 

Term Life Insurance Segment Actual Results.    We entered into the Citi reinsurance and reorganization transactions, which are described more fully in Notes 2 and 3 to our pro forma statement of income, during March and April of 2010. As such, actual results for the year ended December 31, 2010 include approximately three months of operations that do not reflect the Citi reinsurance and reorganization transactions, and actual results for the year ended December 31, 2009 do not reflect the effects of the Citi reinsurance and reorganization transactions. Term Life Insurance segment actual results were as follows:

 

     Year ended
December 31,


     Change

 
     2010

     2009

     $

     %

 
     (Dollars in thousands)  

Revenues:

                                   

Direct premiums

   $ 2,100,709       $ 2,030,988       $ 69,721         3

Ceded premiums

     (1,436,041      (596,791      (839,250      141
    


  


  


        

Net premiums

     664,668         1,434,197         (769,529      -54

Allocated net investment income

     110,633         274,212         (163,579      -60

Other, net

     33,267         33,656         (389      -1
    


  


  


        

Total revenues

     808,568         1,742,065         (933,497      -54

Benefits and expenses:

                                   

Benefits and claims

     277,653         559,038         (281,385      -50

Amortization of DAC

     156,312         371,663         (215,351      -58

Insurance commissions

     3,177         17,614         (14,437      -82

Insurance expenses

     63,885         134,738         (70,853      -53

Interest expense

     8,497         —           8,497         *   
    


  


  


        

Total benefits and expenses

     509,524         1,083,053         (573,529      -53
    


  


  


        

Income before income taxes

   $ 299,044       $ 659,012       $ (359,968      -55
    


  


  


        

*   Not meaningful

 

We believe that the pro forma results presented below provide meaningful additional information necessary to evaluate our segment financial results.

 

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Term Life Insurance Segment Pro Forma Results.    Term Life Insurance segment pro forma results give effect to the Citi reinsurance and reorganization transactions, which are described more fully in Notes 2 and 3 to our pro forma statement of income. On a pro forma basis, Term Life Insurance segment results were as follows:

 

     Year ended
December 31,


    Change

 
     2010

    2009

    $

        %    

 
     (Dollars in thousands)  

Revenues:

                                

Direct premiums

   $ 2,100,709      $ 2,030,988      $ 69,721        3

Ceded premiums

     (1,732,369     (1,680,827     (51,542     3
    


 


 


       

Net premiums

     368,340        350,161        18,179        5

Allocated net investment income

     62,294        68,303        (6,009     -9

Other, net

     33,267        33,656        (389     -1
    


 


 


       

Total revenues

     463,901        452,120        11,781        3

Benefits and expenses:

                                

Benefits and claims

     149,449        135,052        14,397        11

Amortization of DAC

     84,923        91,932        (7,009     -8

Insurance commissions

     1,508        12,091        (10,583     -88

Insurance expenses

     37,802        38,123        (321     *   

Interest expense

     11,309        10,993        316        3
    


 


 


       

Total benefits and expenses

     284,991        288,191        (3,200     -1
    


 


 


       

Income before income taxes

   $ 178,910      $ 163,929      $ 14,981        9
    


 


 


       

*   Less than 1%

 

Direct premiums for 2010 increased mainly due to improved persistency, a stronger Canadian dollar and premium increases for policies reaching the end of their initial level premium period, partially offset by the decline in sales volume noted previously. Ceded premiums, which are highly influenced by the business reinsured with Citi, grew consistent with direct premiums.

 

Additionally, in 2010, we reduced ceded premiums by approximately $13.1 million related to agreements obtained with certain reinsurers to recover ceded premiums for post-issue underwriting class upgrades. The most common reason for such an upgrade occurs when someone who was originally issued a term

life policy as a tobacco user subsequently quits using tobacco. Historically, we have reduced policyholder premiums for such upgrades, but have not reduced ceded premiums to reflect the new underwriting class. We were uncertain of our ability to recover past ceded premiums, but in the fourth quarter of 2010, we approached our reinsurers and reached agreements to recover certain of these past ceded premiums. The $13.1 million of recoveries recognized in 2010 reflects the agreements signed in the fourth quarter of 2010. We recovered $18.8 million of past ceded premiums, which included $5.7 million of recoveries passed on to the Citi reinsurers in accordance with the terms of the associated reinsurance agreements. We expect approximately $8.7 million of additional recoveries in the first quarter of 2011 for the remaining agreements which were signed in January 2011.

 

Allocated net investment income decreased during 2010, primarily due to lower yield on invested assets and slightly lower average allocated invested assets, partially offset by lower investment-related expenses.

 

The increase in benefits and claims in 2010 was primarily due to higher reserve increases as a result of improvements in policy persistency and premium growth. Claims were slightly higher during 2010 due to favorable claims experience in the first quarter of 2009.

 

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In 2010, amortization of DAC decreased largely due to improved policy persistency, partially offset by higher amortization from a lower DAC interest rate assumed for new business. We lowered the interest rate assumption during the third quarter of 2010 to reflect rates available in the current interest rate environment. The new lower DAC interest rate assumption will increase DAC amortization in the near term.

 

The decline in insurance commissions expense in 2010 was largely due to the $8.2 million special sales force payment made in 2009.

 

Insurance expenses were relatively flat primarily reflecting the offsetting effects of a decline in compensation-related items in 2010; payments made in 2009 for contract buyouts associated with our cancelled convention; and an increase in taxes, licenses and fees expense in 2010. The increase in taxes, licenses and fees in 2010 was primarily driven by accruals recognized in the fourth quarter as a result of recognizing these items on the accrual basis of accounting.

 

The changes in the face amount of our in-force book of term life insurance policies were as follows:

 

     Year ended
December 31,


    Change

 
     2010

    2009

    $

    %

 
     (Dollars in millions)  

Face amount in force, beginning of period

   $ 650,195      $ 633,467      $ 16,728        3

Issued face amount

     74,401        80,497        (6,096     -8

Terminations

     (70,964     (74,642     3,678        -5

Foreign currency

     3,158        10,873        (7,715     -71
    


 


 


       

Face amount in force, end of period(1)

   $ 656,791      $ 650,195      $ 6,596        1
    


 


 


       

(1)   Totals may not add due to rounding.

 

The in-force book increased $6.60 billion, or 1%, during 2010. Issued face amount decreased $6.10 billion, or approximately 8%, due to a lower average issued policy size and the effect on production of a slightly smaller base of sales representatives. Terminations decreased by $3.68 billion in 2010, primarily as a result of improved persistency relative to 2009. The decrease in the effect of foreign currency on the end-of-period face amount in force was largely due to the significant strengthening in the Canadian dollar experienced during 2009. The increase in face in force in 2010 did not keep pace with the increase in premiums primarily due to the effect of increased premiums with no corresponding change in face amount and unchanged face amounts on policies reaching the end of their initial level premium period.

 

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Investments and Savings Products Segment Actual Results.     The Transactions had no impact on the Investments and Savings Products segment. On an actual basis, Investments and Savings Products segment results were as follows:

 

     Year ended
December 31,


     Change

 
     2010

     2009

     $

    %

 
     (Dollars in thousands)  

Revenues:

                                  

Commissions and fees:

                                  

Sales-based revenues

   $ 142,606       $ 118,798       $ 23,808        20

Asset-based revenues

     167,473         127,581         39,892        31

Account-based revenues

     41,690         43,247         (1,557     -4
    


  


  


       

Total commissions and fees

     351,769         289,626         62,143        21

Other, net

     10,038         10,514         (476     -5
    


  


  


       

Total revenues

     361,807         300,140         61,667        21

Expenses:

                                  

Amortization of DAC

     9,330         7,254         2,076        29

Insurance commissions

     7,854         6,831         1,023        15

Sales commissions:

                                  

Sales-based

     100,993         86,912         14,081        16

Asset-based

     58,129         42,003         16,126        38

Other operating expenses

     71,971         63,736         8,235        13
    


  


  


       

Total expenses

     248,277         206,736         41,541        20
    


  


  


       

Income before income taxes

   $ 113,530       $ 93,404       $ 20,126        22
    


  


  


       

 

Supplemental information on the underlying metrics that drove results was as follows:

 

     Year ended
December 31,


     Change

 
     2010

     2009

     $

    %

 
     (Dollars in millions and accounts in
thousands)
 

Revenue metric:

                                  

Product sales

   $ 3,623.6       $ 3,006.6       $ 617.0        21

Average of aggregate client account values

   $ 31,908       $ 26,845       $ 5,063        19

Average number of fee-generating accounts

     2,728         2,838         (110     -4

 

Commissions and fees revenue increased in 2010 primarily as a result of improving economic and market trends and client demand. Sales-based commission revenues primarily grew as a result of demand, while asset-based commission revenues were driven by demand and improved equity valuations. As a result, sales-based and asset-based commission expense grew as well. Asset-based revenues and commission expense in 2010 also reflect the impact of accruing certain items that had previously been accounted for on a cash basis. Excluding the impact of these cash-to-accrual adjustments, asset-based revenues and commissions would have increased 22%, consistent with the 19% growth in aggregate client account values.

 

Amortization of DAC and insurance commissions increased in 2010 consistent with the growth in our segregated funds business. Additionally, increases in client account values driven by improving market conditions accelerated amortization of DAC in 2010.

 

Other operating expenses increased in 2010, largely due to higher administrative costs as a result of growth in the business.

 

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Changes in asset values in client accounts were as follows:

 

     Year ended
December 31,


    Change

 
     2010

    2009

    $

    %

 
     (Dollars in millions)  

Asset values, beginning of period

   $ 31,303      $ 24,677      $ 6,626        27

Inflows

     3,624        3,007        617        21

Redemptions

     (3,691     (2,997     (694     23

Change in market value, net and other

     3,633        6,617        (2,984     -45
    


 


 


       

Asset values, end of period (1)

   $ 34,869      $ 31,303      $ 3,565        11
    


 


 


       

(1)   Totals may not add due to rounding.

 

Inflows increased consistent with the increase in sales volume. The amount of redemptions also increased reflecting the year-over-year increase in assets under management. Actual redemption rates were level as a percent of average assets under management for both 2010 and 2009. The market return on assets under management in 2010 and 2009 reflected general market value trends.

 

Corporate and Other Distributed Products Segment Actual Results.    We entered into the reorganization transactions, which are described more fully in Note 3 to our pro forma statement of income, during March and April of 2010. As such, actual results for the year ended December 31, 2010 include approximately three months of operations that do not reflect the reorganization transactions, while actual results for the year ended December 31, 2009 do not reflect the effects of the reorganization transactions. Corporate and Other Distributed Products segment actual results were as follows:

 

     Year ended
December 31,


    Change

 
     2010

    2009

    $

    %

 
     (Dollars in thousands)  

Revenues:

                                

Direct premiums

   $ 80,365      $ 81,793      $ (1,428     -2

Ceded premiums

     (14,325     (13,963     (362     3
    


 


 


       

Net premiums

     66,040        67,830        (1,790     -3

Allocated net investment income

     54,477        77,114        (22,637     -29

Commissions and fees

     31,172        46,360        (15,188     -33

Realized investment gains (losses), including OTTI

     34,146        (21,970     56,116        *   

Other, net

     5,653        8,862        (3,209     -36
    


 


 


       

Total revenues

     191,488        178,196        13,292        7

Benefits and expenses:

                                

Benefits and claims

     40,052        41,235        (1,183     -3

Amortization of DAC

     2,392        2,374        18        *   

Insurance commissions

     8,875        9,943        (1,068     -11

Insurance expenses

     11,615        14,022        (2,407     -17

Sales commissions

     20,800        33,841        (13,041     -39

Interest expense

     12,375        —          12,375        *   

Other operating expenses

     108,810        69,242        39,568        57
    


 


 


       

Total benefits and expenses

     204,919        170,657        34,262        20
    


 


 


       

(Loss) income before income taxes

   $ (13,431   $ 7,539      $ (20,970     *   
    


 


 


       

*   Less than 1%, or not meaningful

 

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We believe that the pro forma results presented below provide meaningful additional information necessary to evaluate our segment financial results.

 

Corporate and Other Distributed Products Segment Pro Forma Results.    Corporate and Other Distributed Products segment pro forma results give effect to the reorganization transactions, which are described more fully in Note 3 to our pro forma statement of income. On a pro forma basis, Corporate and Other Distributed Products segment results were as follows:

 

     Year ended
December 31,


    Change

 
     2010

    2009

    $

    %

 
     (Dollars in thousands)  

Revenues:

                                

Direct premiums

   $ 80,365      $ 81,793      $ (1,428     -2

Ceded premiums

     (14,325     (13,963     (362     3
    


 


 


       

Total premiums

     66,040        67,830        (1,790     -3

Allocated net investment income

     48,081        50,043        (1,962     -4

Commissions and fees

     31,172        46,360        (15,188     -33

Realized investment gains (losses), including OTTI

     34,146        (21,970     56,116        *   

Other, net

     5,653        8,862        (3,209     -36
    


 


 


       

Total revenues

     185,092        151,125        33,967        22

Benefits and expenses:

                                

Benefits and claims

     40,052        41,235        (1,183     -3

Amortization of DAC

     2,392        2,374        18        1

Insurance commissions

     8,875        9,943        (1,068     -11

Insurance expenses

     11,615        14,022        (2,407     -17

Sales commissions

     20,800        33,841        (13,041     -39

Interest expense

     16,500        16,500        —          *   

Other operating expenses

     111,886        104,012        7,874        8
    


 


 


       

Total benefits and expenses

     212,120        221,927        (9,807     -4
    


 


 


       

Loss before income taxes

   $ (27,028   $ (70,802   $ 43,774        -62
    


 


 


       

*   Less than 1%, or not meaningful

 

Total revenues increased in 2010 primarily as a result of recognizing realized investment gains in 2010 versus impairment losses in 2009. This growth was partially offset by lower commissions and fees as a result of the continuing decline in our lending business. The increase in total revenues was also partially offset by lower net investment income and a decline in our print business as reflected in other, net. Realized investment gains (losses) included $12.2 million of OTTI in 2010, compared with $61.4 million of OTTI in 2009.

 

Total benefits and expenses were lower in 2010 primarily as a result of lower sales commissions partially offset by an increase in other operating expenses. Sales commissions expense was lower in 2010 consistent with the decline in commissions and fees revenue noted above. Other operating expenses increased primarily as a result of public company and IPO-related expenses incurred in 2010.

 

For additional segment information, see Note 3 to our consolidated and combined financial statements included in the 2010 Annual Report, which is incorporated by reference into the accompanying prospectus.

 

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2009 Compared to 2008

 

Consolidated Overview

 

     Year ended
December 31,


    Change

 
     2009

    2008

    $

    %

 
     (Dollars in thousands)  

Revenues

                                

Direct premiums

   $ 2,112,781      $ 2,092,792      $ 19,989        *   

Ceded premiums

     (610,754     (629,074     18,320        -3
    


 


 


       

Net premiums

     1,502,027        1,463,718        38,309        3

Net investment income

     351,326        314,035        37,291        12

Commissions and fees

     335,986        466,484        (130,498     -28

Other, net

     53,032        56,187        (3,155     -6

Realized investment (losses) gains , including OTTI

     (21,970     (103,480     81,510        -79
    


 


 


       

Total revenues

     2,220,401        2,196,944        23,457        1

Benefits and expenses

                                

Benefits and claims

     600,273        938,370        (338,097     -36

Amortization of DAC

     381,291        144,490        236,801        164

Insurance commissions

     34,388        23,932        10,456        44

Insurance expenses

     148,760        141,331        7,429        5

Sales commissions

     162,756        248,020        (85,264     -34

Goodwill impairment

     —          194,992        (194,992     *   

Other operating expenses

     132,978        152,773        (19,795     -13
    


 


 


       

Total benefits and expenses

     1,460,446        1,843,908        (383,462     -21
    


 


 


       

Income before income taxes

     759,955        353,036        406,919        115

Income taxes

     265,366        185,354        80,012        43
    


 


 


       

Net income

   $ 494,589      $ 167,682      $ 326,907        195
    


 


 


       

*   Less than 1%, or not meaningful

 

Income before income taxes.    Income before income taxes increased $406.9 million, or 115%, to $760.0 million for the year ended December 31, 2009 from $353.0 million for the year ended December 31, 2008. The increase reflected the impact of a $291.4 million increase in Corporate and Other Distributed Products, a $147.3 million increase in Term Life Insurance and a $31.8 million decrease in Investments and Savings Products.

 

Total revenues.    Total revenues increased $23.5 million, or 1%, to $2.2 billion for the year ended December 31, 2009 from $2.2 billion for the year ended December 31, 2008. The increase reflected the impact of a $69.1 million increase in Term Life Insurance due to the change in our DAC and reserve estimation approach in 2008 and an increased allocation of net investment income; a $40.7 million increase in Corporate and Other Distributed Products, due primarily to a lower level of other-than-temporary impairments taken in 2009, partially offset by a decline in sales commissions from the sale of our loan products; and an $86.4 million decrease in Investment and Savings Products due to adverse market and economic conditions.

 

Total benefits and expenses.    Total benefits and expenses decreased $383.5 million, or 21%, to $1.5 billion for the year ended December 31, 2009 from $1.8 billion for the year ended December 31, 2008. The decrease reflected the impact of a $250.7 million decline in Corporate and Other Distributed Products, which resulted from a $195.0 million goodwill impairment charge in 2008 and from a decline in commissions due to

 

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lower sales of loan products; a $78.2 million decrease in Term Life Insurance, primarily due to the impact of the change in our DAC and reserve estimation approach in 2008; and a $54.6 million decline due to lower sales commissions.

 

Income taxes.    Income taxes increased $80.0 million, or 43%, to $265.4 million for the year ended December 31, 2009 from $185.4 million for the year ended December 31, 2008. The effective tax rate was 34.9% and 52.5% for the years ended December 31, 2009 and 2008, respectively. The decrease in the effective tax rate was primarily a result of the $195.0 million non-tax deductible goodwill impairment charge recognized in 2008. Excluding the effect of the goodwill impairment charge, the effective tax rate would have been 33.2% for the year ended December 31, 2008.

 

Term Life Insurance Segment

 

     Year ended
December 31,


    Change

 
     2009

    2008

    $

    %

 
     (Dollars in thousands)  

Revenues

                                

Direct premiums