EXHIBIT 99.5

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The stockholders and board of directors of Primerica, Inc.:
 
We have audited the accompanying consolidated balance sheets of Primerica, Inc. and subsidiaries (the Company) as of December 31, 2011 and 2010, and the related consolidated and combined statements of income, stockholders' equity, comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2011. These consolidated and combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated and combined financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated and combined financial statements referred to above present fairly, in all material respects, the financial position of Primerica, Inc. and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1 to the consolidated and combined financial statements, in April 2010 the Company completed its initial public offering and a series of related transactions. Also as discussed in Note 1 to the consolidated and combined financial statements, the Company retrospectively adopted the provisions of ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts, as of January 1, 2012, and adopted the provisions of FASB Staff Position Financial Accounting Standard No. 115-2 and Financial Accounting Standard No. 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (included in FASB ASC Topic 320, Investments — Debt and Equity Securities) as of January 1, 2009.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Primerica, Inc.’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 28, 2012 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.


/s/ KPMG LLP
 
Atlanta, Georgia
February 28, 2012, except as to Notes 1, 2, 6, 11, 12, 13, 14 and 19 which are as of May 8, 2012

EX 99.5-1



PRIMERICA, INC. AND SUBSIDIARIES
Consolidated Balance Sheets

 
December 31,
 
2011
 
2010
 
(In thousands)
Assets
 
 
 
Investments:
 
 
 
Fixed-maturity securities available for sale, at fair value (amortized cost: $1,811,359 in 2011 and $1,929,757 in 2010)
$
1,959,156

 
$
2,081,361

Equity securities available for sale, at fair value (cost: $21,329 in 2011 and $17,394 in 2010)
26,712

 
23,213

Trading securities, at fair value (cost: $9,793 in 2011 and $22,619 in 2010)
9,640

 
22,767

Policy loans
25,982

 
26,229

Other invested assets
14

 
14

Total investments
2,021,504

 
2,153,584

Cash and cash equivalents
136,078

 
126,038

Accrued investment income
21,579

 
22,328

Due from reinsurers
3,855,318

 
3,731,002

Deferred policy acquisition costs, net
904,485

 
738,946

Premiums and other receivables
163,845

 
168,026

Intangible assets
71,928

 
75,357

Other assets
268,485

 
307,342

Separate account assets
2,408,598

 
2,446,786

Total assets
$
9,851,820

 
$
9,769,409

Liabilities and Stockholders’ Equity
 
 
 
Liabilities:
 
 
 
Future policy benefits
$
4,614,860

 
$
4,409,183

Unearned premiums
7,022

 
5,563

Policy claims and other benefits payable
241,754

 
229,895

Other policyholders’ funds
340,766

 
357,253

Note payable
300,000

 
300,000

Current income tax payable
33,177

 
43,224

Deferred income taxes
48,139

 
53,702

Other liabilities
381,496

 
385,549

Payable under securities lending
149,358

 
181,726

Separate account liabilities
2,408,598

 
2,446,786

Commitments and contingent liabilities (see Note 16)


 


Total liabilities
8,525,170

 
8,412,881

Stockholders’ equity:
 
 
 
Common stock ($.01 par value, authorized 500,000 in 2011 and 2010 and issued 64,883 shares in 2011 and 72,843 shares in 2010)
649

 
728

Paid-in capital
835,232

 
1,010,635

Retained earnings
344,104

 
194,225

Accumulated other comprehensive income, net of income tax:
 
 
 
Unrealized foreign currency translation gains
51,248

 
54,893

Net unrealized investment gains (losses):
 
 
 
Net unrealized investment gains not other-than-temporarily impaired
97,082

 
98,322

Net unrealized investment losses other-than-temporarily impaired
(1,665
)
 
(2,275
)
Total stockholders’ equity
1,326,650

 
1,356,528

Total liabilities and stockholders’ equity
$
9,851,820

 
$
9,769,409

See accompanying notes to consolidated and combined financial statements.

EX 99.5-2



PRIMERICA, INC. AND SUBSIDIARIES
Consolidated and Combined Statements of Income
 
Year ended December 31,
 
2011
 
2010
 
2009
 
(In thousands, except per-share amounts)
Revenues:
 
 
 
 
 
Direct premiums
$
2,229,467

 
$
2,181,074

 
$
2,112,781

Ceded premiums
(1,703,075
)
 
(1,450,367
)
 
(610,754
)
Net premiums
526,392

 
730,707

 
1,502,027

Commissions and fees
412,979

 
382,940

 
335,986

Net investment income
108,601

 
165,111

 
351,326

Realized investment gains (losses), including other-than-temporary impairment losses
6,440

 
34,145

 
(21,970
)
Other, net
48,681

 
48,960

 
53,032

Total revenues
1,103,093

 
1,361,863

 
2,220,401

Benefits and expenses:
 
 
 
 
 
Benefits and claims
242,696

 
317,703

 
600,273

Amortization of deferred policy acquisition costs
104,034

 
147,841

 
352,257

Sales commissions
191,722

 
180,054

 
162,756

Insurance expenses
89,192

 
105,132

 
179,592

Insurance commissions
38,618

 
48,182

 
50,750

Interest expense
27,968

 
20,872

 

Other operating expenses
164,954

 
180,610

 
132,978

Total benefits and expenses
859,184

 
1,000,394

 
1,478,606

Income before income taxes
243,909

 
361,469

 
741,795

Income taxes
86,718

 
129,013

 
259,114

Net income
$
157,191

 
$
232,456

 
$
482,681

Earnings per share:
 
 
 
 
 
Basic
$
2.11

 
$
3.09

(1
)
 
Diluted
$
2.08

 
$
3.06

(1
)
 
Weighted-average shares used in computing earnings per share:
 
 
 
 
 
Basic
72,283

 
72,099

(1
)
 
Diluted
73,107

 
72,882

(1
)
 
(1) Pro forma basis using weighted-average shares, including the shares issued or issuable upon lapse of restrictions following our April 1, 2010 corporate reorganization as though they had been issued and outstanding on January 1, 2010.
Supplemental disclosures:
 
 
 
 
 
Total impairment losses
$
(2,198
)
 
$
(12,711
)
 
$
(74,967
)
Impairment losses recognized in other comprehensive income before income taxes
183

 
553

 
13,573

Net impairment losses recognized in earnings
(2,015
)
 
(12,158
)
 
(61,394
)
Other net realized investment gains
8,455

 
46,303

 
39,424

Realized investment gains (losses), including other-than-temporary impairment losses
$
6,440

 
$
34,145

 
$
(21,970
)
See accompanying notes to consolidated and combined financial statements.

EX 99.5-3



PRIMERICA, INC. AND SUBSIDIARIES
Consolidated and Combined Statements of Stockholders’ Equity
 
Year ended December 31,
 
2011
 
2010
 
2009
 
(In thousands, except per-share amounts)
Common stock:
 
 
 
 
 
Balance, beginning of period
$
728

 
$

 
$

Repurchase of shares held by Citi
(89
)
 

 

Net issuance of common stock
10

 
728

 

Balance, end of period
649

 
728

 

Paid-in capital:
 
 
 
 
 
Balance, beginning of period
1,010,635

 
1,124,096

 
1,095,062

Share-based compensation
25,335

 
46,094

 
(1,836
)
Net issuance of common stock
(10
)
 
(727
)
 

Repurchase of shares held by Citi
(199,911
)
 

 

Net capital contributed by Citi
1,426

 
295,168

 
30,870

Issuance of warrants to Citi

 
18,464

 

Issuance of note payable to Citi

 
(300,000
)
 

Tax election under Section 338(h)(10) of the Internal Revenue Code
(2,243
)
 
(172,460
)
 

Balance, end of period
835,232

 
1,010,635

 
1,124,096

Treasury Stock:
 
 
 
 
 
Balance, beginning of period

 

 

Treasury stock acquired

 
(75,420
)
 

Treasury stock issued, at cost

 
41,056

 

Treasury stock retired

 
34,364

 

Balance, end of period

 

 

Retained earnings:
 
 
 
 
 
Balance, beginning of period
194,225

 
3,473,306

 
3,177,254

Adoption of FSP SFAS No. 115-2 (included in ASC 320), net of income tax expense of $3,929 in 2009

 

 
7,298

Net income
157,191

 
232,456

 
482,681

Dividends ($0.10 per share in 2011 and $0.02 per share in 2010)
(7,312
)
 
(1,502
)
 

Distributions of warrants to Citi

 
(18,464
)
 

Distributions to Citi

 
(3,491,571
)
 
(193,927
)
Balance, end of period
344,104

 
194,225

 
3,473,306

Accumulated other comprehensive income:
 
 
 
 
 
Balance, beginning of period
150,940

 
169,869

 
(323,033
)
Adoption of FSP SFAS No. 115-2 (included in ASC 320), net of income tax expense of $(3,929) in 2009

 

 
(7,298
)
Change in foreign currency translation adjustment, net of income tax expense of $0 in 2011, $4,630 in 2010, and $27,125 in 2009
(3,645
)
 
15,009

 
47,824

Change in net unrealized investment gains (losses) during the period, net of income taxes:
 
 
 
 
 
Change in net unrealized investment gains (losses) not-other-than temporarily impaired, net of income tax expense (benefit) of $(1,785) in 2011, $(24,848) in 2010, and $245,060 in 2009
(1,240
)
 
(47,783
)
 
461,198

Change in net unrealized investment gains (losses) other-than-temporarily impaired, net of income tax expense (benefit) of $328 in 2011, $7,455 in 2010, and $(4,751) in 2009
610

 
13,845

 
(8,822
)
Balance, end of period
146,665

 
150,940

 
169,869

Total stockholders’ equity
$
1,326,650

 
$
1,356,528

 
$
4,767,271

See accompanying notes to consolidated and combined financial statements.

EX 99.5-4



PRIMERICA, INC. AND SUBSIDIARIES
Consolidated and Combined Statements of Comprehensive Income

 
Year ended December 31,
 
2011
 
2010
 
2009
 
(In thousands)
Net income
$
157,191

 
$
232,456

 
$
482,681

Other comprehensive (loss) income before income taxes:
 
 
 
 
 
Unrealized investment gains (losses):
 
 
 
 
 
Change in unrealized gains on investment securities
3,839

 
114,867

 
663,458

Reclassification adjustment for realized investment gains (losses) included in net income
(5,926
)
 
(33,510
)
 
21,929

Reclassification adjustment for unrealized gains on investment securities transferred

 
(132,688
)
 

Foreign currency translation adjustments:
 
 
 
 
 
Change in unrealized foreign currency translation gains
(3,645
)
 
19,639

 
74,949

Total other comprehensive (loss) income before income taxes
(5,732
)
 
(31,692
)
 
760,336

Income tax (benefit) expense related to items of other comprehensive (loss) income
(1,457
)
 
(12,763
)
 
267,434

Other comprehensive (loss) income, net of income taxes
(4,275
)
 
(18,929
)
 
492,902

Total comprehensive income
$
152,916

 
$
213,527

 
$
975,583

See accompanying notes to consolidated and combined financial statements.

EX 99.5-5



PRIMERICA, INC. AND SUBSIDIARIES
Consolidated and Combined Statements of Cash Flows
 
Year ended December 31,
 
2011
 
2010
 
2009
 
(In thousands)
Cash flows from operating activities:
 
 
 
 
 
Net income
$
157,191

 
$
232,456

 
$
482,681

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
 
 
Change in future policy benefits and other policy liabilities
85,464

 
71,037

 
148,775

Deferral of policy acquisition costs
(270,661
)
 
(259,201
)
 
(343,886
)
Amortization of deferred policy acquisition costs
104,034

 
147,841

 
352,257

Deferred tax provision
(3,426
)
 
19,681

 
(26,067
)
Change in income taxes
(11,866
)
 
(40,902
)
 
74,991

Realized investment gains (losses), including other-than-temporary impairments
(6,440
)
 
(34,145
)
 
21,970

Accretion and amortization of investments
(2,818
)
 
(1,878
)
 
(8,226
)
Depreciation and amortization
10,731

 
10,063

 
10,342

Change in due from reinsurers
(4,292
)
 
(72,172
)
 
(911
)
Change in due to/from affiliates

 
(44,012
)
 
55,460

Change in premiums and other receivables
3,464

 
(7,129
)
 
(2,975
)
Trading securities acquired (sold), net
3,597

 
(5,994
)
 
(4,553
)
Share-based compensation
20,470

 
45,616

 
(1,794
)
Other, net
2,523

 
(20,405
)
 
(42,468
)
Net cash provided by operating activities
87,971

 
40,856

 
715,596

Cash flows from investing activities:
 
 
 
 
 
Available-for-sale investments sold, matured or called:
 
 
 
 
 
Fixed-maturity securities - sold
214,807

 
993,278

 
713,805

Fixed-maturity securities - matured or called
375,124

 
514,132

 
878,215

Equity securities
3,037

 
36,566

 
667

Available-for-sale investments acquired:
 
 
 
 
 
Fixed-maturity securities
(460,459
)
 
(787,683
)
 
(1,945,887
)
Equity securities
(144
)
 
(7,560
)
 
(1,115
)
Change in policy loans
247

 
705

 
1,354

Purchases of furniture and equipment, net
(3,913
)
 
(9,864
)
 
(4,894
)
Cash collateral (returned) received on loaned securities, net
(32,368
)
 
(328,375
)
 
156,207

Sales (purchases) of short-term investments using securities lending collateral, net
32,368

 
328,375

 
(156,207
)
Net cash provided by (used in) investing activities
128,699

 
739,574

 
(357,855
)
Cash flows from financing activities:
 
 
 
 
 
Repurchase of shares held by Citi
(200,000
)
 

 

Dividends
(7,312
)
 
(1,502
)
 

Net distributions to Citi

 
(1,288,391
)
 
(56,427
)
Net cash used in financing activities
(207,312
)
 
(1,289,893
)
 
(56,427
)
Effect of foreign exchange rate changes on cash
682

 
32,979

 
(1,146
)
Change in cash and cash equivalents
10,040

 
(476,484
)
 
300,168

Cash and cash equivalents, beginning of period
126,038

 
602,522

 
302,354

Cash and cash equivalents, end of period
$
136,078

 
$
126,038

 
$
602,522

 
 
 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
 
 
Income taxes paid
$
96,305

 
$
260,275

 
$
220,988

Interest paid
27,555

 
13,695

 
639

Impairment losses included in realized investment gains (losses), including other-than-temporary impairments
2,015

 
12,158

 
61,394

Non-cash activities:
 
 
 
 
 
Share-based compensation
$
29,445

 
$
46,094

 
$
(1,836
)
Net contributions from (distributions to) Citi
1,426

 
(1,908,012
)
 
42,370

See accompanying notes to consolidated and combined financial statements.

EX 99.5-6



PRIMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated and Combined Financial Statements
(1)
Summary of Significant Accounting Policies
Description of Business. Primerica, Inc. (the Parent Company) together with its subsidiaries (collectively, we or the Company) is a leading distributor of financial products to middle income households in the United States and Canada. We assist our clients in meeting their needs for term life insurance, which we underwrite, and mutual funds, annuities and other financial products, which we distribute primarily on behalf of third parties. Our primary subsidiaries include the following entities: Primerica Financial Services, Inc., a general agency and marketing company; Primerica Life Insurance Company (Primerica Life), our principal life insurance company; Primerica Financial Services (Canada) Ltd., a holding company for our Canadian operations, which includes Primerica Life Insurance Company of Canada (Primerica Life Canada); and PFS Investments Inc., an investment products company and broker-dealer. Primerica Life, domiciled in Massachusetts, owns National Benefit Life Insurance Company (NBLIC), a New York life insurance company. Each of these entities was indirectly wholly owned by Citigroup Inc. (together with its non-Primerica affiliates, Citi) through March 31, 2010.
On March 31, 2010, Primerica Life, Primerica Life Canada and NBLIC entered into significant coinsurance transactions with Prime Reinsurance Company, Inc. (Prime Re) and two affiliates of Citi (collectively, the Citi reinsurers). In April 2010, Citi transferred the legal entities that comprise our business to us and we completed a series of transactions including the distribution of Prime Re to Citi and an initial public offering of our common stock by Citi pursuant to the Securities Act of 1933, as amended (the IPO).
We were incorporated in Delaware in 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 on April 1, 2010. In conjunction with our reorganization, 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 the IPO; 16,412,440 shares of common stock were subsequently sold by Citi in April 2010 to certain private equity funds managed by Warburg Pincus LLC (Warburg Pincus) (the 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 the IPO, (ii) warrants to purchase from us an aggregate of 4,103,110 shares of our common stock (which were subsequently transferred by Citi to Warburg Pincus pursuant to the private sale), and (iii) a $300.0 million note payable due on March 31, 2015 bearing interest at an annual rate of 5.5% (the Citi note). Prior to our corporate reorganization, we had no material assets or liabilities. Upon completion of the corporate reorganization, we became a holding company with our primary asset being the capital stock of our operating subsidiaries and our primary liability being the Citi note.

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

The most significant items that involve a greater degree of accounting estimates and actuarial determinations subject to change in the future are the valuation of investments, deferred policy acquisition costs (DAC), and liabilities for future policy benefits and unpaid policy claims. Estimates for these and other items are subject to change and are reassessed by management in accordance with GAAP. Actual results could differ from those estimates.
 
The accompanying consolidated and combined financial statements include the accounts of the Company and those entities required to be consolidated or combined under applicable accounting standards. All material intercompany profits, transactions, and balances among the consolidated or combined entities have been eliminated. Financial statements for 2011 and 2010 have been consolidated and include those assets, liabilities, revenues, and expenses directly attributable to the Company's operations. Financial statements for 2009 have been combined and include those assets, liabilities, revenues, and expenses directly attributable to the Company's operations. All material intercompany profits, transactions, and balances among the consolidated or combined entities have been eliminated.


EX 99.5-7



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

Foreign Currency Translation. Assets and liabilities denominated in Canadian dollars are translated into U.S. dollars using year-end exchange rates. Revenues and expenses are translated monthly at amounts that approximate weighted-average exchange rates, with resulting gains and losses included in stockholders' equity. We may use currency swap and forward contracts to mitigate foreign currency exposures.

Investments. Investments are reported on the following bases:
 
Available-for-sale fixed-maturity securities, including bonds and redeemable preferred stocks not classified as trading securities, are carried at fair value. When quoted market values are unavailable, we obtain estimates from independent pricing services or estimate fair value based upon a comparison to quoted issues of the same issuer or of other issuers with similar characteristics.
 
Equity securities, including common and nonredeemable preferred stocks, are classified as available for sale and are carried at fair value. When quoted market values are unavailable, we obtain estimates from independent pricing services or estimates fair value based upon a comparison to quoted issues of the same issuer or of other issuers with similar characteristics.

Trading securities, which primarily consist of bonds, are carried at fair value. Changes in fair value of trading securities are included in net investment income in the period in which the change occurred.
 
Policy loans are carried at unpaid principal balances, which approximate fair value.
 
Investment transactions are recorded on a trade-date basis. We use the specific-identification method to determine the realized gains or losses from securities transactions and report the realized gains or losses in the accompanying consolidated and combined statements of income.
 
Unrealized gains and losses on available-for-sale securities are included as a separate component of accumulated other comprehensive income except for the credit loss components of other-than-temporary declines in fair value, which are recorded as realized losses in the accompanying consolidated and combined statements of income.
 
Investments are reviewed on a quarterly basis for other-than-temporary impairments (OTTI). Credit risk, interest rate risk, duration of the unrealized loss, actions taken by ratings agencies, and other factors are considered in determining whether an unrealized loss is other-than-temporary. Our consolidated and combined statements of income for the three years ended December 31, 2011 reflect the impairment on debt securities that we intend to sell or would more-likely than-not be required to sell before the expected recovery of the amortized cost basis. For available-for-sale (AFS) debt securities that we have no intent to sell and believe that it more-likely than-not we will not be required to sell prior to recovery, only the credit loss component of the impairment is recognized in earnings, while the remainder is recognized in accumulated other comprehensive income (AOCI) in the accompanying consolidated and combined financial statements. 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. Any subsequent changes in fair value of the security related to non-credit factors recognized in other comprehensive income are presented as an adjustment to the amount previously presented in the net unrealized investment gains (losses) other-than-temporarily impaired category of accumulated other comprehensive income.
 
We participate in securities lending transactions with broker-dealers and other financial institutions to increase investment income with minimal risk. We require minimum collateral on securities loaned equal to 102% of the fair value of the loaned securities. We accept collateral in the form of securities, which we are not able to sell or encumber, and to the extent the collateral declines in value below 100%, we require additional collateral from the borrower. Any securities collateral received is not reflected on our balance sheet. We also accept collateral in the form of cash, all of which we reinvest. For loans involving unrestricted cash collateral, the collateral is reported as an asset with a corresponding liability representing our obligation to return the collateral. We continue to carry the lent securities as investment assets on our balance sheet during the terms of the loans, and we do not report them

EX 99.5-8



as sales.

Interest income on fixed-maturity securities is recorded when earned using the effective-yield method, which gives consideration to amortization of premiums and accretion of discounts. Dividend income on equity securities is recorded when declared. These amounts are included in net investment income in the accompanying consolidated and combined statements of income.
 
Included within fixed-maturity securities are loan-backed and asset-backed securities. Amortization of the premium or accretion of the discount uses the retrospective method. The effective yield used to determine amortization/accretion is calculated based on actual and historical projected future cash flows, which are obtained from a widely accepted data provider and updated quarterly.  

Derivative instruments are stated at fair value based on market prices. Gains and losses arising from forward contracts are a component of realized gains and losses in the accompanying consolidated and combined statements of income. Gains and losses arising from foreign currency swaps are reflected in other comprehensive income as they effectively hedge the variability in cash flows from our investments in foreign currency-denominated debt securities.

Embedded conversion options associated with fixed-maturity securities are bifurcated from the fixed-maturity security host contracts and separately recognized as equity securities. The change in fair value of these bifurcated conversion options is reflected in realized investment gains, including OTTI losses.

Cash and Cash Equivalents. Cash and cash equivalents include cash on hand, money market instruments, and all other highly liquid investments purchased with an original or remaining maturity of three months or less at the date of acquisition.

Reinsurance. We use reinsurance extensively, utilizing yearly renewable term (YRT) and coinsurance agreements. Under YRT agreements, we reinsure only the mortality risk, while under coinsurance, we reinsure a proportionate part of all risks arising under the reinsured policy. Under coinsurance, the reinsurer receives a proportionate part of the premiums, less commission allowances, and is liable for a corresponding part of all benefit payments.
 
All reinsurance contracts in effect for 2011 and 2010 transfer a reasonable possibility of substantial loss to the reinsurer or are accounted for under the deposit method of accounting.
 
Ceded premiums are treated as a reduction to direct premiums and are recognized when due to the assuming company. Ceded claims are treated as a reduction to direct benefits and are recognized when the claim is incurred on a direct basis. Ceded policy reserve changes are also treated as a reduction to benefits expense and are recognized during the applicable financial reporting period.
 
Reinsurance premiums, commissions, expense reimbursements, benefits, and reserves related to reinsured long-duration contracts are accounted for over the life of the underlying contracts using assumptions consistent with those used to account for the underlying policies. Amounts recoverable from reinsurers, for both short- and long-duration reinsurance arrangements, are estimated in a manner consistent with the claim liabilities and policy benefits associated with reinsured policies. Ceded policy reserves and claims liabilities relating to insurance ceded are shown as due from reinsurers on the accompanying consolidated and combined balance sheets.
 
We analyze and monitor the credit-worthiness of each of our reinsurance partners to minimize collection issues. For reinsurance contracts with unauthorized reinsurers, we require collateral such as letters of credit.
 
To the extent we receive ceding allowances to cover policy and claims administration under reinsurance contracts, these allowances are treated as a reduction to insurance commissions and expenses and are recognized when due from the assuming company. To the extent we receive ceding allowances reimbursing commissions that would otherwise be deferred; the amount of commissions deferrable will be reduced. The corresponding DAC balances are reduced on a pro rata basis by the portion of the business reinsured with reinsurance agreements that meet risk transfer provisions. The reduced DAC will result in a corresponding reduction of amortization expense.
 
Deferred Policy Acquisition Costs (DAC). The costs of acquiring new business are deferred to the extent that they result directly from and are essential to the contract transaction(s) and would not have been incurred had the contract transaction(s) not occurred. These 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

EX 99.5-9



principally upon mortality, persistency, investment returns, 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 annually and when impairment indicators exist. We make certain assumptions regarding persistency, expenses, interest rates and claims. These assumptions may not be modified, or unlocked, unless recoverability testing deems them to be inadequate. Assumptions are updated for new business to reflect the most recent experience. Deferrable insurance policy acquisition costs are amortized over the premium-paying period of the related policies in proportion to annual premium income. Acquisition costs for Canadian segregated funds are amortized over the life of the policies in relation to historical and future estimated gross profits before amortization. The gross profits and resulting DAC amortization will vary with actual fund returns, redemptions and expenses. Due to the inherent uncertainties in making assumptions about future events, materially different experience from expected results in persistency could result in a material increase or decrease of deferred acquisition cost amortization in a particular period.
 
Intangible Assets. Intangible assets are amortized over their estimated useful lives. Any intangible asset that was deemed to have an indefinite useful life is not amortized but is subject to an annual impairment test. An impairment exists if the carrying value of the indefinite-lived intangible asset exceeds its fair value. For the other intangible assets, which are subject to amortization, an impairment is recognized if the carrying amount is not recoverable and exceeds the fair value of the intangible asset.
 
Property, Plant, and Equipment. Equipment and leasehold improvements, which are included in other assets, are stated at cost, less accumulated depreciation and amortization. Leasehold improvements are amortized over the remaining life of the lease. Computer hardware, software, and other equipment are depreciated over three to five years. Furniture is depreciated over seven years. Property, plant and equipment were as follows:
 
December 31,
 
2011
 
2010
 
(In thousands)
Data processing equipment and software
$
53,388

 
$
55,793

Leasehold improvements
14,223

 
14,148

Other, principally furniture and equipment
24,120

 
22,437

 
91,731

 
92,378

Accumulated depreciation
(78,794
)
 
(76,055
)
Net property, plant, and equipment
$
12,937

 
$
16,323

Depreciation expense was as follows:
 
Year ended December 31,
 
2011
 
2010
 
2009
 
(In thousands)
Depreciation expense
$
7,302

 
$
6,895

 
$
6,803

Depreciation expense is included in other operating expenses in the accompanying consolidated and combined statements of income.

Separate Accounts. The separate accounts are primarily comprised of contracts issued by the Company through its subsidiary, Primerica Life Canada, pursuant to the Insurance Companies Act (Canada). The Insurance Companies Act authorizes Primerica Life Canada to establish the separate accounts.

The separate accounts are represented by individual variable insurance contracts. Purchasers of variable insurance contracts issued by Primerica Life Canada have a direct claim to the benefits of the contract that entitles the holder to units in one or more investment funds (the Funds) maintained by Primerica Life Canada. The Funds invest in assets that are held for the benefit of the owners of the contracts. The benefits provided vary in amount depending on the market value of the Funds' assets. The Funds' assets are administered by Primerica Life Canada and are held separate and apart from the general assets of the Company. The liabilities reflect the variable insurance contract holders' interests in variable insurance assets based upon actual investment performance of the respective Funds. Separate account operating results relating to contract holders' interests are excluded from our consolidated and combined statements of income.

Primerica Life Canada's contract offerings guarantee the maturity value at the date of maturity (or upon death,

EX 99.5-10



whichever occurs first), to be equal to 75% of the sum of all contributions made, net of withdrawals, on a first-in first-out basis. Otherwise, the maturity value or death benefit will be the accumulated value of units allocated to the contract at the specified valuation date. The amount of this value is not guaranteed, but will fluctuate with the fair value of the Funds.
 
Policyholder Liabilities. Future policy benefits are accrued over the current and expected renewal periods of the contracts. Liabilities for future policy benefits on traditional 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, modified as necessary to reflect anticipated trends and to include provisions for possible adverse deviation. The underlying mortality tables are the Society of Actuaries (SOA) 65-70, SOA 75-80, SOA 85-90, and the 91 Bragg, modified to reflect various underwriting classifications and assumptions. Investment yield reserve assumptions at December 31, 2011 and 2010 range from approximately 3.5% to 7.0%. The liability for future policy benefits and claims on traditional life, health, and credit insurance products includes estimated unpaid claims that have been reported to us and claims incurred but not yet reported.
The reserves we establish are necessarily 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. We cannot determine with precision the ultimate amounts that we will pay for actual claims or the timing of those payments.
 
Other Policyholders' Funds. Other policyholders' funds primarily represent claim payments left on deposit with us.
 
Income Taxes. We are subject to the income tax laws of the United States, its states, municipalities, and certain unincorporated territories, and those of Canada. These tax laws are complex and subject to different interpretations by the taxpayer and the relevant governmental taxing authorities. In establishing a provision for income tax expense, we must make judgments and interpretations about the applicability of these inherently complex tax laws. We also must make estimates about the future impact certain items will have on taxable income in the various tax jurisdictions, both domestic and foreign.
 
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.
 
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 the IPO. After the closing date, the Company was no longer part of Citi's consolidated federal income tax return. As a result of the separation from Citi, the Company will be required to file two consolidated income tax returns for five tax years, which is expected to cover the tax years ending December 31, 2010 through December 31, 2014. Primerica Life and NBLIC will comprise one of the U.S. consolidated tax groups while the Parent Company and the remaining U.S. subsidiaries will comprise the second U.S. consolidated tax group. The method of allocation between companies is pursuant to a written agreement. Allocation is based upon separate return calculations with credit for net losses as utilized. Allocations are calculated and settled quarterly.
 
Premium Revenues. Traditional life insurance products consist principally of those products with fixed and guaranteed premiums and benefits, and are primarily related to term products. Premiums are recognized as revenues when due.
 
Commissions and Fees. We receive commission revenues from the sale of various non-life insurance products on a monthly basis. Commissions are received primarily on sales of mutual funds and annuities. We primarily receive trail commission revenues from mutual fund and annuity products on a monthly basis based on the daily net asset value of shares sold by us. We, in turn, pay certain commissions to our sales force. We also receive marketing and support fees from product originators. We also receive management fees based on the average daily net asset

EX 99.5-11



value of managed accounts and contracts related to separate account assets issued by Primerica Life Canada.
 
We earn recordkeeping fees for administrative functions that we perform on behalf of several of our mutual fund providers and custodial fees for services performed as a non-bank custodian of our clients' retirement plan accounts. These fees are recognized as income during the period in which they are earned.
 
We also receive record-keeping fees monthly from mutual fund accounts on our servicing platform and in turn pay a third-party provider for its servicing of certain of these accounts.
 
Benefits and Expenses. Benefit and expense items are charged to income in the period in which they are incurred. Both the change in policyholder liabilities, which is included in benefits and claims, and the amortization of deferred policy acquisition costs, will vary with policyholder persistency.
 
Share-Based Transactions. For employee share-based compensation, we determine a grant date fair value and recognize the related compensation expense, adjusted for expected forfeitures, in the statement of income over the vesting period of the respective awards. For non-employee share-based compensation, we recognize the impact throughout the vesting period and the fair value of the award is based on the vesting date. To the extent that a share-based award contains sale restrictions extending beyond the vesting date, we reduce the recognized fair value of the award to reflect the corresponding illiquidity discount. Certain non-employee share-based compensation awards are granted based on the successful acquisition of life insurance policies. We defer these expenses and amortize the impact over the life of the underlying life insurance policies acquired to the extent they meet GAAP deferral requirements.
Earnings Per Share (EPS). Primerica has outstanding common stock, warrants, and equity awards. Both the vested and unvested equity awards maintain non-forfeitable dividend rights that result in dividend payment obligations on a one-to-one ratio with common shares for any future dividend declarations. These equity awards are deemed participating securities for purposes of calculating EPS.
As a result of issuing equity awards that are deemed participating securities, we calculate EPS using the two-class method. Under the two-class method, we allocate earnings to common shares and to fully vested equity awards. Earnings attributable to unvested equity awards, along with the corresponding share counts, are excluded from EPS as reflected in our consolidated statements of income.
In calculating basic EPS, we deduct any dividends and undistributed earnings allocated to unvested equity awards from net income and then divide the result by the weighted-average number of common shares and fully vested equity awards outstanding for the period.
We determine the potential dilutive effect of warrants on EPS using the treasury-stock method. Under this method, we utilize the exercise price to determine the amount of cash that would be available to repurchase shares if the warrants were exercised. We then use the average market price of our common shares during the reporting period to determine how many shares we could repurchase with the cash raised from the exercise. The net incremental share count issued represents the potential dilutive securities. We then reallocate earnings to common shares and fully vested equity awards incorporating the increased, fully diluted share count to determine diluted EPS.
Discontinued Operations. Primerica Financial Services Home Mortgages, Inc. (Primerica Mortgages), our U.S. loan brokering company, ceased its loan brokering activities in all states in which it held licenses effective December 31, 2011. As of January 1, 2012, Primerica Mortgages no longer accepts loan requests from U.S. clients. As the pending loan requests are processed by our lender, which we anticipate should be completed by the end of the first quarter of 2012, Primerica Mortgages is commencing the process of surrendering its state licenses and completely exiting the loan brokering business in the United States. The related financial impact is immaterial to our financial statements and will not have a material impact on our business.
New Accounting Principles
Other-Than-Temporary Impairments on Investment Securities. In April 2009, the FASB issued FSP SFAS No. 115-2 and SFAS No. 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (ASC 320-10/FSP SFAS 115-2), which amends the recognition guidance for OTTI of debt securities and expands the financial statement disclosures for OTTI on debt and equity securities. The Company adopted the FSP in the first quarter of 2009.


EX 99.5-12



As a result of this FSP, the Company's consolidated and combined statements of income reflect the full impairment (that is, the difference between the security's amortized cost basis and fair value) on debt securities that the Company intends to sell or would more-likely than-not be required to sell before the expected recovery of the amortized cost basis. For AFS debt securities that management has no intent to sell and believes that it is more-likely than-not will not be required to be sold prior to recovery, only the credit loss component of the impairment is recognized in earnings, while the remainder is recognized in AOCI in the accompanying consolidated and combined balance sheets. The credit loss component recognized in earnings is identified as the amount of principal and interest cash flows not expected to be received over the remaining term of the security. As a result of the adoption of the FSP, we recorded the cumulative effect of the change as an increase to the opening balance of retained earnings at January 1, 2009 of $11.2 million on a pretax basis ($7.3 million after-tax).

Accounting for Deferred Policy Acquisition Costs. In October 2010, the FASB issued ASU 2010-26. ASU 2010-26 defines deferred acquisition costs as incremental direct costs of successful contract acquisitions that result directly from and are essential to the contract transaction(s) and would not have been incurred had the contract transaction(s) not occurred. All other acquisition-related costs, including unsuccessful acquisition and renewal efforts, will be charged to expense as incurred. Administrative costs, rent, depreciation, occupancy, equipment, and all other general overhead costs are considered indirect costs and will be charged to expense as incurred. The update allows either prospective or retrospective adoption.

Effective January 1, 2012, we retrospectively adopted ASU 2010-26. The reduction to our DAC asset was approximately $146.2 million as of December 31, 2011 and approximately $114.3 as of December 31, 2010. The reduction to net income was approximately $21.1 million in 2011, approximately $25.3 million in 2010, and approximately $11.9 million in 2009.  The net impact of adoption reduced stockholders' equity by approximately $96.0 million as of December 31, 2011, by approximately $75.0 million as of December 31, 2010, by approximately $176.5 million as of December 31, 2009 and by approximately $162.7 million as of January 1, 2009.

Future Application of Accounting Standards 
Fair Value Measurement Amendments. In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (ASU 2011-04). The main provisions of ASU 2011-04 result in common fair value measurement and disclosures requirements for U.S. GAAP and International Financial Reporting Standards ("IFRS"). ASU 2011-04 changes the wording used to describe the requirements for measuring fair value and for disclosing information about fair value measurement, including requiring quantitative disclosures about the unobservable inputs used in fair value measurements. The amendments in the update are to be applied prospectively for our fiscal year beginning January 1, 2012. We do not anticipate a material impact on our financial position or results of operations as a result of this update.
Recent accounting guidance not discussed above is not applicable, is immaterial to our financial statements, or did not or will not have an impact on our business.

(2) Segment Information

We have two primary operating segments - Term Life Insurance and Investment and Savings Products. The Term Life Insurance segment includes underwriting profits on our in-force book of term life insurance policies, net of reinsurance, which are underwritten by our life insurance company subsidiaries. The Investment and Savings Products segment includes mutual funds and variable annuities distributed through licensed broker-dealer subsidiaries and includes segregated funds, an individual annuity savings product that we underwrite in Canada through Primerica Life Canada. In the United States, we distribute mutual fund and annuity products of several third-party companies. We also earn fees for account servicing on a subset of the mutual funds we distribute. In Canada, we offer a Primerica-branded fund-of-funds mutual fund product, as well as mutual funds of well known mutual fund companies. These two operating segments are managed separately because their products serve different needs - term life insurance protection versus wealth-building savings products.

We also have a Corporate and Other Distributed Products segment, which consists primarily of revenues and expenses related to the distribution of non-core products, prepaid legal services and various insurance products other than our core term life insurance products. With the exception of certain life and disability insurance products, which we underwrite, these products are distributed pursuant to arrangements with third parties.


EX 99.5-13



Assets specifically related to a segment are held in that segment. We allocate invested assets to the Term Life Insurance segment based on the book value of invested assets necessary to meet statutory reserve requirements and our targeted capital objectives. Remaining invested assets and all unrealized gains and losses are allocated to the Corporate and Other Distributed Products segment. In connection with our corporate reorganization in 2010, we signed a reinsurance agreement subject to deposit accounting (the 10% Reinsurance Agreement) and have recognized the deposit asset in the Term Life Insurance segment. DAC is recognized in a particular segment based on the product to which it relates. Separate account assets supporting the segregated funds product in Canada are held in the Investment and Savings Products segment. Any remaining unallocated assets are reported in the Corporate and Other Distributed Products segment. Information regarding assets by segment follows:
 
December 31,
 
2011
 
2010
 
(In thousands)
Assets:
 
 
 
Term life insurance segment
$
6,009,162

 
$
5,642,243

Investment and savings products segment
2,591,137

 
2,615,916

Corporate and other distributed products segment
1,251,521

 
1,511,250

Total assets
$
9,851,820

 
$
9,769,409


The Investment and Savings Products segment also includes assets held in separate accounts. Excluding separate accounts, the Investment and Savings Product segment assets were as follows:
 
December 31,
 
2011
 
2010
 
(In thousands)
Investment and savings products segment assets, excluding separate accounts
$
183,622

 
$
170,326

Although we do not view our business in terms of geographic segmentation, our Canadian businesses’ percentage of total assets were as follows: 
 
December 31,
 
2011
 
2010
Canadian assets as a percent of total assets
31%
 
32%
Canadian assets as a percent of total assets, excluding separate accounts
9%
 
9%

The deposit asset recognized in connection with the 10% Reinsurance Agreement generates an effective yield, which is reported in the Term Life Insurance segment and reflected in net investment income in our statement of income. We then allocate the remaining 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 total invested assets.

Realized investment gains and losses are reported in the Corporate and Other Distributed Products segment. We allocate certain operating expenses associated with our sales representatives, including supervision, training and legal support, to our two primary operating segments 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. Any remaining unallocated revenue and expense items are reported in the Corporate and Other Distributed Products segment. We measure income and loss for the segments on an income before income taxes basis.


EX 99.5-14



Information regarding operations by segment follows:
 
Year ended December 31,
 
2011
 
2010
 
2009
 
(In thousands)
Revenues:
 
 
 
 
 
Term life insurance segment
$
554,995

 
$
808,568

 
$
1,742,065

Investment and savings products segment
396,703

 
361,807

 
300,140

Corporate and other distributed products segment
151,395

 
191,488

 
178,196

Total revenues
$
1,103,093

 
$
1,361,863

 
$
2,220,401

Income (loss) before income taxes:
 
 
 
 
 
Term life insurance segment
$
162,450

 
$
261,483

 
$
641,118

Investment and savings products segment
117,076

 
113,530

 
93,404

Corporate and other distributed products segment
(35,617
)
 
(13,544
)
 
7,273

Total income before income taxes
$
243,909

 
$
361,469

 
$
741,795

The decline in revenues and income before income taxes primarily reflects the impact of the reinsurance and reorganization transactions executed in the first and second quarters of 2010.
Information regarding operations by country follows: 
 
Year ended December 31,
 
2011
 
2010
 
2009
 
(In thousands)
Revenues by country:
 
 
 
 
 
United States
$
895,067

 
$
1,136,414

 
$
1,922,047

Canada
208,026

 
225,449

 
298,354

Total revenues
$
1,103,093

 
$
1,361,863

 
$
2,220,401

Income before income taxes by country:
 
 
 
 
 
United States
$
181,151

 
$
282,492

 
$
621,083

Canada
62,758

 
78,977

 
120,712

Total income before income taxes
$
243,909

 
$
361,469

 
$
741,795

The contribution to results of operations by our Canadian businesses were as follows: 
 
Year ended December 31,
 
2011
 
2010
 
2009
Canadian revenues as a percent of total revenues
19%
 
17%
 
13%
Canadian income before income taxes as a percent of total income before income taxes
26%
 
22%
 
16%
The increase in the Canadian contribution to total revenues and total income before income taxes largely reflects the dynamic of a smaller U.S. block of business subsequent to the reinsurance transactions as well as growth in our Canadian investments and savings products business.


EX 99.5-15



(3) Investments

The period-end cost or amortized cost, gross unrealized gains and losses, and fair value of fixed-maturity and equity securities follow:
 
December 31, 2011
 
Cost or
amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair value
 
(In thousands)
Securities available for sale, carried at fair value:
 
 
 
 
 
 
 
Fixed-maturity securities:
 
 
 
 
 
 
 
U.S. government and agencies
$
10,050

 
$
935

 
$

 
$
10,985

Foreign government
97,206

 
14,818

 
(179
)
 
111,845

States and political subdivisions
28,264

 
2,671

 

 
30,935

Corporates (1)
1,250,702

 
111,346

 
(7,847
)
 
1,354,201

Mortgage- and asset-backed securities
425,137

 
29,398

 
(3,345
)
 
451,190

Total fixed-maturity securities
1,811,359

 
159,168

 
(11,371
)
 
1,959,156

Equity securities
21,329

 
5,689

 
(306
)
 
26,712

Total fixed-maturity and equity securities
$
1,832,688

 
$
164,857

 
$
(11,677
)
 
$
1,985,868

____________________
(1)
Includes $2.6 million of other-than-temporary impairment losses recognized in AOCI.
 
December 31, 2010
 
Cost or
amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair value
 
(In thousands)
Securities available for sale, carried at fair value:
 
 
 
 
 
 
 
Fixed-maturity securities:
 
 
 
 
 
 
 
U.S. government and agencies
$
21,596

 
$
667

 
$
(61
)
 
$
22,202

Foreign government
81,367

 
13,182

 
(8
)
 
94,541

States and political subdivisions
26,758

 
754

 
(293
)
 
27,219

Corporates (1)
1,276,906

 
112,821

 
(3,806
)
 
1,385,921

Mortgage- and asset-backed securities
523,130

 
31,366

 
(3,018
)
 
551,478

Total fixed-maturity securities
1,929,757

 
158,790

 
(7,186
)
 
2,081,361

Equity securities
17,394

 
5,826

 
(7
)
 
23,213

Total fixed-maturity and equity securities
$
1,947,151

 
$
164,616

 
$
(7,193
)
 
$
2,104,574

____________________
(1)
Includes $3.5 million of other-than-temporary impairment losses recognized in AOCI.
In November 2011, we repurchased approximately $200.0 million of our common stock from Citi and funded the repurchase with the proceeds from a dividend paid by Primerica Life. The dividend from Primerica Life to the Parent Company was funded via sales of investments and available cash. The decrease in invested assets as of December 31, 2011 was primarily the result of securities sold to fund the dividend.

EX 99.5-16



The net effect on stockholders’ equity of unrealized gains and losses on available-for-sale securities was as follows: 
 
December 31,
 
2011
 
2010
 
(In thousands)
Net unrealized investment gains including foreign currency translation adjustment and other-than-temporary impairments:
 
 
 
Fixed-maturity and equity securities
$
153,180

 
$
157,423

Currency swaps
96

 
1,059

Less foreign currency translation adjustment
(6,481
)
 
(9,600
)
Other-than-temporary impairments
2,562

 
3,500

Net unrealized investment gains excluding foreign currency translation adjustment and other-than-temporary impairments
149,357

 
152,382

Less deferred income taxes
52,275

 
54,060

Net unrealized investment gains excluding foreign currency translation adjustment and other-than-temporary impairments, net of tax
$
97,082

 
$
98,322

We also maintain a portfolio of fixed-maturity securities that are classified as trading securities. The carrying value of these securities was as follows: 
 
December 31,
 
2011
 
2010
 
(In thousands)
Fixed-maturity securities classified as trading, carried at fair value
$
9,640

 
$
22,767

During 2011, we transferred approximately $8.9 million of securities from the trading portfolio to the available-for-sale portfolio. Because the securities were transferred at fair value, no gain or loss was recognized.
All of our available-for-sale mortgage- and asset-backed securities represent variable interests in variable interest entities (VIEs). We are not the primary beneficiary of these VIEs, because we do not have the power to direct the activities that most significantly impact the entities’ economic performance. The maximum exposure to loss as a result of our involvement in these VIEs equals the carrying value of the securities.
As required by law, the Company has investments on deposit with governmental authorities and banks for the protection of policyholders. The fair values of investments on deposit were as follows: 
 
December 31,
 
2011
 
2010
 
(In thousands)
Fair value of investments on deposit with governmental authorities
$
19,100

 
$
18,984

We participate in securities lending transactions with broker-dealers and other financial institutions to increase investment income with minimal risk. Cash collateral received and reinvested was as follows: 
 
December 31,
 
2011
 
2010
 
(In thousands)
Securities lending collateral
$
149,358

 
$
181,726


EX 99.5-17



The scheduled maturity distribution of the available-for-sale fixed-maturity portfolio follows. 
 
December 31, 2011
 
Amortized cost
 
Fair value
 
(In thousands)
Due in one year or less
$
129,440

 
$
132,660

Due after one year through five years
622,321

 
663,968

Due after five years through 10 years
583,762

 
653,078

Due after 10 years
50,699

 
58,260

 
1,386,222

 
1,507,966

Mortgage- and asset-backed securities
425,137

 
451,190

Total fixed-maturity securities
$
1,811,359

 
$
1,959,156

Expected maturities may differ from scheduled contractual maturities because issuers of securities may have the right to call or prepay obligations with or without call or prepayment penalties.
Investment Income. On March 31, 2010, we transferred a significant portion of our invested asset portfolio to the Citi reinsurers in connection with our corporate reorganization. As such, comparisons of net investment income to prior years will reflect the effects of these transfers and result in significant variances. The components of net investment income were as follows: 
 
Year ended December 31,
 
2011
 
2010
 
2009
 
(In thousands)
Fixed-maturity securities
$
109,907

 
$
168,051

 
$
352,753

Equity securities
717

 
1,822

 
6,923

Policy loans and other invested assets
1,414

 
1,403

 
1,549

Cash and cash equivalents
307

 
562

 
2,887

Market return on deposit asset underlying 10% reinsurance agreement
2,020

 
1,471

 
299

Gross investment income
114,365

 
173,309

 
364,411

Investment expenses
5,764

 
8,198

 
13,085

Net investment income
$
108,601

 
$
165,111

 
$
351,326

The components of net realized investment gains (losses) as well as details on gross realized investment gains and losses and proceeds from sales or other redemptions were as follows: 
 
Year ended December 31,
 
2011
 
2010
 
2009
 
(In thousands)
Gross realized investment gains (losses):
 
 
 
 
 
Gains from sales
$
8,382

 
$
47,925

 
$
42,983

Losses from sales
(441
)
 
(2,257
)
 
(3,518
)
Other-than-temporary impairment losses
(2,015
)
 
(12,158
)
 
(61,394
)
Gains (losses) from bifurcated options
514

 
635

 
(41
)
Net realized investment gains (losses)
$
6,440

 
$
34,145

 
$
(21,970
)
Gross realized investment gains reclassified from accumulated other comprehensive income
$
5,926

 
$
33,510

 
$
(21,929
)
Proceeds from sales or other redemptions
$
592,968

 
$
1,543,976

 
$
1,592,687

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

EX 99.5-18



period of time sufficient to allow for any anticipated recovery, which may be maturity.
Our review for other-than-temporary impairment generally entails:
Analysis of individual investments that have fair values less than a pre-defined percentage of amortized cost, including consideration of the length of time the investment has been in an unrealized loss position;
Analysis of corporate fixed-maturity securities by reviewing the issuer’s most recent performance to date, including analyst reviews, analyst outlooks and rating agency information;
Analysis of commercial mortgage-backed securities based on an assessment of performance to date, credit enhancement, risk analytics and outlook, underlying collateral, loss projections, rating agency information and available third-party reviews and analytics;
Analysis of residential mortgage-backed securities based on loss projections provided by models compared to current credit enhancement levels;
Analysis of our other fixed-maturity and equity security investments, as required based on the type of investment; and
Analysis of downward credit migrations that occurred during the quarter.
Investments in fixed-maturity and equity securities with a cost basis in excess of their fair values were as follows: 
 
December 31,
 
2011
 
2010
 
(In thousands)
Fixed-maturity and equity security investments with cost basis in excess of fair value
$
286,718

 
$
258,947

The following tables summarize, for all securities in an unrealized loss position, the aggregate fair value and the gross unrealized loss by length of time such securities have continuously been in an unrealized loss position: 
 
December 31, 2011
 
Less than 12 months
 
12 months or longer
 
Fair value
 
Unrealized
losses
 
Number
of
securities
 
Fair value
 
Unrealized
losses
 
Number
of
securities
 
(Dollars in thousands)
Fixed-maturity securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agencies
$

 
$

 

 
$

 
$

 

Foreign government
7,150

 
(179
)
 
10

 

 

 

States and political subdivisions

 

 

 

 

 

Corporates
188,643

 
(6,979
)
 
185

 
4,092

 
(868
)
 
11

Mortgage- and asset-backed securities
49,026

 
(478
)
 
60

 
25,280

 
(2,867
)
 
30

Total fixed-maturity securities
244,819

 
(7,636
)
 
 
 
29,372

 
(3,735
)
 
 
Equity securities
850

 
(306
)
 
78

 

 

 

Total fixed-maturity and equity securities
$
245,669

 
$
(7,942
)
 
 
 
$
29,372

 
$
(3,735
)
 
 

EX 99.5-19



 
December 31, 2010
 
Less than 12 months
 
12 months or longer
 
Fair value
 
Unrealized
losses
 
Number
of
securities
 
Fair value
 
Unrealized
losses
 
Number
of
securities
 
(Dollars in thousands)
Fixed-maturity securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agencies
$
6,350

 
$
(61
)
 
2

 
$

 
$

 

Foreign government
2,478

 
(8
)
 
1

 

 

 

States and political subdivisions
11,015

 
(293
)
 
29

 

 

 

Corporates
151,291

 
(2,961
)
 
104

 
12,690

 
(845
)
 
14

Mortgage- and asset-backed securities
30,685

 
(365
)
 
25

 
37,215

 
(2,653
)
 
20

Total fixed-maturity securities
201,819

 
(3,688
)
 
 
 
49,905

 
(3,498
)
 
 
Equity securities

 

 

 
30

 
(7
)
 
2

Total fixed-maturity and equity securities
$
201,819

 
$
(3,688
)
 
 
 
$
49,935

 
$
(3,505
)
 
 
The amortized cost and fair value of available-for-sale fixed-maturity securities in default were as follows: 
 
December 31, 2011
 
December 31, 2010
 
Amortized
cost
 
Fair
value
 
Amortized
cost
 
Fair
value
 
(In thousands)
Fixed-maturity securities in default
$
3,983

 
$
5,168

 
$
970

 
$
1,558

Impairment charges recognized in earnings on available-for-sale securities were as follows: 
 
Year ended December 31,
 
2011
 
2010
 
2009
 
(In thousands)
Impairments on fixed-maturity securities in default
$
179

 
$
39

 
$
20,275

Impairments on fixed-maturity securities not in default
1,831

 
11,855

 
38,765

Impairments on equity securities
5

 
264

 
2,354

Total impairment charges
$
2,015

 
$
12,158

 
$
61,394

The fixed-maturity and equity securities noted above were considered to be other-than-temporarily impaired due to adverse credit events, such as news of an impending filing for bankruptcy; analyses of the issuer’s most recent financial statements or other information in which liquidity deficiencies, significant losses and large declines in capitalization were evident; and analyses of rating agency information for issuances with severe ratings downgrades that indicated a significant increase in the possibility of default. During 2011, we recognized impairment charges primarily as a result of further declines in the fair value of previously impaired corporate and mortgage-backed securities. During 2010 and 2009, we recognized impairments primarily as a result of our intent to sell certain corporate and mortgage-backed securities in anticipation of the reinsurance and reorganization transactions.
As of December 31, 2011, the unrealized losses on our invested asset portfolio were largely caused by interest rate sensitivity and changes in credit spreads. We believe that fluctuations caused by interest rate movement have little bearing on the recoverability of our investment. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because we have the ability to hold these investments until a market price recovery or maturity as well as no present intention to dispose of them, we do not consider these investments to be other-than-temporarily impaired.

EX 99.5-20



Net impairment losses recognized in earnings were as follows: 
 
Year ended December 31,
 
2011
 
2010
 
2009
 
(In thousands)
Impairment losses related to securities which the Company does not intend to sell or is more-likely-than-not that it will not be required to sell:
 
 
 
 
 
Total OTTI losses recognized
$
1,109

 
$
1,402

 
$
34,616

Less portion of OTTI loss recognized in accumulated other comprehensive income (loss)
(183
)
 
(553
)
 
(13,573
)
Net impairment losses recognized in earnings for securities that the Company does not intend to sell or is more-likely-than-not that it will not be required to sell before recovery
926

 
849

 
21,043

OTTI losses recognized in earnings for securities that the Company intends to sell or more-likely-than-not will be required to sell before recovery
1,089

 
11,309

 
40,351

Net impairment losses recognized in earnings
$
2,015

 
$
12,158

 
$
61,394

The roll-forward of the credit-related losses recognized in income for all fixed-maturity securities still held follows. 
 
Year ended December 31,
 
2011
 
2010
 
(In thousands)
Cumulative OTTI credit losses recognized for securities still held, beginning of period
$
41,129

 
$
98,528

Additions for OTTI securities where no credit losses were recognized prior to the beginning of the period
830

 
9,842

Additions for OTTI securities where credit losses have been recognized prior to the beginning of the period
1,180

 
2,052

Reductions due to sales, maturities or calls of credit impaired securities
(9,067
)
 
(69,293
)
Cumulative OTTI credit losses recognized for securities still held, end of period
$
34,072

 
$
41,129

Derivatives. We use foreign currency swaps to reduce our foreign exchange risk due to direct investment in foreign currency-denominated debt securities. The aggregate notional balance and fair value of these currency swaps follow. 
 
December 31,
 
2011
 
2010
 
(In thousands)
Aggregate notional balance of currency swaps
$
5,878

 
$
5,878

Aggregate fair value of currency swaps
(2,032
)
 
(2,228
)
The change in fair value of these currency swaps is reflected in other comprehensive income as they effectively hedge the variability in cash flows from these foreign currency-denominated debt securities.
The embedded conversion options associated with fixed-maturity securities are bifurcated from the fixed-maturity security host contracts and separately recognized as equity securities. The change in fair value of these bifurcated conversion options is reflected in realized investment gains, including OTTI losses. The fair value of these bifurcated options follows.
 
December 31,
 
2011
 
2010
 
(In thousands)
Aggregate fair value of embedded conversion options
$
8,583

 
$
3,269

We have a deferred loss related to closed forward contracts that were used to mitigate our exposure to foreign currency exchange rates that resulted from the net investment in our Canadian operations.

EX 99.5-21



The amount of deferred loss included in accumulated other comprehensive income was as follows: 
 
December 31,
 
2011
 
2010
 
(In thousands)
Deferred loss related to closed forward contracts
$
26,385

 
$
26,385

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

(4) Fair Value of Financial Instruments
Fair value is the price that would be received upon the sale of an asset in an orderly transaction between market participants at the measurement date. Fair value measurements are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our view of market assumptions in the absence of observable market information. We classify and disclose all invested assets carried at fair value in one of the following three categories:
Level 1. Quoted prices for identical instruments in active markets. Level 1 primarily consists of financial instruments whose value is based on quoted market prices in active markets, such as exchange-traded common stocks and actively traded mutual fund investments;
Level 2. Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 2 includes those financial instruments that are valued using industry-standard pricing methodologies, models or other valuation methodologies. Various inputs are considered in deriving the fair value of the underlying financial instrument, including interest rate, credit spread, and foreign exchange rates. All significant inputs are observable, or derived from observable information in the marketplace or are supported by observable levels at which transactions are executed in the marketplace. Financial instruments in this category primarily include: certain public and private corporate fixed-maturity and equity securities; government or agency securities; certain mortgage- and asset-backed securities and certain non-exchange-traded derivatives, such as currency swaps and forwards; and
Level 3. Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Level 3 consists of financial instruments whose fair value is estimated based on industry-standard pricing methodologies and models using significant inputs not based on, nor corroborated by, readily available market information. Valuations for this category primarily consist of non-binding broker quotes. Financial instruments in this category primarily include less liquid fixed-maturity corporate securities.
As of each reporting period, all assets and liabilities recorded at fair value are classified in their entirety based on the lowest level of input (level 3 being the lowest) that is significant to the fair value measurement. Significant levels of estimation and judgment are required to determine the fair value of certain of our investments. The factors influencing these estimations and judgments are subject to change in subsequent reporting periods.

EX 99.5-22



The estimated fair value and hierarchy classifications were as follows: 
 
December 31, 2011
 
Level 1
 
Level 2
 
Level 3
 
Fair value
 
(In thousands)
Fair value assets:
 
 
 
 
 
 
 
Fixed-maturity securities:
 
 
 
 
 
 
 
U.S. government and agencies
$

 
$
10,985

 
$

 
$
10,985

Foreign government

 
111,845

 

 
111,845

States and political subdivisions

 
30,935

 

 
30,935

Corporates
256

 
1,349,021

 
4,924

 
1,354,201

Mortgage- and asset-backed securities

 
449,228

 
1,962

 
451,190

Total fixed-maturity securities
256

 
1,952,014

 
6,886

 
1,959,156

Equity securities
18,069

 
8,592

 
51

 
26,712

Trading securities

 
9,640

 

 
9,640

Separate accounts

 
2,408,598

 

 
2,408,598

Total fair value assets
$
18,325

 
$
4,378,844

 
$
6,937

 
$
4,404,106

Fair value liabilities:
 
 
 
 
 
 
 
Currency swaps
$

 
$
2,032

 
$

 
$
2,032

Separate accounts

 
2,408,598

 

 
2,408,598

Total fair value liabilities
$

 
$
2,410,630

 
$

 
$
2,410,630

 
December 31, 2010
 
Level 1
 
Level 2
 
Level 3
 
Fair value
 
(In thousands)
Fair value assets:
 
 
 
 
 
 
 
Fixed-maturity securities:
 
 
 
 
 
 
 
     U.S. government and agencies
$

 
$
22,202

 
$

 
$
22,202

     Foreign government

 
94,541

 

 
94,541

     States and political subdivisions

 
27,219

 

 
27,219

     Corporates

 
1,366,774

 
19,147

 
1,385,921

     Mortgage- and asset-backed securities

 
549,188

 
2,290

 
551,478

          Total fixed-maturity securities

 
2,059,924

 
21,437

 
2,081,361

Equity securities
15,110

 
4,542

 
3,561

 
23,213

Trading securities

 
22,767

 

 
22,767

Separate accounts

 
2,446,786

 

 
2,446,786

          Total fair value assets
$
15,110

 
$
4,534,019

 
$
24,998

 
$
4,574,127

Fair value liabilities:
 
 
 
 
 
 
 
Currency swaps
$

 
$
2,228

 
$

 
$
2,228

Separate accounts

 
2,446,786

 

 
2,446,786

          Total fair value liabilities
$

 
$
2,449,014

 
$

 
$
2,449,014

In assessing fair value of our investments, we use a third-party pricing service for approximately 94% of our securities. The remaining securities are primarily thinly traded securities valued using models based on observable inputs on public corporate spreads having similar tenors (e.g., sector, average life and quality rating) and liquidity and yield based on quality rating, average life and treasury yields. All observable data inputs are corroborated by independent third-party data. In the absence of sufficient observable inputs, we utilize non-binding broker quotes, which are reflected in our Level 3 classification as we are unable to evaluate the valuation technique(s) or significant inputs used to develop the quote.

EX 99.5-23



We corroborate pricing information provided by our third-party pricing servicing by performing a review of selected securities. Our review activities include obtaining detailed information about the assumptions, inputs and methodologies used in pricing the security; documenting this information; and corroborating it by comparison to independently obtained prices and or independently developed pricing methodologies.
We perform internal reasonableness assessments on fair value determinations within our portfolio throughout the month and at month-end, including pricing variance analyses and comparisons to alternative pricing sources and benchmark returns. If a fair value appears unusual relative to these assessments, we will re-examine the inputs and may challenge a fair value assessment made by the pricing service. If there is a known pricing error, we will request a reassessment by the pricing service. If the pricing service is unable to perform the reassessment on a timely basis, we will determine the appropriate price by requesting a reassessment from an alternative pricing service or other qualified source as necessary. We do not adjust quotes or prices except in a rare circumstance to resolve a known error.
Because many fixed-maturity securities do not trade on a daily basis, fair value is determined using industry-standard methodologies by applying available market information through processes such as U.S. Treasury curves, benchmarking of similar securities, sector groupings, quotes from market participants and matrix pricing. Observable information is compiled and integrates relevant credit information, perceived market movements and sector news. Additionally, security prices are periodically back-tested to validate and/or refine models as conditions warrant. Market indicators and industry and economic events are also monitored as triggers to obtain additional data. For certain structured securities with limited trading activity, industry-standard pricing methodologies use adjusted market information, such as index prices or discounting expected future cash flows, to estimate fair value. If these measures are not deemed observable for a particular security, the security will be classified as Level 3 in the fair value hierarchy.
Where specific market information is unavailable for certain securities, pricing models produce estimates of fair value primarily using Level 2 inputs along with certain Level 3 inputs. These models include matrix pricing. The pricing matrix uses current treasury rates and credit spreads received from third-party sources to estimate fair value. The credit spreads incorporate the issuer’s industry- or issuer-specific credit characteristics and the security’s time to maturity, if warranted. Remaining un-priced securities are valued using an estimate of fair value based on indicative market prices that include significant unobservable inputs not based on, nor corroborated by, market information, including the utilization of non-binding broker quotes.
The roll-forward of the Level 3 asset category was as follows: 
 
Year ended December 31,
 
2011
 
2010
 
(In thousands)
Level 3 assets, beginning of period
$
24,998

 
$
771,271

Net unrealized losses through other comprehensive income
(169
)
 
(2,904
)
Net realized gains (losses) through realized investment gains, including OTTI
1,446

 
(28
)
Purchases

 
11,250

Sales
(4,770
)
 
(24,049
)
Settlements
(2,747
)
 
(16,105
)
Transfers into level 3
9

 
44,522

Transfers out of level 3
(11,830
)
 
(236,587
)
Transfers due to funding of reinsurance transactions

 
(522,372
)
Level 3 assets, end of period
$
6,937

 
$
24,998


EX 99.5-24



We obtain independent pricing quotes based on observable inputs as of the end of the reporting period for all securities in Level 2. Those inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, market bids/offers, quoted prices for similar instruments in markets that are not active, and other relevant data. We monitor these inputs for market indicators, industry and economic events. We recognize transfers into new levels and out of previous levels as of the end of the reporting period, including interim reporting periods, as applicable. There were no transfers between Level 1 and Level 2 during 2011 and 2010.
Invested assets included in the transfer from Level 2 to Level 3 in both 2011 and 2010 primarily were fixed-maturity investments for which we were unable to corroborate independent broker quotes with observable market data. Invested assets included in the transfer from Level 3 to Level 2 in 2011 primarily were fixed-maturity investments for which we were able to corroborate independent broker quotes with observable market data. Invested assets included in the transfer from Level 3 to Level 2 during 2011 primarily were fixed-maturity investments with embedded options for which we were able to obtain independent pricing quotes based on observable inputs. Invested assets included in the transfer from Level 3 to Level 2 during 2010 primarily were non-agency mortgage-backed securities. There were no significant transfers between Level 1 and Level 3 during 2011 and 2010.
The carrying values and estimated fair values of our financial instruments were as follows:
 
December 31, 2011
 
December 31, 2010
 
Carrying
value
 
Estimated
fair value
 
Carrying
value
 
Estimated
fair value
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Fixed-maturity securities
$
1,959,156

 
$
1,959,156

 
$
2,081,361

 
$
2,081,361

Equity securities
26,712

 
26,712

 
23,213

 
23,213

Trading securities
9,640

 
9,640

 
22,767

 
22,767

Policy loans
25,982

 
25,982

 
26,229

 
26,229

Other invested assets
14

 
14

 
14

 
14

Deposit asset underlying 10% reinsurance agreement
59,975

 
59,975

 
50,099

 
50,099

Separate accounts
2,408,598

 
2,408,598

 
2,446,786

 
2,446,786

Liabilities:
 
 
 
 
 
 
 
Note payable
$
300,000

 
$
329,779

 
$
300,000

 
$
323,670

Currency swaps and forwards
2,032

 
2,032

 
2,228

 
2,228

Separate accounts
2,408,598

 
2,408,598

 
2,446,786

 
2,446,786

The fair values of financial instruments presented above are estimates of the fair values at a specific point in time using various sources and methods, including market quotations and a complex matrix system that takes into account issuer sector, quality, and spreads in the current marketplace.
Estimated fair values of investments in fixed-maturity securities are principally a function of current spreads and interest rates that are corroborated by independent third-party data. Therefore, the fair values presented are indicative of amounts we could realize or settle at the respective balance sheet date. We do not necessarily intend to dispose of or liquidate such instruments prior to maturity. Trading securities, which primarily consist of fixed-maturity securities, are carried at fair value. Equity securities, including common and non-redeemable preferred stocks, are carried at fair value. The carrying value of policy loans and other invested assets approximates fair value. The fair value of our note payable is based on prevailing interest rates and an estimated spread based on notes of comparable issuers and maturity. Currency swaps are stated at fair value. Segregated funds in separate accounts are carried at the underlying value of the variable insurance contracts, which is fair value.
The carrying amounts for cash and cash equivalents, receivables, accrued investment income, accounts payable, cash collateral and payables for security transactions approximate their fair values due to the short-term nature of these instruments. Consequently, such instruments are not included in the above table.
Fair Value Option. In connection with our corporate reorganization, in the first quarter of 2010 we transferred to Citi or sold to third parties all of the securities that had previously been accounted for using the fair value option. On January 1, 2010, these securities had a fair value of approximately $7.7 million. Fair value gains included in net

EX 99.5-25



investment income were approximately $667,000 in 2010 and approximately $3.1 million in 2009.

(5) Reinsurance
Reinsurance arrangements do not relieve us of our primary obligation to the policyholder. Our reinsurance contracts typically do not have a fixed term. In general, the reinsurers' ability to terminate coverage for existing cessions is limited to such circumstances as material breach of contract or nonpayment of premiums by the ceding company. Our reinsurance contracts generally contain provisions intended to provide the ceding company with the ability to cede future business on a basis consistent with historical terms. However, either party may terminate any of the contracts with respect to the future business upon appropriate notice to the other party. Generally, the reinsurance contracts do not limit the overall amount of the loss that can be incurred by the reinsurer.
Our policy is to limit the amount of life insurance retained on the life of any one person to $1 million. To limit our exposure with any one reinsurer, we monitor the concentration of credit risk we have with our reinsurance counterparties, as well as their financial condition. We have not experienced any credit losses related to our reinsurance counterparties during the three-year period ended December 31, 2010.
Due from reinsurers represents ceded policy reserve balances and ceded claim liabilities. The amounts of ceded claim liabilities included in due from reinsurers that we paid and which are recoverable from those reinsurers were as follows:
 
December 31,
 
2011
 
2010
 
(In thousands)
Ceded claim liabilities recoverable from reinsurers
$
37,756

 
$
30,981

As part of our corporate reorganization and prior to completion of the IPO, we formed a new subsidiary, Prime Re, to which we made an initial capital contribution. On March 31, 2010, we entered into a series of coinsurance agreements with the Citi reinsurers. Under these agreements, we ceded between 80% and 90% of the risks and rewards of our term life insurance policies in force at year-end 2009. Because these agreements were part of a business reorganization among entities under common control, they did not generate any deferred gain or loss upon their execution. 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 the Citi reinsurers. On April 1, 2010, as part of our corporate reorganization, we transferred all of the issued and outstanding capital stock of Prime Re to Citi. Each of the transferred account balances, including the invested assets and the distribution of Prime Re, were transferred at book value with no gain or loss recorded in net income.
Three of the Citi coinsurance agreements satisfy GAAP risk transfer rules. Under these agreements, we ceded between 80% and 90% of our term life future policy benefit reserves, and we transferred a corresponding amount of assets to the Citi reinsurers. These transactions did not impact our future policy benefit reserves. As such, we have recorded an asset for the same amount of risk transferred in due from reinsurers. We also reduced DAC by a corresponding amount, which reduces future amortization expenses. In addition, we are transferring between 80% and 90% of all future premiums and benefits and claims associated with these policies to the corresponding reinsurance entities. We receive ongoing ceding allowances, which are reflected as a reduction to insurance expenses, to cover policy and claims administration expenses as well as certain corporate overhead charges under each of these reinsurance contracts.
A fourth coinsurance agreement relates to a 10% reinsurance transaction that includes an experience refund provision. This agreement does not satisfy GAAP risk transfer rules. As a result, we have accounted for this contract using deposit method accounting and have recognized a deposit asset in other assets on our balance sheet for assets backing the economic reserves. The deposit assets held in support of this agreement were $60.0 million at December 31, 2011, with no associated liability. We make contributions to the deposit asset during the life of the agreement to fulfill our responsibility of funding the economic reserve. The market return on these deposit assets is reflected in net investment income during the life of the agreement. Prime Re is responsible for ensuring that there are sufficient assets to meet all statutory requirements. We pay Prime Re a 3% finance charge for any statutory reserves required above the economic reserves. This finance charge is reflected in interest expense in our statements of income.
The net impact of these transactions was reflected as an increase in paid-in capital. Because the agreements were executed on March 31, 2010, but transferred the economic impact of the agreements retroactive to January 1,

EX 99.5-26



2010, we recognized the earnings attributable to the underlying policies through March 31, 2010 in our statement of income. The corresponding impact on retained earnings was equally offset by a return of capital to Citi.
Due from reinsurers represents ceded policy reserve balances and ceded claim liabilities. The amounts of ceded claim liabilities included in due from reinsurers that we paid and which are recoverable those reinsurers were as follows:
 
December 31,
 
2011
 
2010
 
(Dollars in millions)
Direct life insurance in force
$
669,939

 
$
662,135

Amounts ceded to other companies
(596,975
)
 
(600,807
)
Net life insurance in force
$
72,964

 
$
61,328

Percentage of reinsured life insurance in force
89
%
 
91
%
Due from reinsurers includes ceded reserve balances and ceded claim liabilities. Reinsurance receivable and financial strength ratings by reinsurer were as follows: 
 
December 31, 2011
 
December 31, 2010
Reinsurance
receivable
 
A.M. Best
rating
 
Reinsurance
receivable
 
A.M. Best
rating
(In millions)
Prime Reinsurance Company (1)
$
2,439

 
NR
 
$
2,353

 
NR
Financial Reassurance Company 2010, Ltd. (1)
335

 
NR
 
333

 
NR
American Health and Life Insurance Company (1)
164

 
A-
 
156

 
A
Due from related party reinsurers
2,938

 
 
 
2,842

 
 
Swiss Re Life & Health America Inc. (2)
253

 
A+
 
242

 
A
SCOR Global Life Reinsurance Companies
143

 
A
 
139

 
A
Generali USA Life Reassurance Company
115

 
A-
 
112

 
A
Transamerica Reinsurance Companies
104

 
A+
 
103

 
A+
Munich American Reassurance Company
99

 
A+
 
97

 
A+
Korean Reinsurance Company
83

 
A
 
83

 
A-
RGA Reinsurance Company
68

 
A+
 
64

 
A+
All other reinsurers
52

 
 
49

 
Due from reinsurers
$
3,855

 
 
 
$
3,731

 
 
____________________ 
NR – not rated
(1)
Amounts shown are net of their share of the reinsurance recoverable from other reinsurers. As of December 31, 2011, the reinsurer was no longer a related party.
(2)
Includes amounts ceded to Lincoln National Life Insurance and 100% retroceded to Swiss Re Life & Health America Inc.
Certain reinsurers with which we do business receive group ratings. Individually, those reinsurers are Scor Global Life Re Insurance Company of Texas, Scor Global Life U.S. Re Insurance Company, Transamerica Financial Life Insurance Company, and Transamerica Life Insurance Company.
As Prime Re and Financial Reassurance Company 2010, Ltd. (FRAC) do not have financial strength ratings, we required various safeguards prior to executing the coinsurance agreements with these entities. Both coinsurance agreements include provisions to ensure that Primerica Life and Primerica Life Canada receive full regulatory credit for the reinsurance treaties. Under these agreements, Primerica Life and Primerica Life Canada will be able to recapture the ceded business with no fee in the event Prime Re or FRAC do not comply with the various safeguard provisions in their respective coinsurance agreements. Prime Re also has entered into a capital maintenance agreement requiring Citi to provide additional funding, if needed, at any point during the term of the agreement up to the maximum as described in the capital maintenance agreement.
In October 2010, a routine reinsurance audit identified payments to reinsurers that may have exceeded our obligations under our reinsurance agreements. 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 for post-issue underwriting class upgrades. The most common reason for such an upgrade

EX 99.5-27



occurs when a policyholder 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. As a result, we reduced ceded premiums in 2010 by approximately $13.1 million related to the agreements obtained with certain reinsurers to recover these ceded premiums. The recoveries recognized in 2010 reflect the agreements signed in the fourth quarter of 2010. Additionally, in the first quarter of 2011 we reduced ceded premiums by approximately $8.7 million related to agreements obtained with certain reinsurers to recover ceded premiums. The recoveries recognized in 2011 reflect the agreements signed in 2011. Further recoveries, if any, are not expected to be significant.

(6) Deferred Policy Acquisition Costs
The balances of and changes in DAC were as follows:
 
Year ended December 31,
 
2011
 
2010
 
2009
 
(In thousands)
DAC balance, beginning of period
$
738,946

 
$
2,520,251

 
$
2,478,565

Capitalization
270,661

 
259,201

 
343,886

Amortization
(104,034
)