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EX-23.1 - CONSENT OF KPMG LLP - Primerica, Inc.dex231.htm
Table of Contents

As filed with the Securities and Exchange Commission on November 5, 2009

Registration No. 333-            


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933


Primerica, Inc.

(Exact Name of Registrant as Specified in Its Charter)


Delaware   6331   27-1204330

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

Primerica, Inc.

3120 Breckinridge Blvd.

Duluth, Georgia 30099

(770) 381-1000

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

Peter W. Schneider, Esq.

Executive Vice President, General Counsel and Secretary

Primerica, Inc.

3120 Breckinridge Blvd.

Duluth, Georgia 30099

(770) 381-1000

(770) 564-6216 (facsimile)

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)


COPIES TO:

Gregory A. Fernicola, Esq.

Jeffrey A. Brill, Esq.

Skadden, Arps, Slate, Meagher & Flom LLP

Four Times Square

New York, New York 10036

(212) 735-3000

(212) 735-2000 (facsimile)

  

Steven E. Fox, Esq.

Alan C. Leet, Esq.

Rogers & Hardin LLP

229 Peachtree St. N.E.

Atlanta, Georgia 30303

(404) 522-4700

(404) 525-2224 (facsimile)

  

Jeffrey D. Karpf, Esq.

Cleary Gottlieb Steen & Hamilton LLP

One Liberty Plaza

New York, New York 10006

(212) 225-2000

(212) 225-3999 (facsimile)


APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one).

Large accelerated filer  ¨                Accelerated filer  ¨                Non-accelerated filer  x                Smaller reporting company  ¨

CALCULATION OF REGISTRATION FEE


TITLE OF EACH CLASS OF

SECURITIES TO BE REGISTERED

  

PROPOSED

MAXIMUM
AGGREGATE
OFFERING PRICE(1)

   AMOUNT OF
REGISTRATION
FEE

Common Stock, $0.01 par value

   $100,000,000    $5,580

(1)   Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933. Includes offering price of shares that the underwriters have the option to purchase pursuant to their over-allotment option.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.



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The information in this prospectus is not complete and may be changed. The selling stockholder may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale thereof is not permitted.

 

SUBJECT TO COMPLETION, DATED NOVEMBER 5, 2009

 

PRELIMINARY PROSPECTUS

 

            Shares

 

Primerica, Inc.

 

Common Stock

$            per share

 


 

This is an initial public offering of shares of our common stock. A wholly owned subsidiary of Citigroup Inc. is our sole stockholder and is selling            shares of our common stock. We will not receive any of the proceeds from the sale of shares of our common stock being offered hereby. We currently expect the initial public offering price to be between $            and $            per share of common stock.

 

The selling stockholder has granted the underwriters an option to purchase up to            additional shares of common stock to cover over-allotments.

 

Prior to this offering, there was no public market for our common stock. We intend to apply to have our common stock listed on the            under the symbol “             ”.

 


 

Investing in our common stock involves risks. Please see the section of this prospectus entitled “Risk Factors” beginning on page 12.

 

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

 


 

     Per Share

   Total

Public offering price

   $                 $             

Underwriting discount

   $      $  

Proceeds to the selling stockholder (before expenses)

   $      $  

 

The underwriters expect to deliver the shares to purchasers on or about                    , 2010 through the book-entry facilities of The Depository Trust Company.

 


 

Citi

 


 

                    , 2010


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You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. None of Primerica, the selling stockholder or the underwriters is making an offer to sell these securities in any jurisdiction where the offer or sale thereof is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus.

 

TABLE OF CONTENTS

 

     Page

Summary

   1

Risk Factors

   12

Cautionary Statement Concerning Forward-Looking Statements

   37

Use of Proceeds

   39

Dividend Policy

   39

Dilution

   40

Capitalization

   41

Selected Historical Combined Financial Data

   42

Pro Forma Combined Financial Statements

   45

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

   51

Business

   98

Management

   130

Principal and Selling Stockholder

   150

Certain Relationships and Related Party Transactions

   151

Description of Capital Stock

   165

Shares Eligible for Future Sale

   174

Certain United States Federal Tax Consequences to Holders

   176

Underwriting

   179

Conflicts of Interest

   181

Legal Matters

   185

Experts

   185

Where You Can Find More Information

   185

Index To Historical Combined Financial Statements

   F-1

 

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

 

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SUMMARY

 

This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including the sections entitled “Risk Factors” and “Cautionary Statement Concerning Forward-Looking Statements” and our combined financial statements, the notes to such financial statements and our selected historical combined financial data and pro forma combined financial statements before making an investment decision regarding our common stock. As used in this prospectus, references to “Primerica,” “we,” “us” and “our” refer to Primerica, Inc., a Delaware corporation, and its consolidated subsidiaries, after giving effect to the transfer to us by Citi of the subsidiaries that comprise our business, and references to “Citi” refer to Citigroup Inc. and its subsidiaries other than Primerica.

 

Our Company

 

We are a leading distributor of financial products to middle income households in North America with approximately 100,000 licensed sales representatives. We assist our clients in meeting their needs for term life insurance, which we underwrite, and mutual funds, variable annuities and other financial products, which we distribute primarily on behalf of third parties. We insure more than 4.3 million lives and more than two million clients maintain investment accounts with us. Our distribution model uniquely positions us to reach underserved middle income consumers in a cost effective manner and has proven itself in both favorable and challenging economic environments. We view this offering as our company’s refounding — an opportunity to enhance the entrepreneurial spirit of our organization and to align the interests of our independent sales force and our employees with our future performance.

 

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

 

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

 

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

 

We were the largest provider of individual term life insurance in the United States in 2008 based on the amount of in force premiums collected, according to LIMRA International, an independent market research organization. In 2008, we issued new term life insurance policies with more than $87 billion of aggregate face value and sold approximately $4.5 billion of investment and savings products.

 

In connection with this offering, we will enter into co-insurance agreements with affiliates of Citi pursuant to which we will cede the risks and rewards of a significant majority of our term life insurance policies that will be in force at December 31, 2009. On a pro forma basis, after giving effect to the Citi reinsurance transactions and the other concurrent transactions described in this prospectus, our stockholder’s equity would have been $             million as of June 30, 2009.

 

 

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Our History

 

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

 

Our Clients

 

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

 

   

they have inadequate or no life insurance coverage;

 

   

they need help saving for retirement and other personal goals;

 

   

they need to reduce their consumer debt; and

 

   

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

 

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

 

Our Distribution Model

 

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

 

   

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

 

   

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

 

   

Incentive to build distribution:    When a sale is made, the selling representative receives a commission, as does the representative who recruited him or her, which we refer to as “override compensation.”

 

 

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Override compensation is paid through several levels of the selling representative’s recruitment and supervisory organization. This structure motivates existing sales representatives to grow our sales force by providing them with commission income from the sales completed by their recruits.

 

   

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

 

   

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

 

These attributes have enabled us to build a large sales force in North America with approximately 100,000 sales representatives licensed to sell life insurance. Approximately 25,000 of our sales representatives are also licensed to sell mutual funds in North America. In 2008, our sales representatives generated approximately 240,000 newly-issued term life insurance policies and acquired approximately 138,000 new mutual fund clients and 39,000 new variable annuity clients.

 

Our Segments

 

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

 

   

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

 

   

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

 

   

Corporate and Other Distributed Products:    We also earn fees and commissions from the distribution of various third party products, including loans, long-term care insurance, auto insurance, homeowners insurance and prepaid legal services, and from our mail-order student life insurance and short-term

 

 

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disability benefit insurance, which we underwrite through our New York insurance subsidiary. This segment also includes unallocated corporate income and expenses, realized gains and losses and investment income on our invested asset portfolio that is not allocated to Term Life Insurance.

 

Our Strengths

 

Proven excellence in building and supporting a large independent financial services sales force.    We believe success in serving middle income consumers requires generating and supporting a large distribution system, which we view as one of our core competencies. We have recruited more than 200,000 new sales representatives and assisted more than 35,000 recruits to obtain life insurance licenses in each of the last five calendar years. Approximately 65,000 sales representatives registered to attend our six regional meetings in 2009, and approximately 50,000 sales representatives registered to attend our most recent national convention in 2007. Our RVPs conduct thousands of meetings per month to introduce our business opportunity to new recruits. Over 500 instructors conduct approximately 5,500 classes annually to help our sales representatives obtain all requisite life insurance licenses and fulfill state-mandated licensing requirements. We have excelled at motivating and coordinating a large and geographically diverse, mostly part-time sales force by connecting with them through multiple channels of communication and providing innovative compensation programs and home office support.

 

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

 

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

 

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

 

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

 

Experienced management team and sales force.    We are led by a management team that has extensive experience in our business and a thorough understanding of our unique culture and business model. Our senior executives largely have grown up in the business. Primerica’s co-Chief Executive Officers, John Addison and Rick Williams, both joined our company more than 20 years ago and were appointed co-CEOs in late 1999. The 14 members of our senior management team have an average of 23 years of experience at Primerica. Equally important, our more successful sales representatives, who have become influential within our sales organization, also have significant longevity with us. Of our sales representatives, 20,000 have been with us for at least ten years, and 6,500 have been with us for at least 20 years.

 

 

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Our Strategy

 

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

 

Align the interests of our company and sales force.    Becoming a publicly traded company will allow us to use equity awards to align the interests of our employees and sales representatives with the performance of our company. This will be accomplished by the issuance of Primerica equity awards to certain employees and sales force leaders concurrently with this offering, the implementation of a directed share program in which employees and RVPs will have the opportunity to buy shares of our common stock in this offering, the intended conversion of certain outstanding Citi equity awards held by our employees and sales representatives to Primerica equity awards and the creation of Primerica equity award compensation programs for our employees and sales representatives. These incentives will give us new ways to motivate our sales force.

 

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

 

   

Increasing the number of recruits.    Our existing sales representatives replenish and grow our sales force through recruiting activities that generate a high volume of new recruits. Moreover, the introduction of new recruits to our business provides us with an opportunity for product sales, both to the recruits themselves and to their friends, family members and personal acquaintances. When our co-CEOs were appointed in late 1999, they prioritized recruiting growth. The number of recruits more than doubled to over 202,000 in 2002, the highest annual number since the company’s inception up to that time. We have increased this level of recruiting, reaching a record of 235,000 recruits in 2008. We intend to continue to grow recruiting through a number of initiatives launched in recent years, including a reduction in the upfront entry fee charged to new recruits to join our sales force, increased use of our electronic application technology and an expansion of early-stage compensation opportunities for new recruits.

 

   

Increasing the number of licensed sales representatives.    In recent years, we have launched a series of initiatives designed to increase the number of recruits who obtain life insurance licenses. Working with industry groups, we have been instrumental in enacting licensing reforms to reduce regulatory barriers for applicants and to address licensing disparities across ethnic groups. In addition, we continue to design and improve educational courses, training tools and incentives that are made available to help recruits prepare for state and provincial licensing examinations.

 

   

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

 

Increase our use of innovative technology.    We expect to continue to invest in technology to make it easier for individuals to join our sales force, complete licensing requirements and build their own businesses. We provide our sales representatives, who are generally most active during nights and weekends outside their own homes and offices, with access to innovative technology, including wireless communication devices and Internet record access, to facilitate “straight-through-processing” of the client information that they collect. We intend to develop new analytical tools to help our sales representatives manage their businesses better and increase efficiency. For example, in cooperation with Morningstar, Inc., a leading provider of independent investment research, we are developing a portfolio management tool to enable our sales representatives to view client investment positions, which is expected to create additional sales opportunities for our investment and savings products.

 

 

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

 

This Offering, the Citi Reinsurance Transactions and the Other Concurrent Transactions

 

This offering.    We were incorporated in Delaware in October 2009 by Citi to serve as a holding company for the life insurance and financial product distribution businesses that our predecessors have operated for more than 30 years. These businesses, which currently are subsidiaries of Citi, will be transferred to us prior to the completion of this offering. We will remain a subsidiary of Citi following its sale of approximately     % of our outstanding common stock in this offering. Citi intends to divest its remaining interest in us as soon as is practicable, subject to market and other conditions.

 

Citi reinsurance transactions.    Prior to completion of this offering, we will enter into co-insurance agreements with three affiliates of Citi, which we refer to in this prospectus as the “Citi reinsurance transactions.” Under these agreements, we will cede between 80% and 90% of the risks and rewards of our term life insurance policies that will be in force at December 31, 2009. Citi will assume future policy benefit reserves of approximately $     billion, and we will transfer an equal amount of invested assets to Citi prior to the completion of this offering. The Citi reinsurance transactions will reduce the amount of our capital and will result in a substantial reduction in our insurance exposure. We will retain our operating platform and infrastructure and continue to administer all policies subject to these reinsurance agreements.

 

As a result of the Citi reinsurance transactions, the revenues and earnings of our term life insurance segment are expected to initially decline in proportion to the amount of revenues and earnings associated with our existing in force book of term life insurance policies ceded to Citi. In periods following this offering, as we add new in force business that will not be ceded to Citi, revenues and earnings of our life insurance segment would be expected to grow from these initial levels. The rate of revenue and earnings growth in periods following the Citi reinsurance transactions would be expected to decelerate with each successive financial period as the size of our in force book grows and the incremental sales have a reduced marginal effect on the size of the then existing in force book. For more information about the financial effect of the Citi reinsurance transactions, please see the sections entitled “Pro Forma Combined Financial Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

Other concurrent transactions.    Prior to completion of this offering, the following concurrent transactions will be effected:

 

   

we will pay a dividend to Citi of $        million in cash and securities;

 

   

we will issue to Citi, as consideration for the businesses to be transferred to us prior to the completion of this offering, shares of our common stock and a $         million note due on              bearing interest at an annual rate of     %, which we refer to in this prospectus as the “Citi note”;

 

   

we will exchange certain of our invested assets for certain invested assets held by Citi;

 

 

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we will issue equity awards for              shares of our common stock to our directors, officers and certain of our employees and sales force leaders;

 

   

we intend that certain unvested equity awards held by our employees and sales representatives under Citi’s equity compensation plans will be converted into Primerica equity awards; and

 

   

we will amend and restate our certificate of incorporation and bylaws.

 

On a pro forma basis, after giving effect to the Citi reinsurance transactions and the other concurrent transactions, we expect to have $             billion of stockholder’s equity and $             billion of total assets, as of June 30, 2009. Additionally, we will have $             million of indebtedness owing to Citi that matures in                 . We believe that these changes to our balance sheet favorably position our company with the growth profile of a newly-formed life insurance holding company with a proven track record and infrastructure developed over more than 30 years.

 

Conflicts of Interest

 

Prior to this offering, all of our outstanding common stock is owned by the selling stockholder, a wholly owned subsidiary of Citigroup Inc. The selling stockholder will continue to own a majority of our outstanding common stock immediately following completion of this offering. Prior to this offering we have had, and after this offering we will continue to have, numerous commercial and contractual arrangements with affiliates of the selling stockholder. In addition, Citigroup Global Markets Inc., the sole book-running manager of this offering, is a wholly owned subsidiary of Citigroup Inc. The selling stockholder will receive all of the net proceeds of this offering. Please see the sections entitled “Risk Factors — Risks Related to Our Relationship with Citi,” “Use of Proceeds” and “Underwriting.”

 


 

Our principal executive offices are located at 3120 Breckinridge Blvd., Duluth, Georgia 30099, and our telephone number is (770) 381-1000.

 

 

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The Offering

 

Common stock to be sold by Citi in this offering

             shares (     % of shares outstanding)

 

Common stock to be held by Citi after this offering

             shares (     % of shares outstanding)

 

Common stock to be outstanding after this offering

             shares

 

Use of proceeds

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

 

Stock exchange symbol

We intend to apply to have our common stock listed on the              under the symbol “            ”.

 


 

Throughout this prospectus, all references to the number and percentage of shares of common stock outstanding following this offering, assume the following:

 

   

the underwriters’ over-allotment option will not be exercised;

 

   

             shares of common stock will be issued upon the intended conversion of certain unvested Citi equity awards, which has been estimated based on the midpoint of the initial public offering price range set forth on the cover page of this prospectus and the average closing price of Citi’s common stock over a recent three trading day period. The actual amount will change based on our stock price and Citi’s stock price for the three trading days following the date of the final prospectus; and

 

   

             shares of common stock will be issued as equity awards to our directors, officers and certain of our employees and sales force leaders in connection with this offering.

 

In addition, we have reserved                  additional shares for issuance pursuant to an omnibus equity incentive plan that we intend to adopt prior to the completion of this offering.

 

 

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SUMMARY HISTORICAL AND FINANCIAL DATA

 

The summary historical income statement data for the years ended December 31, 2008, 2007 and 2006 and the summary historical balance sheet data as of December 31, 2008 presented below have been derived from our audited combined financial statements which are included in this prospectus. The summary historical income statement data for the six months ended June 30, 2009 and 2008 and the summary historical balance sheet data as of June 30, 2009 have been derived from our unaudited condensed combined financial statements, which are included in this prospectus. In the opinion of management, the unaudited condensed combined financial statements provided herein have been prepared on substantially the same basis as the audited combined financial statements and reflect all normal and recurring adjustments necessary for a fair statement of the information for the periods presented.

 

The unaudited summary pro forma statement of operations data for the six months ended June 30, 2009 and for the year ended December 31, 2008 have been derived from our unaudited condensed combined financial statements and our audited combined financial statements, respectively, included in this prospectus and give effect to the Citi reinsurance transactions and the other concurrent transactions as if they had occurred on January 1, 2008. The unaudited summary pro forma balance sheet data as of June 30, 2009 give effect to such transactions as if they had occurred on June 30, 2009. The unaudited summary pro forma financial data are based upon available information and assumptions that we believe are reasonable. The unaudited summary pro forma financial data are not necessarily indicative of the results of future operations or the actual results that would have been achieved had the transactions occurred on the dates indicated.

 

All financial data presented in this prospectus have been prepared using U.S. generally accepted accounting principles, or GAAP. The Citi reinsurance transactions and the other concurrent transactions will result in financial results that are materially different from those reflected in the combined financial data that appear in this prospectus. For an understanding of the pro forma financial data that gives pro forma effect to the Citi reinsurance transactions and the other concurrent transactions, please see the section entitled “Pro Forma Combined Financial Statements.”

 

You should read the following summary historical and financial data in conjunction with the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Selected Historical Combined Financial Data” and “Pro Forma Combined Financial Statements” and our audited and unaudited combined financial statements and related notes thereto included elsewhere in this prospectus.

 

 

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    Historical

    Pro Forma

    Six Months Ended
June 30,


    Year Ended December 31,

    Six Months
Ended
June 30,
2009


  Year
Ended
Dec. 31,
2008


    2009

    2008

    2008(1)

    2007

    2006

     
    (in thousands)

Income statement data

                                                   

Revenues

                                                   

Direct premiums

  $ 1,045,651      $ 1,038,601      $ 2,092,792      $ 2,003,595      $ 1,898,419      $                $             

Ceded premiums

    (290,011     (282,396     (629,074     (535,833     (496,061            
   


 


 


 


 


 

 

Net premiums

    749,640        756,205        1,463,718        1,467,762        1,402,358               

Net investment income

    172,140        158,352        314,035        328,609        318,853               

Commissions and fees

    162,406        261,887        466,484        545,584        486,145               

Other, net

    26,498        26,924        56,187        41,856        37,962               

Realized investment (losses) gains

    (20,261     (12,879     (103,480     6,527        8,746               
   


 


 


 


 


 

 

Total revenues

    1,090,423        1,190,489        2,196,944        2,390,338        2,254,064               

Benefits and Expenses

                                                   

Benefits and claims

    297,194        306,695        938,370        557,422        544,556               

Amortization of deferred policy acquisition costs

    183,598        159,587        144,490        321,060        284,787               

Insurance commissions

    18,466        12,249        23,932        28,003        26,171               

Insurance expenses

    76,291        78,867        141,331        137,526        126,843               

Sales commissions

    80,578        142,798        248,020        296,521        265,662               

Goodwill impairment(2)

    —          —          194,992        —          —                 

Other operating expenses

    61,187        82,626        152,773        136,634        127,849               
   


 


 


 


 


 

 

Total benefits and expenses

    717,314        782,822        1,843,908        1,477,166        1,375,868               
   


 


 


 


 


 

 

Income (loss) before income taxes

    373,109        407,667        353,036        913,172        878,196               

Income taxes (loss)

    128,432        138,611        185,354        319,538        276,244               
   


 


 


 


 


 

 

Net income (loss)

  $ 244,677      $ 269,056      $ 167,682      $ 593,634      $ 601,952      $     $  
   


 


 


 


 


 

 

Segment data

                                                   

Revenues

                                                   

Term Life Insurance

  $ 875,761      $ 857,330      $ 1,682,852      $ 1,654,895      $ 1,584,866      $     $  

Investment and Savings Products

    141,097        210,581        386,508        439,945        383,397               

Corporate and Other Distributed Products

    73,565        122,578        127,584        295,498        285,801               

Segment income (loss) before income taxes

                                                   

Term Life Insurance

  $ 341,999      $ 342,552      $ 521,649      $ 693,439      $ 675,130      $     $  

Investment and Savings Products

    40,411        72,466        125,163        152,386        132,208               

Corporate and Other Distributed Products

    (9,301     (7,351     (293,776     67,347        70,858               

 

 

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    Historical

    Six Months Ended
June 30,

  Year Ended December 31,

    2009

  2008

  2008

  2007

  2006

    (in thousands)

Operating data

                             

Number of new recruits

    115,076     124,935     235,125     220,950     204,316

Number of newly insurance-licensed sales representatives

    19,248     19,796     39,383     36,308     35,233

Average number of licensed sales representatives(3)

    100,590     98,028     99,361     97,103     96,998

Number of term life insurance policies issued

    115,225     121,350     241,173     244,733     245,520

Average number of mutual fund licensed sales representatives

    24,056     24,973     25,269     25,483     26,983

Client asset values (end of period)

  $ 26,181,207   $ 34,088,629   $ 24,406,787   $ 37,300,483   $ 34,190,353

 

     As of June 30, 2009

     Actual

   Pro Forma

     (in thousands)

Balance sheet data

      

Investments

   $ 5,911,604    $             

Cash and cash equivalents

     448,415       

Deferred policy acquisition costs, net

     2,757,143       

Total assets

     12,128,134       

Future policy benefits

     4,100,628       

        % note payable to Citi

     —         

Total liabilities

     7,542,459       

Stockholder’s equity

     4,585,675       

(1)   Includes a $191.7 million pre-tax charge due to a change in our deferred policy acquisition cost and reserve estimation approach implemented as of December 31, 2008.
(2)   Relates to a goodwill impairment charge resulting from impairment testing as of December 31, 2008.
(3)   Sales representatives licensed to sell insurance.

 

 

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RISK FACTORS

 

Investing in our common stock involves substantial risks. You should consider carefully the following risks and other information in this prospectus, including our combined and pro forma financial statements and related notes, before you decide to purchase our common stock. If any of the following risks actually materializes, our business, financial condition and results of operations could be materially adversely affected. As a result, the trading price of our common stock could decline and you could lose part or all of your investment.

 

Risks Related to Our Distribution Structure

 

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

 

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

 

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

 

Furthermore, if we or any other direct sales businesses with a similar distribution structure engage in practices resulting in increased negative public attention for our business, the resulting reputational challenges could adversely affect our ability to attract new recruits.

 

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

 

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

 

In the past, certain direct sale distribution models have been subject to challenge under various laws, including laws relating to business opportunities, franchising, pyramid schemes and unfair or deceptive trade practices. If these laws were to apply to us, we may be required to make changes to our distribution model, which could materially adversely affect our business, financial condition and results of operations.

 

State business opportunity laws often impose, among other things, registration and disclosure requirements. While we have not been and are not currently subject to such laws, there is a risk that a governmental agency or court could disagree with our assessment or that these laws and regulations could change. In addition, the Federal Trade Commission, or FTC, is in the process of promulgating a new “Business Opportunity Rule,” which would

 

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not apply to companies like ours as currently drafted, but could be broadened in its final form to encompass our business. Becoming subject to business opportunity or franchise laws or regulations could require us to provide certain disclosures and regulate the manner in which we recruit our sales representatives that may increase the expense of, or adversely impact our success in, recruiting new sales representatives and make it more difficult for us to successfully attract and recruit new sales representatives or require us to change our business model, which could materially adversely affect our business, financial condition and results of operations.

 

There are various laws and regulations that prohibit fraudulent or deceptive schemes known as “pyramid schemes.” The application of these laws and regulations to a given set of business practices is inherently fact-based and, therefore, is subject to interpretation by applicable enforcement authorities. Thus, even though we believe that our distribution practices are currently in compliance with, or exempt from, these laws and regulations, there is a risk that a governmental agency or court could disagree with our assessment or that these laws and regulations could change, which may require us to alter our distribution model or cease our operations in certain jurisdictions or result in other costs or fines, any of which could materially adversely affect our business, financial condition and results of operations.

 

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

 

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

 

Our sales representatives are treated by us as independent contractors who operate their own businesses. In the past, we have been successful in defending our company against claims that our sales representatives should be treated like employees in various contexts before courts and administrative agencies. Of note, the Internal Revenue Service, or IRS, issued a National Office Technical Advice Memorandum in 1997 confirming the independent contractor status of our U.S. sales representatives for U.S. federal income tax purposes. Nevertheless, there is a risk that the IRS or another authority will take a different view or that the standing practice of our industry will change. Furthermore, the tests governing the determination of whether an individual is considered to be an independent contractor or an employee are typically fact sensitive and vary from jurisdiction to jurisdiction. Laws and regulations that govern the status of independent sales representatives are subject to change or interpretation by various authorities. If a federal, state or provincial authority or court enacts legislation or adopts regulations that change the manner in which employees and independent contractors are classified or makes any adverse determination with respect to some or all of our independent contractors, we could incur significant costs in complying with such laws and regulations, including, in respect of tax withholding, social security payments and recordkeeping, or we may be required to modify our business model, any of which could have a material adverse effect on our business, financial condition and results of operations. In addition, there is the risk that we may be subject to significant monetary liabilities arising from fines or judgments as a result of any such actual or alleged non-compliance with federal, state, or provincial tax or employment laws. Further, if it were determined that our sales representatives should be treated as employees, we could possibly incur additional liabilities with respect to any applicable employee benefit plan.

 

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Our sales representatives’ non-compliance with any applicable laws could subject us to material liabilities.

 

Extensive federal, state, provincial and local laws regulate our products and our relationships with our clients, imposing certain requirements that our sales representatives must follow. Some of these requirements and procedures vary from jurisdiction to jurisdiction, but many of them, especially those applicable to our securities business, arise from applicable securities laws or from the rules promulgated by the Financial Industry Regulatory Authority, Inc., or FINRA, or other applicable regulatory authorities. In addition to imposing requirements that representatives must follow in their dealings with clients, these laws and rules generally require us to maintain a system of supervision to attempt to ensure that our sales representatives comply with these requirements. In order to comply with these laws, we have developed policies, procedures and controls to supervise and monitor our sales representatives. However, despite these compliance and supervisory efforts, the breadth of our operations and the broad regulatory requirements could result in oversight failures and instances of non-compliance or misconduct on the part of our sales representatives.

 

Examples of such non-compliance or misconduct could include selling products that are not provided or otherwise authorized by us, which is referred to as “selling away,” selling fictitious products, misappropriating client funds or engaging in other fraudulent or otherwise improper activity, recommending products that are not suitable, engaging in activities for which a sales representative is unlicensed or otherwise not authorized to sell, or failing to comply with applicable laws regarding contact with persons on “do not call” or “do not fax” lists, or requirements under anti-spam laws.

 

Non-compliance or misconduct by our sales representatives could result in violations of law, and could subject us to regulatory sanctions, significant monetary liabilities, restrictions on or the loss of the operation of our business, claims against us or reputational harm, any of which could have a material adverse effect on our business, financial condition and results of operations.

 

In addition, from time to time, we are subject to private litigation as a result of misconduct by our sales representatives. Such litigation may be costly to defend and settle. Although incidents of misconduct in the past have not caused material harm to our business, financial condition and results of operations, there is no assurance that future incidents will not result in significant claims or result in litigation that could have a material adverse effect on our business, financial condition and results of operations.

 

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

 

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

 

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Risks Related to Our Insurance Business and Reinsurance

 

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

 

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

 

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

 

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

 

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

 

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

 

In addition, most of the jurisdictions in which our insurance subsidiaries are admitted to transact business require life insurers doing business within the jurisdiction to participate in guaranty associations, which raise funds to pay contractual benefits owed pursuant to insurance policies issued by impaired, insolvent or failed

 

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issuers. It is possible that a catastrophic event could require extraordinary assessments on our insurance companies, which may have a material adverse effect on our business, financial condition and results of operations.

 

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

 

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

 

The laws of the various U.S. jurisdictions grant insurance departments broad powers to regulate almost all aspects of our insurance business.

 

Some recent NAIC and state statutory and regulatory activity has been undertaken in response to increased federal attention focused on inefficiencies in the current U.S. state-based regulatory system. The U.S. Congress continues to examine the current condition of U.S. state-based insurance regulation to determine whether to impose federal regulation and to allow optional federal insurance company incorporation. Bills are occasionally introduced in the U.S. Congress that could affect life insurers. In addition to an optional federal charter, Congress has considered legislation pre-empting state law in certain respects in connection with the regulation of reinsurance and other matters. We cannot predict with certainty whether, or in what form, reforms will be enacted and, if so, whether the enacted reforms will positively or negatively affect our business or whether any effects will be material. Changes in federal statutes, including the Gramm-Leach-Bliley Act, financial services regulation and federal taxation, in addition to changes to state statutes and regulations, may be more restrictive than current requirements or may result in higher costs, and could materially adversely affect the insurance industry and our business, financial condition and results of operations.

 

Provincial and federal insurance laws regulate many aspects of our Canadian insurance business. Please see the section entitled “Business — Insurance Regulation.” Changes to provincial or federal statutes and regulations may be more restrictive than current requirements or may result in higher costs could materially adversely affect the insurance industry and our business, financial condition and results of operations.

 

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

 

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

 

Each of our insurance subsidiaries is subject to RBC standards and other minimum statutory capital and surplus requirements (in Canada, minimum continuing capital and surplus requirements, or MCCSR) imposed under the laws of its respective jurisdiction of domicile. The RBC formula for U.S. life insurance companies

 

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generally establishes capital requirements relating to insurance, business, asset and interest rate risks. Our U.S. insurance subsidiaries are required to report their results of RBC calculations annually to the applicable state department of insurance and the NAIC. Our Canadian insurance subsidiary is required to provide its MCCSR calculations to the Canadian regulators. In any particular year, statutory capital and surplus amounts and RBC and MCCSR ratios may increase or decrease depending on a variety of factors, including the amount of statutory income or losses generated by our insurance subsidiaries (which is sensitive to equity and credit market conditions), the amount of additional capital our insurance subsidiaries must hold to support business growth, changes in their reserve requirements, the value of certain fixed income and equity securities in their investment portfolios, the credit ratings of investments held in their portfolios, the value of certain derivative instruments, changes in interest rates, credit market volatility, changes in consumer behavior, as well as changes to the NAIC’s RBC formula or the MCCSR calculation of the Office of the Superintendent of Financial Institutions, or OSFI. Many of these factors are outside of our control. Our financial strength and credit ratings are significantly influenced by the statutory surplus amounts and RBC and MCCSR ratios of our insurance company subsidiaries. Ratings agencies may change their internal models, effectively increasing or decreasing the amount of statutory capital we must hold in order to maintain our current ratings. In addition, ratings agencies may downgrade the invested assets held in our portfolio, which could result in a reduction of our capital and surplus by means of other-than-temporary impairments. Changes in statutory accounting principles could also adversely impact our ability to meet minimum RBC, MCCSR and statutory capital and surplus requirements. Furthermore, during the initial years of operation after the Citi reinsurance transactions, our statutory capital and surplus may prove to be insufficient and we may incur ongoing statutory losses as a result of the high amounts of upfront commissions that are paid to our sales force in connection with the issuance of term life insurance policies. The statutory capital and surplus strain associated with payment of these commissions will be of greater impact during the initial years of our operations as a public company, as the in force book of business, net of the Citi reinsurance transactions, grows. There is no assurance that our insurance subsidiaries will not need additional capital or that we will be able to provide it to maintain the targeted RBC and MCCSR levels to support their business operations.

 

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

 

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

 

We have three insurance subsidiaries. Primerica Life Insurance Company, or Primerica Life, our Massachusetts life insurance company, National Benefit Life Insurance Company, or NBLIC, our New York life insurance company, and Primerica Life Insurance Company of Canada, or Primerica Life Canada, our Canadian life insurance company, have each been assigned a financial strength rating of “A+” (superior) by A.M. Best Co. Primerica Life currently also has an insurer financial strength rating of “AA” (very strong) from Standard & Poor’s. Primerica Life Canada and NBLIC are not rated by Standard & Poor’s.

 

Financial strength ratings are an important factor in establishing the competitive position of insurance companies. Such ratings are important to maintaining public confidence in us and our ability to market our insurance products. Ratings organizations review the financial performance and financial conditions of insurance companies, including our three insurance subsidiaries, and provide opinions regarding financial strength, operating performance and ability to meet obligations to policyholders. A downgrade in the financial strength

 

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ratings of our insurance subsidiaries, or the announced potential for a downgrade, could have a material adverse effect on our business, financial condition and results of operations, including by:

 

   

reducing sales of insurance products;

 

   

adversely affecting our relationships with our sales representatives;

 

   

materially increasing the amount of policy cancellations by our policyholders;

 

   

requiring us to reduce prices in order to remain competitive; and

 

   

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

 

The financial strength ratings of our insurance subsidiaries are subject to periodic review using, among other things, the ratings agencies’ proprietary capital adequacy models, and are subject to revision or withdrawal at any time. Insurance financial strength ratings are directed toward the concerns of policyholders and are not intended for the protection of investors or as a recommendation to buy, hold or sell securities. This offering, the Citi reinsurance transactions, the other concurrent transactions and any potential difficulties associated with anticipated statutory losses during the initial period of operation following the Citi reinsurance transactions could cause the ratings agencies to reduce the financial strength ratings of our insurance subsidiaries, which may adversely affect our ability to attract and retain clients and could result in reduced sales of our products. Our financial strength ratings will affect our competitive position relative to other insurance companies. If the financial strength ratings of our insurance subsidiaries fall below certain levels, some of our policyholders may move their business to our competitors.

 

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

 

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

 

Following the consummation of this offering, the Citi reinsurance transactions and the other concurrent transactions, we expect that a large percentage of our invested asset portfolio will be invested in fixed income securities; as a result, credit deterioration and interest rate fluctuations could materially affect the value and earnings of our invested asset portfolio. Fixed income securities decline in value if there is no active trading market for the securities or the market’s impression of, or the ratings agencies’ views on, the credit quality of an issuer worsens. During periods of declining market interest rates, any interest income we receive on variable interest rate investments would decrease. In addition, during such periods, we would be forced to reinvest the cash we receive as interest or return of principal on our investments in lower-yielding high-grade instruments or in lower-credit instruments to maintain comparable returns. Issuers of fixed income securities could also decide to prepay their obligations in order to borrow at lower market rates, which would increase the percentage of our portfolio that we would have to reinvest in lower-yielding investments of comparable credit quality or in lower quality investments offering similar yields. If interest rates generally increase, the market value of our fixed rate income portfolio decreases. If the market value of our fixed maturity portfolio decreases, we may realize losses if we deem the value of our fixed income portfolio to be other-than-temporarily-impaired. Our invested asset portfolio is also exposed to risks associated with the broader equity markets to the extent of the relatively small position we maintain in equity securities.

 

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

 

GAAP requires that when the fair value of our invested assets declines and such decline is deemed to be other-than-temporary, we recognize a loss in either accumulated other comprehensive income or on our combined statement of income based on certain criteria in the period that such determination is made. Determining the fair value of certain invested assets, particularly those that do not trade on a regular basis, requires an assessment of available data and the use of assumptions and estimates. Once it is determined that the fair value of an asset is below its carrying value, we must determine whether the decline in fair value is other-than-temporary, which is based on subjective factors and involves a variety of assumptions and estimates. For information on our valuation methodology, please see Note 2 to our audited combined financial statements included elsewhere in this prospectus and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies — Investments.” There are certain risks and uncertainties associated with determining whether declines in market value are other-than-temporary. These include significant changes in general economic conditions and business markets, trends in certain industry segments, interest rate fluctuations, rating agency actions, changes in significant accounting estimates and assumptions and legislative actions. In the case of mortgage-and other asset-backed securities, there is added uncertainty as to the performance of the underlying collateral assets. To the extent that we are incorrect in our determination of fair value of our investment securities or our determination that a decline in their value is other-than-temporary, we may realize losses that never actually materialize or may fail to recognize losses within the appropriate reporting period.

 

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

 

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

 

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

 

The failure by Citi to perform its obligations to us under our co-insurance agreements could have a material adverse effect on our business, financial condition and results of operations.

 

Prior to the completion of this offering, we will enter into a total of four co-insurance agreements with three affiliates of Citi pursuant to which we will cede between 80% and 90% of the risks and rewards of our term life insurance policies that will be in force at December 31, 2009. We estimate that the insurance policies will have allocable general account reserves of approximately $         billion at such date. Under this arrangement, our current third party reinsurance agreements will remain in place. The largest of these transactions will involve two reinsurance agreements between Primerica Life and a newly-formed Citi-owned Vermont special purpose financial insurance company, or SPFC. SPFC will be formed solely for the purpose of entering into these reinsurance transactions, has no operating history and does not possess a financial strength rating from any rating agency. The other transactions will be between (1) Primerica Life Canada and Financial Reassurance Company, Ltd., or FRAC, an unrated Bermuda reinsurer that operates solely for the purpose of reinsuring Citi-related risks

 

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and is a wholly owned subsidiary of Citi, and (2) NBLIC and American Health and Life Insurance Company, or AHL, a wholly owned insurance subsidiary of Citi that has a financial strength rating of “A” by A.M. Best. Each of the three reinsurers will enter into trust agreements with our respective insurance subsidiaries and a third party trustee pursuant to which the reinsurer will place assets (primarily treasury and fixed income securities) in trust for such subsidiary’s benefit to secure the reinsurer’s obligations to such subsidiary. Each such reinsurance agreement will require each reinsurer to maintain assets in trust sufficient to give the subsidiary full credit for regulatory purposes for the insurance, which amount will not be less than the amount of the reserves for the reinsured liabilities. In addition, in the case of the reinsurance transactions between SPFC and Primerica Life, Citi will agree in a capital maintenance agreement to maintain SPFC’s RBC above a specified minimum level, subject to a maximum amount of $       million being contributed by Citi. After the first five years of the capital maintenance agreement, the maximum amount payable will be an amount equal to a fixed percentage of total statutory reserves. In the case of the reinsurance transaction between NBLIC and AHL, Citi will over-collateralize the assets in the trust for NBLIC by         % for the life of the reinsurance agreement between NBLIC and AHL. Furthermore, our insurance subsidiaries will have the right to recapture the business upon the occurrence of an event of default under their respective reinsurance agreement with Citi affiliates. An event of default includes (1) a reinsurer insolvency, (2) failure through the fault of the reinsurer to maintain the fair market value of the assets in trust equal to the statutory reserves required to be carried for the reinsured liabilities or (3) a material breach of any covenant, representation or warranty by the reinsurer. While any such recapture will be at no cost to us, such recapture will result in a substantial increase in our insurance exposure and require us to be fully responsible for the management of the assets set aside to support statutory reserves. The type of assets we might obtain as a result of a recapture may not be as highly liquid as our current invested asset portfolio and could result in an unfavorable impact on our risk profile. Please see the section entitled “Certain Relationships and Related Party Transactions — Relationship with Citi Following this Offering — Citi Reinsurance Transactions” for a further description of these reinsurance agreements and the related trust agreements.

 

No assurance is given that the relevant Citi reinsurer will pay the reinsurance obligations owed to us now or in the future or that it will pay these obligations on a timely basis. Notwithstanding the capital maintenance agreement between SPFC and Citi and the initial over-collateralization of assets in trust for the benefit of our insurance companies, if any of our reinsurers affiliated with Citi becomes insolvent, the amount in the trust account to support the obligations of such reinsurer is insufficient to pay such reinsurer’s obligations to us and we fail to enforce our right to recapture the business, it could have a material adverse effect on our business, financial condition and results of operations.

 

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

 

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

 

Risks Related to Our Investments and Savings Products Business

 

A decision by certain mutual funds to discontinue custodial or recordkeeping services with us would materially adversely affect our business, financial condition and results of operations.

 

A significant portion of our earnings from investment and savings products comes from fees earned for custodial services and recordkeeping services that we provide to clients that hold mutual funds of certain mutual fund companies. A decision by one or more of these fund companies to discontinue these services would result in

 

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a significant loss in recordkeeping and custodial fee revenue. We also receive revenue sharing payments from certain mutual fund companies based on our sales and our clients’ asset values. A decision by one or more of these fund companies to alter or discontinue these arrangements would materially adversely affect our business, financial condition and results of operations.

 

We are subject to extensive federal, state and provincial securities legislation and regulation, changes in which may require us to alter our business practices and could materially adversely affect our business, financial condition and results of operations.

 

U.S. federal and state securities laws apply to our sales of mutual funds and certain insurance products that are also “securities,” including variable annuities. As a broker-dealer, our subsidiary, PFS Investments, is subject to federal and state regulation of its securities business, including sales practices, trade suitability, supervision of registered representatives, receipt and safekeeping of consumers’ funds, recordkeeping, the conduct and qualification of officers and employees, the rules and regulations of the Municipal Securities Rulemaking Board and state blue sky regulation. Violations of laws or regulations applicable to the activities of PFS Investments could subject it to disciplinary actions and could result in the imposition of cease and desist orders, fines or censures, restitution to clients, disciplinary actions, including the potential suspension or revocation of its license by the Securities and Exchange Commission, or SEC, or the suspension or expulsion from FINRA and reputational damage. Our subsidiary, Primerica Shareholder Services, or PSS, is a registered transfer agent engaged in the recordkeeping business and is subject to SEC regulation and, therefore, could face similar disciplinary actions for violations of applicable laws and regulations. Moreover, there is a risk that a third party with which PSS contracts will improperly perform its task, which could subject us to liability. Changes in, or violations of, any of these laws or regulations could affect the cost of, or our ability to distribute, our products, which could materially adversely affect our business, financial condition and results of operations.

 

We are subject to the securities laws of the provinces and territories of Canada in which we sell our mutual fund products and those of third parties. We are also subject to the rules of the self-regulatory organization governing mutual fund dealers, the Mutual Fund Dealers Association of Canada, or MFDA. Our Canadian dealer subsidiary, PFSL Investments Canada Ltd., or PFSL Investments Canada, is registered as a mutual fund dealer in all Canadian provinces and territories in which we sell investment and savings products and is regulated by the MFDA, as well as by all provincial and territorial securities commissions. Our sales representatives who sell mutual funds through PFSL Investments Canada are required to be registered representatives of PFSL Investments Canada and are also subject to regulation by the MFDA and the provincial and territorial securities commissions. PFSL Investments Canada is subject to periodic review by both the MFDA and the provincial and territorial securities commissions to assess its compliance with, among other things, applicable capital requirements and sales practices and procedures. These regulators have broad administrative powers, including the power to limit or restrict the conduct of our business for failure to comply with applicable laws or regulations. Possible sanctions that may be imposed include the suspension of individual sales representatives, limitations on the activities in which the dealer may engage, suspension or revocation of the dealer registration, censure or fines. Changes in, or violations of, any of these laws or regulations could affect the cost of, or our ability to distribute, our products, which could materially adversely affect our business, financial condition and results of operations.

 

If heightened standards of conduct are imposed on us or our sales representatives as a result of currently pending legislation, it could have a material adverse effect on our business, financial condition and results of operations.

 

PFS Investments, which is regulated as a broker-dealer, and our U.S. sales representatives are currently subject to general anti-fraud limitations under the Securities Exchange Act of 1934, or the Exchange Act, and SEC rules and regulations, as well as other conduct standards prescribed by FINRA. These standards generally require that broker-dealers and their sales representatives disclose conflicts of interest that might affect the advice or recommendations they provide. The Investor Protection Act of 2009, or IPA, proposed by the Treasury

 

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Department in July 2009, would, if enacted, establish fiduciary duties for broker-dealers similar to those imposed on investment advisers under the Investment Advisers Act of 1940 and could limit or ban mandatory arbitration provisions in our client agreements. If the IPA is enacted, our sales representatives would, among other requirements, be required to adhere to heightened standards of conduct and to disclose any conflicts of interest and compensation structures. The IPA would also enhance the SEC’s enforcement powers by expanding the scope of enforcement actions for aiding and abetting violations, increasing the SEC’s authority to ban persons from selling our products and increasing the potential recovery for whistleblowers. If the IPA is enacted, it could result in increased litigation, regulatory risks, sanctions, changes to our business model or a reduction of the products we offer to our clients, which could have a material adverse effect on our business, financial condition and results of operations.

 

Our suitability policies and procedures could be deemed inadequate.

 

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

 

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

 

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

 

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

 

PFS Investments is a non-bank custodian of retirement accounts, as permitted under Treasury Regulation 1.408-2. The IRS retains authority to revoke or suspend that status if it finds that PFS Investments is unwilling or unable to administer retirement accounts in a manner consistent with the requirements of the regulations. Revocation of PFS Investments’ non-bank custodian status would affect its ability to earn revenue for providing such services and, consequently, could materially adversely affect our business, financial condition and results of operations.

 

Risks Related to Our Loan Business

 

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

 

In response to recent economic conditions and consistent with steps taken by other mortgage lenders generally, our mortgage lenders have implemented more rigorous credit standards, including more restrictive loan-to-value limitations and more restrictive underwriting criteria, which have adversely affected our loan business since the second half of 2008. We anticipate that these credit restrictions will be ongoing, and it is possible that further restrictive underwriting criteria may be imposed by our mortgage lenders in reaction to changes in the economic environment or by new legislative or regulatory requirements impacting mortgage lending generally. Heightened credit standards could materially reduce the volume of our loan sales. In addition, it is possible that our mortgage lender in the United States, Citicorp Trust Bank, fsb, or CTB, will modify the mortgage product that it currently offers to make it a conforming loan product that would be saleable to one of

 

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the government-sponsored enterprises. This modification may result in more restrictive underwriting criteria and materially adversely affect the volume of loans that we sell. Any change to a conforming product could materially adversely impact the compensation paid to our loan broker, Primerica Financial Services Home Mortgages, Inc., or Primerica Mortgages.

 

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

 

The loss of our Citi-affiliated lenders may reduce sales of our loan products.

 

Our sales representatives in the United States sell mortgage products of CTB through Primerica Mortgages, and also sell unsecured loans of Citibank, N.A., or Citibank. Our sales representatives in Canada refer mortgage loan clients to Citicorp Home Mortgage, a division of CitiFinancial Canada, Inc., or CitiFinancial Canada. However, our current Citi-affiliated lenders are not obligated, and have made no commitment, to continue serving as our lenders following this offering. Although we currently anticipate that there will be a transition period following this offering, during which our Citi-affiliated lenders will continue to serve as our lenders, there is no guarantee that such a transition period will occur or any certainty regarding the potential terms of our commercial relationships with our lenders during any such transition period, and our current lenders are under no obligation to continue serving as our lenders after such transition period, if any, expires. Consequently, CTB and Citicorp Home Mortgage may choose to no longer serve as our mortgage lenders, and Citibank may choose to no longer permit us to sell its unsecured loans. There is no assurance that we will be able to negotiate viable arrangements with other lenders that will allow Primerica Mortgages to continue to offer, and our sales representatives in Canada to continue to refer, loan products in the future. In the United States, we currently anticipate that if Primerica Mortgages is able to find a new lender or lenders, or if Primerica Mortgages continues with CTB as our mortgage lender, we will only be able to offer traditional conforming loans, which may have more restrictions than the loan products we currently offer. These restrictions could limit our product offering and, therefore, materially negatively affect our sales. In addition, in Canada, there is some uncertainty as to the availability of funding for our loan referral program. Should funding be significantly restricted, and we are unable to secure an alternate lending source, our ability to offer the loan referral program in Canada would be significantly reduced or curtailed.

 

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

 

The number of our sales representatives who are authorized to sell loan products in the United States has decreased and will continue to decrease due to the implementation of individual licensing requirements mandated by the recently enacted Federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008, or the “SAFE Act.” The SAFE Act requires all states to enact laws that require all U.S. sales representatives to be individually licensed or registered if they intend to offer the mortgage loan products that we distribute in the United States. Prior to the enactment of the SAFE Act, our sales representatives were not required to be individually licensed or registered to sell mortgage loan products in the majority of states. By the end of 2010, we anticipate that all of our sales representatives who engage in our loan business will be subject to the SAFE Act licensing or registration requirements. These licensing requirements include enrollment in the Nationwide Mortgage Licensing System, application to state regulators for individual licenses, a minimum of 20 hours of pre-licensing education, an annual minimum of eight hours of continuing education and the successful completion of both national and state exams. We expect that compliance with these licensing and registration regimes (including background checks) may be prohibitive in terms of cost or time for a large number of our sales representatives. In addition, we currently anticipate that the exams may prove to be challenging to pass and that many of our sales

 

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representatives could find the educational and testing requirements or the associated necessary preparation time inconvenient or daunting. We currently expect that the SAFE Act licensing and registration requirements will cause a significant reduction in the scale of our loan product distribution business in the near term, which could materially adversely affect our loan product sales.

 

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

 

Our U.S. loan business is subject to various federal laws, including the Truth In Lending Act and its implementing regulation, Regulation Z, the Equal Credit Opportunity Act and its implementing regulation, Regulation B, the Fair Housing Act and the Home Ownership Equity Protection Act. We are also subject to the Real Estate Settlement and Procedures Act, or RESPA, and its implementing regulation, Regulation X, which requires timely disclosures related to the nature and costs of real estate settlement amounts and limits those costs and compensation to amounts reasonably related to the services performed. Additionally, we must comply with various state and local laws and policies concerning the provision of consumer disclosures, net branching, predatory lending and high cost loans and recordkeeping. For example, under the predatory lending and high cost loan laws of some states, the origination of certain residential mortgage loans, including loans that are not classified as “high cost” loans under applicable law, must satisfy tangible benefits tests with respect to the related borrower. Differing interpretations of, changes in, or violations of, any of these laws or regulations could subject us to damages, fines or sanctions and could affect the cost or our ability to distribute our products, which could materially adversely affect our business, financial condition and results of operations.

 

Other Risks Related to Our Business

 

The continuing effects of the downturn in the North American economy could materially adversely affect our business, financial condition and results of operations.

 

Our business, financial condition and results of operations have been materially adversely affected by the recent economic crisis in North America, including increased volatility in the availability and cost of credit, shrinking mortgage markets, falling equity values and consumer confidence and general instability of financial and other institutions. In an economic downturn like the recent one, which is characterized by higher unemployment, lower family income, lower valuation of retirement savings accounts, lower corporate earnings, lower business investment and lower consumer spending, the demand for term life insurance products, variable annuities, mutual funds and other financial products that we sell has been adversely affected. A continuation of the effects of the economic downturn could severely affect new sales and cause clients to liquidate mutual funds and other investments sold by our sales representatives. This could cause a decrease in the asset value of client accounts, reduce our trailing commission revenues and result in other-than-temporary-impairments in our invested asset portfolio. In addition, we may experience an elevated incidence of lapses or surrenders of insurance policies, and some of our policyholders may choose to defer paying insurance premiums or stop paying insurance premiums altogether. Downturns and volatility in equity markets may discourage purchases of variable annuities and mutual funds that we sell for third parties. Moreover, if the effects of the recent downturn continue, it will likely have an adverse effect on our business, including our ability to efficiently access the capital markets for capital management purposes. If credit markets remain tight for a prolonged period, our liquidity will be more limited than it otherwise would have been, and our business, financial condition and results of operations may be materially adversely affected.

 

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

 

In the United States, we are subject to the Right to Financial Privacy Act and its implementing regulation, Regulation S-P, the Fair Credit Reporting Act, the Gramm-Leach-Bliley Act, the Foreign Corrupt Practices Act,

 

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the Sarbanes-Oxley Act, the Telemarketing and Consumer Fraud and Abuse Prevention Act, the Telephone Consumer Protection Act, the FTC Act, the Unfair Trade Practices Act, the Electronic Funds Transfer Act, the Bank Holding Company Act Amendments of 1970 and anti-tying restrictions. We are also subject to anti-money laundering laws and regulations, including the Bank Secrecy Act, as amended by the Patriot Act, which requires us to develop and implement customer identification and risk-based anti-money laundering programs, report suspicious activity and maintain certain records. We are also required to follow certain economic and trade sanctions programs that are administered by the Office of Foreign Asset Control that prohibit or restrict transactions with suspected countries, their governments, and in certain circumstances, their nationals.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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We may need to incur debt or issue additional equity in order to meet our operating and regulatory capital requirements.

 

In light of the cash outflows associated with issuing new term life insurance policies and the Citi reinsurance transactions, there will be significant demands on our liquidity in the near to intermediate term. Therefore, in order to meet our operating and regulatory requirements, we may need to incur debt or issue additional equity in order to fund working capital and capital expenditures or to make acquisitions and other investments. If we raise funds through the issuance of debt securities or preferred equity securities, any such debt securities or preferred equity securities issued will have liquidation rights, preferences and privileges senior to those of the holders of our common stock. If we raise funds through the issuance of additional equity securities, the issuance will dilute your ownership interest in us. There is no assurance that debt or equity financing will be available to us on acceptable terms, if at all. If we are not able to obtain sufficient financing, we may be unable to maintain or grow our business.

 

Our non-compliance with the covenants of the Citi note could result in a reduction in our liquidity and lead to downgrades in our financial strength ratings.

 

Prior to the completion of this offering, we will issue to Citi the $         million Citi note. Our obligations under the Citi note are subject to our compliance with the covenants contained therein. Our failure to comply with these covenants would restrict our liquidity and, consequently, could have a material adverse effect on our business, financial condition and results of operations.

 

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

 

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

 

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

 

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

 

In addition, the loss of key RVPs for any reason could negatively affect our financial results and could impair our ability to attract new sales representatives. Please see the risk factor above entitled “— Our failure to continue to attract large numbers of new recruits and retain sales representatives or to maintain the licensing success of our sales representatives would materially adversely affect our business.”

 

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

 

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

 

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

 

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

 

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

 

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

 

Over the three year period ended December 31, 2008, we derived approximately 13% and 17% of our revenues and pre-tax earnings, respectively, from our Canadian businesses. In recent periods, there have been significant exchange rate fluctuations between the U.S. dollar and the Canadian dollar. A weaker Canadian dollar relative to the U.S. dollar would result in lower levels of reported revenues, net income, assets, liabilities and accumulated other comprehensive income in our U.S. dollar combined financials statements. We have not historically hedged against this exposure. Significant exchange rate fluctuations between the U.S. dollar and Canadian dollar could have a material adverse effect on our financial condition and results of operations.

 

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Risks Related to Our Relationship with Citi

 

Control of our company by Citi may result in conflicts of interest.

 

After the completion of this offering, Citi will beneficially own             million shares of our common stock, representing     % of the voting power of our outstanding common stock.

 

As long as Citi owns shares of our common stock representing more than 50% of the voting power of our outstanding voting securities, Citi will generally be able to determine the outcome of all corporate actions requiring stockholder approval, including the election of directors. As a result, Citi will be in a position to continue to control most of our significant corporate actions. Please see the section entitled “Principal and Selling Stockholder” included elsewhere in this prospectus.

 

Under the provisions of our certificate of incorporation, the prior consent of Citi will be required in connection with certain corporate actions by us until Citi ceases to beneficially own shares of our common stock entitled to 50% or more of the votes entitled to be cast by the holders of our then outstanding common stock and, with respect to certain other actions, until Citi ceases to beneficially own 20% or more of the votes entitled to be cast by the holders of our then outstanding common stock. Please see the section entitled “Description of Capital Stock — Certificate of Incorporation Provision Relating to Control by Citi.”

 

Because Citi’s interests may differ from ours, actions that Citi, as our controlling stockholder, may take with respect to us may not be favorable to us. As a result, conflicts of interest may arise between us and Citi in a number of areas relating to our past and ongoing relationships.

 

Citi and its directors and officers will have limited liability to us or you for breach of fiduciary duty.

 

Our certificate of incorporation will provide that, subject to any contractual provision to the contrary (including the intercompany agreement), Citi will have no obligation to refrain from:

 

   

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

 

   

doing business with any of our clients or consumers; or

 

   

employing or otherwise engaging any of our officers or employees.

 

Under our certificate of incorporation, neither Citi nor any officer or director of Citi, except as provided in our certificate of incorporation, will be liable to us or to our stockholders for breach of any fiduciary duty by reason of any of these activities. Please see the section entitled “Description of Capital Stock — Certificate of Incorporation Provision Relating to Corporate Opportunities and Interested Directors.”

 

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

 

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

 

Please see the section entitled “Description of Capital Stock — Certificate of Incorporation Provision Relating to Corporate Opportunities and Interested Directors.” Due to the significant resources of Citi, including financial resources and name recognition, Citi could have a significant competitive advantage over us should it decide to engage in the type of business we conduct, which may cause our business to be materially adversely affected.

 

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Some of our arrangements with Citi may not be sustained at the same levels as when we were wholly owned by Citi.

 

We have, and after this offering will continue to have, contractual arrangements which require Citi and its affiliates to provide certain services to us. Following this offering, many of these services will be governed by a transition services agreement between Citi and us. There is no assurance that upon termination or expiration of the transition services agreement, these services will be sustained at the same levels as they were when we were receiving such services from Citi or that we will obtain the same benefits. We may not be able to replace services and arrangements in a timely manner or on terms and conditions, including cost, as favorable as those we have previously received from Citi. The agreements with Citi and its affiliates were entered into in the context of a parent-wholly owned subsidiary relationship, and we may have to pay higher prices for similar services from Citi or unaffiliated third parties in the future. Please see the section entitled “Certain Relationships and Related Party Transactions — Relationship with Citi Following this Offering — Transition Services Agreement.”

 

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

 

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

 

   

our historical combined financial data do not reflect the Citi reinsurance transactions or the other concurrent transactions (please see the sections entitled “Certain Relationships and Related Party Transactions” and “Pro Forma Combined Financial Statements”);

 

   

our historical combined financial data reflect allocations of corporate expenses from Citi associated with information technology support, treasury, financial reporting, tax administration, human resources administration, legal, procurement and other services that may be lower than the comparable expenses we would have actually incurred as a stand-alone company;

 

   

our cost of debt and our capitalization will be different from that reflected in our combined financial statements;

 

   

significant increases may occur in our cost structure as a result of this offering, including costs related to public company reporting, investor relations and compliance with the Sarbanes Oxley Act of 2002; and

 

   

this offering may have a material effect on our client and other business relationships, including supplier relationships, and may result in the loss of preferred pricing available by virtue of our relationship with Citi.

 

Our financial condition and future results of operations, after giving effect to the Citi reinsurance transactions and the other concurrent transactions, will be materially different from amounts reflected in our combined financial statements that appear elsewhere in this prospectus. As a result of these transactions, it may be difficult for investors to compare our future results to historical results or to evaluate our relative performance or trends in our business. For an understanding of pro forma combined financial statements taking into account, among other things, the Citi reinsurance transactions and the other concurrent transactions, please see the risk factor above entitled “— The failure by Citi affiliates to perform their obligations to us under our co-insurance agreements could have a material adverse effect on our business, financial condition and results of operations” and the section entitled “Pro Forma Combined Financial Statements.”

 

We expect to incur significant charges in connection with this offering and incremental costs as a stand-alone public company.

 

We will need to replicate or replace certain facilities, systems and infrastructure to which we will no longer have the same access after this offering. In addition, we expect to incur significant non-cash compensation charges associated with the grant of equity awards to our sales representatives and employees. We will also need

 

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to make significant investments to operate without the same access to Citi’s existing operational and administrative infrastructure. These initiatives will be costly to implement. We estimate that we will incur $       in total pre-tax costs related to this offering. Due to the scope and complexity of the underlying projects relative to these efforts, the amount of total costs could be materially higher than our estimate, and the timing of the incurrence of these costs is subject to change.

 

Citi currently performs or supports many important corporate functions for our operations, including information technology, treasury, financial reporting, tax administration, human resources administration, government relations, procurement and other services. Our combined financial statements reflect charges for these services. Following this offering, many of these services will be governed by a transition services agreement with Citi. For more information regarding transition services, please see the section entitled “Certain Relationships and Related Party Transactions.” There is no assurance that upon termination or expiration of the transition services agreement, these services will be sustained at the same levels as when we were receiving such services from Citi or that we will obtain the same benefits. When we begin to operate these functions independently, if we do not have our own adequate systems and business functions in place, or are unable to obtain them from other providers, we may not be able to operate our business effectively or at comparable costs, and our profitability may decline. In addition, our business has benefited from Citi’s purchasing power when procuring goods and services, including office supplies and equipment, employee benefit platforms, travel services and computer software licenses. As a stand-alone company, we may be unable to obtain such goods and services at comparable prices or on terms as favorable as those obtained prior to this offering, which could decrease our overall profitability.

 

This offering and future sales of our common stock by Citi could adversely affect our business and profitability due to our loss of Citi’s strong brand, reputation and capital base.

 

As a subsidiary of Citi, we have marketed our products and services using the tag line, “Primerica, a Citi Company,” and we believe the association with Citi has provided us with preferred status among our clients, vendors and other persons due to Citi’s globally recognized brand, perceived high quality products and services, and strong capital base and financial strength. This offering could also adversely affect our ability to attract and retain clients, which could result in reduced sales of our products. The loss of the Citi brand may also prompt some third parties to reprice, modify or terminate their distribution or vendor relationships with us. We cannot predict with certainty the effect that this offering will have on our business, our clients, vendors or other persons.

 

If Citi sells a controlling interest in our company to a third party in a private transaction, you may not realize any change of control premium on the shares of our common stock purchased in this offering.

 

Following this offering, Citi will continue to own at least a majority equity interest in our company. Citi will have the ability, should it choose to do so, to sell some or all of its shares of our common stock in a privately negotiated transaction, which, if sufficient in size, could result in a change of control of our company. Citi’s ability to privately sell its shares of our common stock, with no requirement for a concurrent offer to be made for the shares of our common stock that will be publicly traded hereafter, could prevent you from realizing any change of control premium on your shares of our common stock that may otherwise accrue to Citi upon its private sale of our common stock. Additionally, if Citi privately sells its majority equity interest in our company, we will be subject to the control of a presently unknown third party. Citi has indicated that, except as otherwise described in this prospectus, it does not currently have any agreement or understanding with respect to the disposition of its remaining ownership stake in us.

 

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

 

Citi’s relationship and good standing with its regulators are important to the conduct of our business. Citi is a bank holding company and a “financial holding company” regulated by the Board of Governors of the Federal Reserve System, or FRB, under the Bank Holding Company Act of 1956, or the BHC Act. The BHC Act imposes

 

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regulations and requirements on Citi and on any company that the FRB deems to be controlled by Citi. The regulation of Citi and its controlled companies under applicable banking laws is intended primarily for the protection of Citi’s banking subsidiaries, their depositors, the deposit insurance fund of the Federal Deposit Insurance Corporation, and the banking system as a whole, rather than for the protection of stockholders or creditors of Citi or us. Because we are controlled by Citi, we are currently subject to regulation, supervision, examination and potential enforcement action by the FRB. Following this offering, we will continue to be controlled by Citi for bank regulatory purposes and, therefore, we will continue to be subject to regulation by the FRB and to most banking laws, regulations and orders that apply to Citi.

 

We will remain subject to this regulatory regime until Citi is no longer deemed to control us for bank regulatory purposes, which may not occur until Citi has significantly reduced its ownership interest in us. The ownership level at which the FRB would consider us no longer controlled by Citi will depend on the circumstances at that time (such as the extent of our relationships with Citi) and could be less than 5%. For so long as we are subject to the BHC Act, we generally may conduct only activities that are authorized for a “financial holding company” under the BHC Act, which in some cases are more restrictive than those available to us under applicable insurance regulatory requirements. There are limits on the ability of bank subsidiaries of Citi to extend credit to, or conduct other transactions with, us. Citi and its subsidiaries are also subject to examination by various banking regulators, which results in examination reports and ratings that may adversely impact the conduct and growth of our businesses. The FRB has broad enforcement authority over us, including the power to prohibit us from conducting any activity that, in the FRB’s opinion, is unauthorized or constitutes an unsafe or unsound practice in conducting our business. The FRB may also impose substantial fines and other penalties for violations of applicable banking laws, regulations and orders. The failure of Citi to maintain its status as a financial holding company could result in substantial limitations on certain of our activities and our growth. In addition, pursuant to the intercompany agreement we will enter into with Citi, we will agree not to take any action or fail to take any action that would result in Citi being in non-compliance with the BHC Act or any other applicable bank regulatory law, rule, regulation, guidance, order or directive.

 

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

 

Our employees may be subject to compensation restrictions under the American Recovery and Reinvestment Act.

 

For so long as Citi continues to own at least a majority equity interest in us following this offering, our employees will continue to be considered employees of Citi for purposes of determining whether their compensation is subject to restrictions under the American Recovery and Reinvestment Act of 2009. If the compensation that can be paid to or accrued with respect to certain members of our senior management team were to be so restricted, it could materially adversely affect our ability to retain those members of our senior management or attract suitable replacements.

 

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Risks Related to this Offering and Ownership of Our Common Stock

 

An active trading market for our common stock may not develop, and you may not be able to sell your common stock at or above the initial public offering price.

 

Prior to this offering, there has been no public market for our common stock. An active trading market for shares of our common stock may never develop or be sustained following this offering. If an active trading market does not develop, you may have difficulty selling your shares of common stock at an attractive price, or at all. The price for our common stock in this offering will be determined by negotiations among Citi and representatives of the underwriters, and it may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell your common stock at or above the initial public offering price or at any other price or at the time that you would like to sell. An inactive market may also impair our ability to raise capital by selling our common stock, and it may impair our ability to motivate our employees and sales representatives through equity incentive awards and our ability to acquire other companies, products or technologies by using our common stock as consideration.

 

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

 

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

reputational issues;

 

   

changes in general economic and market conditions in North America;

 

   

changes in industry conditions or perceptions; and

 

   

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

 

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

 

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

 

Upon completion of this offering, Citi will own              shares of our common stock. Citi intends to divest its remaining interest in us as soon as is practicable, subject to market and other conditions. Future sales of these shares in the public market will be subject to the volume and other restrictions of Rule 144 under the Securities Act for so long as Citi is deemed to be our affiliate, unless the shares to be sold are registered with the SEC. We

 

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will grant Citi demand registration rights, beginning 180 days after the consummation of this offering, with respect to registration of such shares of common stock with the SEC. Please see the section entitled “Certain Relationships and Related Party Transactions — Relationship with Citi Following this Offering — Intercompany Agreement — Registration Rights.” We are unable to predict with certainty whether or when Citi will sell a substantial number of shares of our common stock. Sales by Citi of a substantial number of shares after this offering, or a perception that such sales could occur, could significantly reduce the market price of our common stock. Upon completion of this offering, except as otherwise described herein, all shares that are being offered hereby will be freely tradable without restriction, assuming they are not held by our affiliates.

 

We, our officers, directors and the selling stockholder have agreed with the underwriters that, without the prior written consent of Citigroup Global Markets Inc., we and they will not, subject to certain exceptions and extensions, during the period ending 180 days after the date of this prospectus, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of directly or indirectly, or enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of shares of our common stock or any securities convertible into or exercisable or exchangeable for shares of our common stock. Citigroup Global Markets Inc. may, in its sole discretion and at any time without notice, release all or any portion of the shares of our common stock subject to the lock-up. Please see the section entitled “Shares Eligible for Future Sale — Lock-Up Agreements.”

 

In addition, immediately following this offering, we intend to file a registration statement registering under the Securities Act the shares of common stock reserved for issuance in respect of certain incentive awards to our officers, employees and sales representatives. If any of these holders causes a large number of securities to be sold in the public market, the sales could reduce the trading price of our common stock. These sales also could impede our ability to raise future capital. Please see the section entitled “Shares Eligible for Future Sale” for a more detailed description of the shares of our common stock that will be available for future sales upon completion of this offering.

 

You will incur immediate dilution as a result of this offering.

 

If you purchase common stock in this offering, you will pay more for your shares than the pro forma net tangible book value of your shares. As a result, you will incur immediate dilution of $             per share, representing the difference between the assumed initial public offering price of $             per share and our estimated net tangible book value as of                     , 2010. Accordingly, should we be liquidated at our book value, you would not receive the full amount of your investment. Please see the section entitled “Dilution.”

 

As an independent public company, we are expected to expend additional time and resources to comply with rules and regulations that do not currently apply to us, and failure to comply with such rules may lead investors to lose confidence in our financial data.

 

As an independent public company, the various rules and regulations of the SEC, as well as the rules of the                     , will require us to implement additional corporate governance practices and adhere to a variety of reporting requirements. Compliance with these public company obligations will increase our legal and financial compliance costs and could place additional demands on our finance and accounting staff and on our financial, accounting and information systems.

 

In particular, as a public company, our management will be required to conduct an annual evaluation of our internal controls over financial reporting and include a report of management on our internal controls in our annual reports on Form 10-K. In addition, we will be required to have our independent registered public accounting firm attest to the effectiveness of our internal controls over financial reporting pursuant to Auditing Standard No. 5. Under current rules, we will be subject to these requirements beginning with our annual report on

 

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Form 10-K for the fiscal year ending December 31, 2010. If we are unable to conclude that we have effective internal controls over financial reporting, or if our registered public accounting firm is unable to provide us with an attestation and an unqualified report as to the effectiveness of our internal controls over financial reporting, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our common stock.

 

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

 

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

 

   

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

 

   

after Citi ceases to own a majority of our voting stock, elimination of the right of our stockholders to act by written consent;

 

   

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

 

   

the right of our board of directors to issue preferred stock without stockholder approval, or adopt a “poison pill”; and

 

   

after Citi ceases to own a majority of our voting stock, limitations on the right of stockholders to remove directors.

 

Delaware law also imposes some restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock. For more information, please read the section entitled “Description of Capital Stock — Anti-Takeover Effects of Provisions of Our Certificate of Incorporation and Bylaws, and of Delaware Law.” We believe that these provisions protect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers to negotiate with our board of directors and by providing our board of directors with more time to assess any acquisition proposal. These provisions are not intended to make us immune from takeovers. However, these provisions apply even if the offer may be considered beneficial by some stockholders and could delay or prevent an acquisition that our board of directors determines is not in our best interests and that of our stockholders.

 

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

 

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We currently intend to pay a modest dividend on our common stock; consequently, your ability to achieve a return on your investment will primarily depend on appreciation in the price of our common stock.

 

We currently anticipate paying a quarterly cash dividend on our common stock of $             per share. Returns on your investment will primarily depend on the appreciation, if any, in the price of our common stock. We anticipate that we will retain most of our future earnings, if any, for use in the development and expansion of our business and for general corporate purposes. The determination of whether to pay such a dividend or to increase such dividend on our common stock in the future will be at the discretion of our board of directors and will be dependent on a variety of factors, including our financial condition, earnings, legal requirements and other factors that the board of directors deems relevant.

 

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

 

Investors are cautioned that certain statements contained in this document as well as some statements in periodic press releases and some oral statements made by our officials and their respective subsidiaries during our presentations are “forward-looking” statements. Forward-looking statements include, without limitation, any statement that may project, indicate or imply future results, events, performance or achievements, and may contain the words “expect,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “will be,” “will continue,” “will likely result,” “may increase,” “may fluctuate” and similar expressions, or future conditional verbs such as “will,” “should,” “would,” and “could.” In addition, any statement concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects, and possible actions taken by us or our subsidiaries, which may be provided by our management teams, are also forward-looking statements. These forward-looking statements involve external risks and uncertainties, including, but not limited to, those described under the section entitled “Risk Factors.”

 

Forward-looking statements are based on current expectations and projections about future events and are inherently subject to a variety of risks and uncertainties, many of which are beyond the control of our management team, which could cause our actual results to differ materially from those anticipated or projected or cause a significant reduction in the market price of our common stock. These risks and uncertainties include, among others:

 

   

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

 

   

our violation of, non-compliance with or subjection to certain laws and regulations, including with respect to our distribution practices;

 

   

changes to the independent contractor status of our sales representatives;

 

   

our sales representatives’ violation of, non-compliance with or subjection to certain laws and regulations;

 

   

our failure to protect the confidentiality of client information;

 

   

differences between our actual experience and our expectations regarding mortality, deferred acquisition costs or persistency as reflected in the pricing for our insurance policies;

 

   

the occurrence of a catastrophic event;

 

   

changes in, or non-compliance with, federal and state legislation and regulation, including with respect to our insurance, securities and loan businesses;

 

   

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

 

   

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

 

   

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

 

   

incorrectly valuing our investments;

 

   

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

 

   

the failure by Citi to perform its obligations under our co-insurance agreements;

 

   

the continuation of the effects of the recent economic crisis and stringent lending credit policies;

 

   

the loss of our Citi-affiliated mortgage lenders;

 

   

new loan licensing requirements for our sales representatives;

 

   

a discontinuation of custodial or recordkeeping services;

 

   

inadequate policies and procedures regarding suitability review of client transactions;

 

   

failure or challenge of our sales force’s support tools;

 

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

 

   

our ability to generate a sufficient amount of capital;

 

   

fluctuations in currency exchange rates;

 

   

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

 

   

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

 

   

the competitive environment;

 

   

the loss of key personnel;

 

   

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

 

   

conflicts of interests due to control of our company by Citi and the holding of Citi stock by some of our directors and officers and their limited liability for breach of fiduciary duty;

 

   

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

 

   

arrangements with Citi that may not be sustained at the same level as when we were controlled by Citi;

 

   

historical combined and pro forma financial data may not be reliable indicator of future results;

 

   

charges in connection with this offering and incremental costs as a stand-alone public company, including with respect to internal controls over financial reporting;

 

   

the sale by Citi of a controlling interest in our company to a third party in a private transaction;

 

   

limitations on our business activities due to banking regulations for so long as we are controlled by Citi; and

 

   

substantial fluctuation in the price of our common stock, the absence of an active trading market for our common stock or the future sale of our common stock or the perception that such a sale could occur.

 

Developments in any of these areas, which are more fully described elsewhere in this prospectus, could cause our results to differ materially from results that have been or may be anticipated or projected which could cause actual results to differ materially from those anticipated or projected or cause a significant reduction in the market price of our common stock and impair your ability to sell shares of our common stock at an attractive price.

 

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USE OF PROCEEDS

 

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

 

DIVIDEND POLICY

 

We are a holding company, and we have no operations. Our sole asset is the capital stock of our subsidiaries. The states in which our insurance subsidiaries are domiciled impose certain restrictions on our insurance subsidiaries’ ability to pay dividends to us. These restrictions are based in part on the prior year’s statutory income and surplus. In general, dividends up to specified levels are considered ordinary and may be paid without prior approval. Dividends in larger amounts are considered extraordinary and are subject to approval by the insurance commissioner of the state of domicile. No assurance is given that more stringent restrictions will not be adopted from time to time by states in which our insurance subsidiaries are domiciled, and such restrictions could have the effect, under certain circumstances, of significantly reducing dividends or other amounts payable to us by our subsidiaries without affirmative prior approval by state regulatory authorities. In addition, in the future, we may become subject to debt instruments or other agreements that limit our ability to pay dividends. Please see the section entitled “Business — Insurance Regulation — Insurance Holding Company Regulation; Limitations on Dividends.”

 

During the six months ended June 30, 2009 and the years ended December 31, 2008 and 2007, we paid $33.2 million (none of which were deemed extraordinary), $436.2 million (none of which were deemed extraordinary) and $336.1 million (none of which were deemed extraordinary) of dividends, respectively, to Citi.

 

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

 

Special Dividend to Citi.    Upon completion of the Citi reinsurance transactions and prior to the completion of this offering, certain of our insurance subsidiaries will pay a special dividend to Citi in the aggregate amount of $             million of cash and securities. Please see the section entitled “Certain Relationships and Related Party Transactions — Relationship with Citi Following this Offering — Citi Reinsurance Transactions.”

 

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DILUTION

 

Our net tangible book value as of June 30, 2009 was approximately $            , or $             per share, assuming              shares of our common stock were issued and outstanding at such date. Net tangible book value per share represents:

 

   

total assets less intangible assets;

 

   

reduced by our total liabilities; and

 

   

divided by the number of shares of our common stock outstanding.

 

Dilution in net tangible book value per share represents the difference between the amount per share paid by purchasers of our common stock in this offering and the net tangible book value per share immediately following this offering.

 

After giving effect to the Citi reinsurance transactions and the other concurrent transactions and after deducting estimated offering expenses payable by us, our pro forma net tangible book value as of June 30, 2009 would have been approximately $            , or $            per share. This represents an immediate dilution of $             per share to investors purchasing shares of our common stock in this offering. The following table illustrates this dilution per share:

 

Assumed initial public offering price per share

   $  

Pro forma net tangible book value per share

   $             

Dilution per share to new investors

   $  

 

Immediately prior to this offering, we will issue              shares of our common stock to our directors, officers and certain employees and              shares of our common stock to our sales force leaders, representing an aggregate of     % of our outstanding common stock. In addition, certain unvested equity awards held by our employees and sales representatives under Citi’s equity compensation plan will be converted into Primerica equity awards. Because these shares of common stock will be issued or converted in connection with this offering and are assumed to be issued and outstanding for purposes of this prospectus, there will not be any dilution to investors in this offering relating to such stock issuances. However, we also intend to allocate up to            shares of our common stock, or     % of our common stock outstanding immediately following the completion of this offering, for future grants to our employees. To the extent that we issue any such shares of our common stock or issue options to purchase our common stock that are subsequently exercised, there will be further dilution to investors in this offering. Please see the section entitled “Management — Equity Incentive Plan.”

 

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CAPITALIZATION

 

Set forth below are our cash and cash equivalents and our capitalization as of June 30, 2009:

 

   

on a historical basis; and

 

   

on a pro forma basis to give effect to the Citi reinsurance transactions and the other concurrent transactions as if each such transaction had occurred on June 30, 2009.

 

The information presented below should be read in conjunction with the sections entitled “Selected Historical Combined Financial Data,” “Pro Forma Combined Financial Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical combined financial statements and related notes included elsewhere in this prospectus.

 

     As of June 30, 2009

     Actual

    Pro Forma

     (in millions)

Cash and cash equivalents

   $ 448.4      $             
    


 

% note payable to Citi

   $ —        $  

Stockholder’s equity:

              

Common stock, authorized —              shares and              shares, issued and outstanding —              shares and              shares, on an actual and pro forma basis; par value $0.01 per share(1)

              

Preferred stock, authorized —              shares and             , issued and outstanding — no shares on an actual and pro forma basis; par value $0.01 per share

     —           

Additional paid-in capital

     1,095.8         

Retained earnings

     3,565.2         

Accumulated other comprehensive income (loss)

     (75.2      
    


 

Total stockholder’s equity

   $ 4,585.7      $  
    


 

Total capitalization

   $ 4,585.7      $  
    


 


(1)   At June 30, 2009,              shares of issued and outstanding common stock on a pro forma basis were subject to vesting and forfeiture provisions. Please see the section entitled “Management—Omnibus Incentive Plan.”

 

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SELECTED HISTORICAL COMBINED FINANCIAL DATA

 

The selected historical combined income statement data for the years ended December 31, 2008, 2007, 2006 and 2005 and the selected historical balance sheet data as of December 31, 2008, 2007, 2006 and 2005 presented below have been derived from our audited combined financial statements. The selected historical combined income statement data for the six months ended June 30, 2009 and 2008 and the selected historical combined balance sheet data as of June 30, 2009 have been derived from our unaudited condensed combined financial statements included in this prospectus. In the opinion of management, the unaudited financial statements provided herein have been prepared on substantially the same basis as the audited combined financial statements and reflect all normal and recurring adjustments necessary for a fair statement of the information for the periods presented.

 

All financial data presented in this prospectus have been prepared in accordance with GAAP. The selected historical combined financial data may not be indicative of our revenues, expenses, assets and liabilities that would have existed or resulted if we had operated independently of Citi.

 

The Citi reinsurance transactions and the other concurrent transactions will result in financial results that are materially different from those reflected in the historical combined financial data that appear in this prospectus. For an understanding of pro forma financial data taking into account, among other things, the Citi reinsurance transactions and the other concurrent transactions, please see the section entitled “Pro Forma Combined Financial Statements.”

 

Due to a change in our DAC and reserve estimation approach implemented as of December 31, 2008, our results of operations for the year ended December 31, 2008 are not directly comparable to our results for other fiscal years and our results of operations for the six months ended June 30, 2009 are not directly comparable to our results of operations for the six months ended June 30, 2008. For information about this change, please see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies — Change in DAC and Reserve Estimation Approach.”

 

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You should read the following selected historical combined financial data in conjunction with the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Pro Forma Combined Financial Statements” and our combined financial statements and related notes thereto included elsewhere in this prospectus. The selected historical combined financial data are not necessarily indicative of the financial position or results of operations as of any future date or for any future period. Our financial condition and financial results as of dates and for periods following the Citi reinsurance transactions and the other concurrent transactions will be materially different from the amounts reflected in the selected historical combined financial data.

 

    Six Months Ended
June 30,

    Year Ended December 31,

 
    2009

    2008

    2008(1)

    2007

    2006

    2005

 
    (in thousands, except per share amounts)  

Income statement data

                                               

Revenues

                                               

Direct premiums

  $ 1,045,651      $ 1,038,601      $ 2,092,792      $ 2,003,595      $ 1,898,419      $ 1,808,992   

Ceded premiums

    (296,011     (282,396     (629,074     (535,833     (496,061     (448,815
   


 


 


 


 


 


Net premiums

    749,640        756,205        1,463,718        1,467,762        1,402,358        1,360,177   

Net investment income

    172,140        158,352        314,035        328,609        318,853        319,360   

Commissions and fees

    162,406        261,887        466,484        545,584        486,145        489,763   

Other, net

    26,498        26,924        56,187        41,856        37,962        44,916   

Realized investment (losses) gains

    (20,261     (12,879     (103,480     6,527        8,746        32,821   
   


 


 


 


 


 


Total revenues

    1,090,423        1,190,489        2,196,944        2,390,338        2,254,064        2,247,037   

Benefits and Expenses

                                               

Benefits and claims

    297,194        306,695        938,370        557,422        544,556        567,089   

Amortization of deferred policy acquisition costs

    183,598        159,587        144,490        321,060        284,787        269,775   

Insurance commissions

    18,466        12,249        23,932        28,003        26,171        19,841   

Insurance expenses

    76,291        78,867        141,331        137,526        126,843        128,391   

Sales commissions

    80,578        142,798        248,020        296,521        265,662        249,203   

Goodwill impairment(2)

    —          —          194,992        —          —          —     

Other operating expenses

    61,187        82,626        152,773        136,634        127,849        126,627   
   


 


 


 


 


 


Total benefits and expenses

    717,314        782,822        1,843,908        1,477,166        1,375,868        1,360,926   
   


 


 


 


 


 


Income before income taxes

    373,109        407,667        353,036        913,172        878,196        886,111   

Income taxes

    128,432        138,611        185,354        319,538        276,244        292,695   
   


 


 


 


 


 


Net income

  $ 244,677      $ 269,056      $ 167,682      $ 593,634      $ 601,952      $ 593,416   
   


 


 


 


 


 


Share data

                                               

Earnings per share

                                               

Basic

  $        $        $                             

Diluted

                                               

Weighted average shares outstanding

                                               

Basic

                                               

Diluted

                                               

Cash dividends per share

                                               

 

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Table of Contents

 

    As of June 30,
2009

  As of December 31,

      2008

  2007

  2006

  2005

    (in thousands)

Balance sheet data

                             

Investments

  $ 5,911,604   $ 5,355,458   $ 5,494,495   $ 5,583,813   $ 5,571,928

Cash and cash equivalents

    448,415     302,354     625,350     239,103     70,644

Deferred policy acquisition costs, net

    2,757,143     2,727,422     2,510,045     2,408,444     2,298,131

Total assets

    12,128,134     11,161,133     12,176,049     11,096,167     10,378,930

Future policy benefits

    4,100,628     4,023,009     3,650,192     3,616,930     3,512,464

Total liabilities

    7,542,459     7,049,147     7,396,084     6,612,702     6,078,305

Stockholder’s equity

    4,585,675     4,111,986     4,779,965     4,483,465     4,300,625

(1)   Includes a $191.7 million pre-tax charge due to a change in our deferred policy acquisition costs and reserve estimation approach implemented as of December 31, 2008. For additional information, please see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies — Change in DAC and Reserve Estimation Approach.”
(2)   Goodwill impairment charge resulting from impairment testing as of December 31, 2008. For additional information, please see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies — Goodwill.”

 

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PRO FORMA COMBINED FINANCIAL STATEMENTS

 

The following pro forma combined financial statements are intended to provide you with information about how the transactions described therein might have affected our combined financial statements if they had been consummated at an earlier time. The pro forma combined financial statements do not necessarily reflect our financial position or results of operations that would actually have resulted had the transactions described therein occurred as of the dates indicated, nor should they be taken as necessarily indicative of our future financial position or results of operations.

 

Concurrent with this offering, we are implementing the following transactions:

 

   

SPFC will be formed as a wholly owned subsidiary of Primerica Life and capitalized with $             million;

 

   

we will enter into a series of co-insurance reinsurance agreements with SPFC and other Citi subsidiaries;

 

   

we will distribute the common stock of SPFC and certain other assets to Citi;

 

   

Citi will transfer all of the issued and outstanding stock of the companies that comprise our business to Primerica, Inc. in exchange for shares of common stock of Primerica, Inc. and a $             million note due on                       bearing interest at an annual rate of             %, which will be accounted for as a transfer of assets among entities under common control; and

 

   

we will exchange certain of our invested assets for certain assets owned by Citi.

 

Set forth below are our pro forma combined financial statements as of and for the six months ended June 30, 2009 and our pro forma combined statement of operations for the year ended December 31, 2008:

 

   

on a historical basis; and

 

   

on a pro forma basis to give effect to the Citi reinsurance transactions and the other concurrent transactions described above.

 

Our pro forma combined statements of operations for the six months ended June 30, 2009 and for the year ended December 31, 2008 are presented as if the transactions described above had occurred on January 1, 2008. The June 30, 2009 pro forma combined balance sheet is presented as if these transactions occurred on June 30, 2009.

 

The following items are not reflected in the pro forma combined financial statements:

 

   

incremental costs or charges associated with becoming a publicly traded company operating separately from Citi, which are estimated to be approximately $             million annually;

 

   

elections under Section 338(h)(10) of the Internal Revenue Code with respect to Citi’s transfer of all of the issued and outstanding stock of our domestic corporate subsidiaries to Primerica, Inc., which would result in a $             million change in our deferred tax liability assuming this offering is completed at the midpoint of the estimated price range set forth on the cover page of this prospectus; and

 

   

estimated non-cash compensation charges of approximately $             million as a result of the grant and conversion of equity awards to certain of our employees and our sales force leaders in connection with this offering.

 

You should read the following pro forma combined financial statements in conjunction with the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and “Selected Historical Combined Financial Data” and our combined financial statements and related notes thereto included elsewhere in this prospectus.

 

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Pro Forma Balance Sheet

 

As of June 30, 2009

 

     Actual

    Adjustments
for the
Citi Reinsurance
Transactions

(1)

   Adjustments
for the Other

Concurrent
Transactions


   Pro Forma

     (in thousands)

Assets

                            

Investments

   $ 5,911,604      $         (A)    $     (N)(R)    $         

Cash and cash equivalents

     448,415                       (O)       

Accrued investment income

     67,987                       

Premiums and other receivables

     186,823                       

Due from reinsurers

     837,726                (B)              

Due from affiliates

     2,133                       

Deferred policy acquisition costs, net (DAC)

     2,757,143                (C)              

Intangible assets

     80,665                       

Income tax recoverable

     —                         

Other assets

     68,710                (D)              

Separate account assets

     1,766,928                       
    


 

  

  

Total assets

   $ 12,128,134      $      $      $  
    


 

  

  

Liabilities

                            

Future policy benefits

   $ 4,100,628      $      $      $  

Unearned premiums

     5,481                       

Policy claims and other benefits payable

     221,371                       

Other policyholders’ funds

     348,139                       

Current income tax payable

     28,744                       

Deferred income taxes

     712,241                (E)              (R)       

Due to affiliates

     44,189                       

Other liabilities

     314,738                       

Separate account liabilities

     1,766,928                       

        % Note payable to Citi

     —                         (P)       
    


 

  

  

Total liabilities

   $ 7,542,459      $      $      $  
    


 

  

  

Stockholder’s equity

                            

Common stock

     —                         (S)       

Paid-in capital

     1,095,755                   (R)(S)       

Retained earnings

     3,565,166                   (O)(P)       

Accumulated other comprehensive income, net of income taxes

     (75,246             (F)              (R)       
    


 

  

  

Total stockholder’s equity

     4,585,675                       
    


 

  

  

Total liabilities and stockholder’s equity

   $ 12,128,134      $      $      $  
    


 

  

  

 

See accompanying notes to the pro forma combined financial statements.

 

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Table of Contents

 

Pro Forma Statement of Operations

 

Six Months Ended June 30, 2009

 

     Actual

    Adjustments
for the
Citi Reinsurance
Transactions

(1)

   Adjustment
for the Other
Concurrent
Transactions


   Pro Forma

     (unaudited)                
     (in thousands)

Revenues

                            

Direct premiums

   $ 1,045,651      $      $      $         

Ceded premiums

     (296,011             (G)              
    


 

  

  

Net premiums

     749,640                       

Net investment income

     172,140                (H)              

Commissions and fees

     162,406                       

Other, net

     26,498                       

Realized investment gains (losses)

     (20,261                    
    


 

  

  

Total revenues

   $ 1,090,423      $      $      $  
    


 

  

  

Benefits and Expenses

                            

Benefits and claims

     297,194                (I)              

Amortization of DAC

     183,598                (J)              

Insurance commissions

     18,466                (K)              

Insurance expenses

     76,291                (K)              

Sales commissions

     80,578                       

Interest expense

     —                  (L)              (Q)       

Other operating expenses

     61,187                       
    


 

  

  

Total benefits and expenses

     717,314                       
    


 

  

  

Income (loss) before income taxes

     373,109                       

Income taxes

     128,432                (M)              (Q)       
    


 

  

  

Net income (loss)

   $ 244,677      $      $      $  
    


 

  

  

 

 

See accompanying notes to the pro forma combined financial statements.

 

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Pro Forma Statement of Operations

 

Year Ended December 31, 2008

 

     Actual

    Adjustments
for the
Citi Reinsurance
Transactions

(1)

   Adjustment
for the Other
Concurrent
Transactions


   Pro Forma

     (in thousands)

Revenues

                            

Direct premiums

   $ 2,092,792      $      $      $         

Ceded premiums

     (629,074             (G)              
    


 

  

  

Net premiums

     1,463,718                       

Net investment income

     314,035                (H)              

Commissions and fees

     466,484                       

Other, net

     56,187                       

Realized investment gains (losses)

     (103,480                    
    


 

  

  

Total revenues

   $ 2,196,944      $      $      $  

Benefits and Expenses

                            

Benefits and claims

     938,370                (I)              

Amortization of DAC

     144,490                (J)              

Insurance commissions

     23,932                (K)              

Insurance expenses

     141,331                (K)              

Sales commissions

     248,020                       

Goodwill impairment

     194,992                       

Interest expense

     —                  (L)              (Q)       

Other operating expenses

     152,773                       
    


 

  

  

Total benefits and expenses

     1,843,908                       
    


 

  

  

Income (loss) before income taxes

     353,036                       

Income taxes

     185,354                (M)              (Q)       
    


 

  

  

Net income (loss)

   $ 167,682                    $  
    


 

  

  

 

 

See accompanying notes to the pro forma combined financial statements.

 

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Adjustments for the Citi reinsurance transactions.

 

(1)   We account for reinsurance under the provision of SFAS No. 113, “Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts” (“SFAS No. 113”). We believe that three of the Citi co-insurance agreements, which we refer to as the risk transfer agreements, will satisfy the risk transfer rules of SFAS 113. Under the risk transfer agreements, we will cede between 80% and 90% of our term life future policy benefit reserves and transfer a corresponding amount of invested assets (at carrying value) to the Citi reinsurers. Under GAAP, we are not permitted to reduce the future policy benefit reserves on our books, but rather we will record an asset for the same amount of risk transferred under the line item caption “due from reinsurers.” We will also reduce deferred policy acquisition costs recorded on our books by between 80% and 90%, which will reduce future amortization expenses. In addition, we will transfer between 80% and 90% of all future premiums and benefits and claims associated with these policies to the Citi reinsurers. One co-insurance agreement, which we refer to as the deposit agreement, relates to a 10% transaction that includes an experience refund provision, will not satisfy risk transfer rules under SFAS 113. As such, this contract will be accounted for under GAAP using the deposit method of accounting. Under deposit accounting, the amount we pay to the reinsurer will be treated as a deposit and will be reported on the balance sheet as an asset under the line item caption “other assets.” We will receive ongoing ceding allowances to cover policy and claims administration under each of these reinsurance contracts.

 

  (A)   Reflects the fair value of invested assets transferred to the Citi reinsurers under the Citi reinsurance agreements. (See notes F and H)

 

  (B)   Reflects future policy benefit reserves ceded to the Citi reinsurers under the risk transfer agreements. Under GAAP, we are required to report such amounts as due from reinsurers rather than offsetting future policy benefits.

 

  (C)   Reflects a reduction in our term life DAC balance equal to the Citi reinsurers’ percentage of DAC on policies in force as of the balance sheet date that are subject to the risk transfer agreements.

 

  (D)   Reflects the deposit we paid to the Citi reinsurer under the deposit agreement. (See note M)

 

  (E)   Reflects the reduction of the deferred tax liability, which is primarily associated with the reduction in our term life DAC balance resulting from the risk transfer agreements, calculated at an assumed 35% effective tax rate.

 

  (F)   Reflects an adjustment to unrealized gains (losses) associated with the transfer of invested assets to the Citi reinsurers. (See notes A and H)

 

  (G)   Reflects premiums ceded to the Citi reinsurers under the risk transfer agreements. This amount represents the Citi reinsurers’ percentage of net premiums earned on policies in force as of the opening balance sheet date.

 

  (H)   Reflects net investment income on invested assets transferred to the Citi reinsurers. (See notes F and A)

 

  (I)   Reflects benefits and claims ceded to the Citi reinsurers. This amount reflects the Citi reinsurers’ percentage of benefits and claims incurred on policies in force as of the opening balance sheet date that are subject to the risk transfer agreements.

 

  (J)   Reflects the Citi reinsurers’ percentage of DAC amortization on policies in force as of the opening balance sheet date that are subject to the risk transfer agreements.

 

  (K)   Reflects an expense allowance from the Citi reinsurers to us.

 

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

 

  (M)   Income tax benefit associated with the net recurring cost of the Citi reinsurance agreements.

 

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Adjustments for the other concurrent transactions.

 

  (N)   Reflects the initial capitalization of SPFC.

 

  (O)   Reflects cash dividends paid to Citi.

 

  (P)   Reflects issuance of a $             million         % note payable to Citi.

 

  (Q)   Reflects interest incurred on the $             million note to Citi, as well as the associated reduction in income tax expense.

 

  (R)   Reflects an adjustment to investments and unrealized gains (losses) associated with the exchange of invested assets with Citi, as well as associated deferred taxes.

 

  (S)   Reflects common stock to be issued to Citi in respect of the transfer of the subsidiaries that comprise our business to us.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited and unaudited combined financial statements and related notes as well as our unaudited pro forma combined financial statements included elsewhere in this prospectus. Except to the limited extent indicated below, the following discussion and analysis of our financial condition and results of operations covers periods prior to the consummation of the Citi reinsurance transactions and the other concurrent transactions described elsewhere in this prospectus and does not reflect the effect those transactions will have on our financial condition and results of operations in future periods. The Citi reinsurance transactions and the other transactions we are effecting concurrently with this offering will result in financial results which are materially different from those reflected in the combined financial statements that appear in this prospectus. For an understanding of pro forma financial information taking into account the Citi reinsurance transactions and the other concurrent transactions, please see the section entitled “Pro Forma Combined Financial Statements.” This discussion contains forward-looking statements that constitute our plans, estimates and beliefs. These forward-looking statements involve numerous risks and uncertainties, including those discussed below and elsewhere in this prospectus in the section entitled “Risk Factors.” Actual results may differ materially from those contained in any forward-looking statements.

 

The Citi Reinsurance Transactions and the Other Concurrent Transactions

 

Prior to completion of this offering, we will enter into co-insurance agreements with three affiliates of Citi, which we refer to in this prospectus as the “Citi reinsurance transactions.” Under these agreements, we will cede between 80% and 90% of the risks and rewards of our term life insurance policies that will be in force at December 31, 2009. Citi will assume future policy benefit reserves of approximately $     billion, and we will transfer an equal amount of invested assets to Citi prior to the completion of this offering. The Citi reinsurance transactions will reduce the amount of our capital and will result in a substantial reduction in our insurance exposure. We will retain our operating platform and infrastructure and continue to administer all of the policies subject to the Citi reinsurance transactions. We will also receive an initial ceding commission from the Citi reinsurers.

 

Currently, as a mature company, our aggregate recurring net premium revenues are reduced every reporting period as policies reach the end of their terms or lapse and we must sell a large number of new policies just to replace these lost premium revenues. However, because our base of net premium revenues associated with our in force book following the Citi reinsurance transactions and this offering will be much smaller than it is today, our sale of new policies (which will not be ceded to Citi) at or even below historical levels would be expected to result in significant net increases in our net premium revenues, particularly in the near term. The rate of revenue and earnings growth in periods following the Citi reinsurance transactions would be expected to decelerate with each successive financial period as our base of net premium revenues grows and the incremental sales that are not subject to the Citi reinsurance transactions have a decreased marginal effect on the size of the then-existing in force book.

 

Prior to this offering, the following transactions will be effected:

 

   

we will directly or indirectly transfer $             billion of assets and life insurance reserves to Citi;

 

   

we will pay a dividend to Citi of $             million in cash and securities;

 

   

we will issue to Citi, as consideration for the businesses to be transferred to us prior to the completion of this offering, shares of our common stock and a $             million note due on              bearing interest at an annual rate of     %, which we refer to in this prospectus as the “Citi note”;

 

   

we will exchange certain of our invested assets for certain invested assets held by Citi;

 

   

we will issue equity awards for              shares of our common stock to our directors, officers and certain of our employees, and sales force leaders;

 

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we intend that certain unvested equity awards held by our employees and sales representatives under Citi’s equity compensation plans will be converted into Primerica equity awards; and

 

   

we will amend and restate our certificate of incorporation and bylaws.

 

Overview

 

Our business

 

We are a leading distributor of financial products to middle income households in North America with approximately 100,000 licensed sales representatives. We assist our clients to meet their needs for term life insurance, which we underwrite, and mutual funds, variable annuities and other asset protection products, which we distribute primarily on behalf of third parties. We have two primary operating segments: Term Life Insurance and Investment and Savings Products.

 

   

Term Life Insurance.    We distribute term life insurance products in North America that we originate through our three life insurance company subsidiaries, Primerica Life, NBLIC and Primerica Life Canada. Investment income earned on assets supporting our required statutory reserves and targeted capital is allocated to our Term Life Insurance segment.

 

   

Investment and Savings Products.    We distribute mutual funds, variable annuities and segregated funds. In the United States, we distribute mutual fund products of several third-party mutual fund companies and variable annuity products of MetLife and its affiliates. In Canada, we offer our own Primerica-branded mutual funds, funds of well-known mutual fund companies and segregated funds underwritten by Primerica Life Canada. Revenues associated with these products are comprised of commissions and fees earned at the time of sale, fees based on the asset values of client accounts and administrative and custodial fees charged on a per-account basis.

 

We also have a Corporate and Other Distributed Products segment, which consists primarily of revenues and expenses related to other distributed products, including loans, various insurance products and prepaid legal services. These products are distributed pursuant to distribution arrangements with third parties, except for certain life and disability insurance products underwritten by us that are not distributed through our sales force. In addition, our Corporate and Other Distributed Products segment includes unallocated corporate income and expenses, and realized gains and losses on our invested asset portfolio.

 

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The table below reflects the profit and loss of each of our operating segments and the relative contribution of each segment to our combined revenues and benefits and expenses for the six months ended June 30, 2009 and the year ended December 31, 2008, on an actual and pro forma basis, after giving effect to the Citi reinsurance transactions and the other concurrent transactions.

 

     Six Months Ended
June 30, 2009

   Year Ended
December 31, 2008

     Actual

    Pro Forma

   Actual

    Pro Forma

     $

    %

    $

   %

   $

    %

    $

   %

     (dollars in thousands)

Term Life Insurance(1)

                                               

Revenue

   $ 875,761      80             $ 1,682,852      77         

Benefits and expenses

     533,762      74               1,161,203      63         
    


                 


              

Segment income (loss) before income taxes

   $ 341,999                      $ 521,649                  
    


                 


              

Investment and Savings Products

                                               

Revenue

   $ 141,097      13             $ 386,508      18         

Benefits and expenses

     100,686      14               261,345      14         
    


                 


              

Segment income (loss) before income taxes

   $ 40,411                      $ 125,163                  
    


                 


              

Corporate and Other Distributed Products

                                               

Revenue

   $ 73,565      7             $ 127,584      6         

Benefits and expenses(2)

     82,866      12               421,360      23         
    


                 


              

Segment income (loss) before income taxes

   $ (9,301                   $ (293,776               
    


                 


              

Total

                                               

Revenue

   $ 1,090,423      100             $ 2,196,944      100         

Benefits and expenses

     717,314      100               1,843,908      100         
    


                 


              

Net income (loss) before income taxes

   $ 373,109                      $ 353,036                  
    


                 


              

 


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

 

Business Trends and Conditions

 

As a financial services company, the relative strength and stability of North American financial markets and economies affects our profitability. Our business is, and we expect will continue to be, influenced by a number of industry-wide and product-specific trends and conditions.

 

Economic and financial market conditions in North America deteriorated throughout 2008, accelerating in the second half, and early 2009. Declining business and consumer confidence, rising unemployment, concerns over inflation, the lack of available credit, the collapse of the U.S. mortgage market and a declining real estate market in the United States contributed to an economic slowdown and severe recession. Credit markets experienced reduced liquidity, higher volatility and widening credit spreads across numerous asset classes as the financial markets grappled with dramatic increases in counterparty risk and rising default rates. The failure or near failure of a number of large financial service companies resulted in government intervention. Downgrades in ratings and a weakening of the overall economy during such periods all contributed to illiquidity and declining asset values.

 

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These challenging market and economic conditions and rising unemployment levels influenced, and will continue to influence, investment and spending decisions by middle income consumers. Sales and the value of consumer investment products across a wide spectrum of asset classes, as well as consumer spending and borrowing levels, declined precipitously during the financial crisis. Although our operations remained profitable through these challenging times, we were not immune to these macro economic trends and market forces affecting our industry. These conditions have had and will continue to have an adverse effect on our operations and prospects, which are summarized below.

 

Term life insurance products.    Sales volume of our term life insurance products has remained stable. For example, we issued 115,225 and 241,173 new policies for the six months ended June 30, 2009 and the year ended December 31, 2008, respectively, as compared to 121,350 and 244,733 new policies for the six months ended June 30, 2008 and the year ended December 31, 2007, respectively. Despite this stability with respect to new policy sales, we experienced a slight decline in the average face amount of our newly-issued policies and higher lapse rates for our in force term life insurance policies. We believe these trends stem primarily from economic hardship as middle income families seek to conserve cash and reduce expenses.

 

Sales of investment and savings products.    We experienced reduced demand for our investment and savings products as a result of volatility and uncertainty in the equity markets. Sales of new investment and savings products were $1.5 billion and $4.5 billion for the six months ended June 30, 2009 and the year ended December 31, 2008, respectively, as compared to $2.6 billion and $5.2 billion for the six months ended June 30, 2008 and the year ended December 31, 2007, respectively.

 

Decline in asset values.    A significant percentage of revenues in our Investment and Savings Products segment are derived from commission and fee revenues that are based on the value of assets in client accounts. These assets are invested in diversified funds comprised primarily of U.S. and Canadian equity securities. As equity markets fell dramatically in the second half of 2008, the value of these portfolios declined significantly and redemption rates increased, which adversely affected our revenues from these sources. For example, the average value of assets in client accounts was $24.2 billion for the six months ended June 30, 2009 as compared to $35.4 billion for the comparable period in 2008, a decline of 32%.

 

Invested asset portfolio losses.    We experienced significant realized and unrealized losses on our invested asset portfolio, consisting primarily of asset-backed and corporate debt securities. Our corporate bond portfolio experienced a significant decline in value due to ratings downgrades and credit concerns and our mortgage-backed securities portfolio became increasingly illiquid through the second half of 2008 and early 2009, resulting in declines in carrying values and other-than-temporary impairment charges. These trends reversed during the second fiscal quarter of 2009, with strengthening market conditions substantially reducing our unrealized losses as of June 30, 2009. Following this offering, our pro forma invested asset portfolio will be substantially smaller than our current portfolio and will be comprised of a different mix of invested assets. For additional information about our pro forma invested asset portfolio, please see “— Investments.”

 

Tightening of credit.    As the financial sector experienced mounting investment losses and increasing default rates on mortgage loans and asset-backed securities in 2008 and early 2009, the banking industry experienced a severe contraction in consumer lending. Credit and underwriting standards have tightened significantly across the industry, including at Citi, which currently originates the loans that we distribute. These tighter credit and underwriting standards have made it difficult for our middle income clients to qualify for loans, which has adversely affected our sales of these products. In addition, more stringent licensing requirements for the sale of mortgage loan products have been imposed under the recently-adopted SAFE Act, which will continue to reduce the size of our sales force eligible to distribute loan products in the United States. We experienced a significant decline in the sale of loan products in recent periods. Although these products did not significantly contribute to our historical earnings, they were an important source of our sales force compensation.

 

Reinsurance.    Due to our extensive use of reinsurance, we are exposed to the credit risks of our reinsurers because we remain ultimately liable to policyholders for the full amount of obligations under the policies we underwrite. Despite the collapse and near collapse of several large financial institutions during the financial

 

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crisis, we have thus far avoided counterparty defaults under our reinsurance treaties. The majority of our reinsurers have retained strong financial strength ratings; however, two of our reinsurers have financial strength ratings that are well below where they were when we entered into our contracts. In addition, liquidity concerns and overall financial weakness have led to a contraction in various types of reinsurance arrangements, particularly those designed to provide insurers with statutory capital financing. We have not experienced material increases in the cost of our reinsurance arrangements in recent periods, but our costs may increase in the future, particularly if significant industry participants fail or otherwise stop providing the type of reinsurance we use.

 

Canadian dollar fluctuations.    Over the three year period ended December 31, 2008, we have derived approximately 13% and 17% of our revenues and pre-tax earnings, respectively, from Canadian sources. Accordingly, exchange rate fluctuations between the U.S. dollar and the Canadian dollar affect our financial results. In recent periods, these fluctuations have been significant. In late 2007, after a relatively rapid ascent, the Canadian dollar became more valuable than the U.S. dollar for the first time in more than 35 years. In the second half of 2008, the trend was reversed, resulting in a decline of the Canadian dollar relative to the U.S. dollar of more than 15% on average for the first six months of 2009, compared to the comparable period of 2008.

 

Factors Affecting our Results

 

Term Life Insurance.    Our Term Life Insurance segment results are affected by the size and characteristics of our in force book of term life insurance policies. The size of the in force book is a function of the sale of new coverages and the number and size of policies that lapse or terminate. Characteristics of the in force book include the amount and type of applicable coverage and average pricing terms (which are influenced by the average policy size, average issue age of policyholders and underwriting class). Our in force term insurance policies have “level” premiums for the stated term period, which means the policyholder pays the same amount each year. Initial policy term periods are between 10 and 35 years (with policies with 20-year terms or more accounting for 82% of the policies we issued in 2008) and the average face amount of our in force policies was approximately $273,000 as of June 30, 2008. Premiums are guaranteed to remain level during the initial term period, up to a maximum of 20 years in the United States. While premiums remain level over the initial term period, our claim obligations generally increase with increases in the age of policyholders. In addition, we incur significant upfront costs in acquiring new insurance business. In accordance with GAAP, our deferral and amortization of policy acquisition costs and reserving methodology are designed to match the recognition of premium revenues with the timing of upfront acquisition costs and the payment of claims obligations, such that profits are realized ratably with the level premiums of the underlying policies.

 

We believe our Term Life Insurance segment results are primarily driven by the following factors:

 

   

Sales.    Sales volume affects the size of the in force book of policies on which we earn premium revenues.

 

   

Accuracy of our pricing assumptions.    The profitability of our life insurance operations is dependent upon our ability to price policies appropriately for the levels of risk we assume and to recover our client acquisition and administration costs. Our pricing decisions are based on policy characteristics and historical experience regarding persistency and mortality.

 

   

Reinsurance.    We have used a combination of co-insurance and YRT reinsurance in the past to manage our risk profile. Accordingly, our results for any given fiscal period are significantly influenced by the level, mix and cost of reinsurance employed by us.

 

   

Investment income.    We allocate investment income to our Term Life Insurance segment each fiscal period based on our required statutory reserves and targeted capital for such period.

 

   

Expenses.    Term Life Insurance segment results are also affected by variances in client acquisition, maintenance and administration expense levels.

 

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Sales.    Sales of new term policies are vital to our results over the long-term but do not materially affect our results in the period in which sales are made. Premium revenue is recognized as it is earned over the term of the policy and acquisition expenses are generally deferred and amortized ratably with the level premiums of the underlying policies. However, because we incur significant cash outflows at or about the time policies are issued, including the payment of sales commissions and underwriting costs, changes in life insurance sales volume will have a more immediate effect on our cash flows.

 

Historically, we have found that while sales volume of term life insurance products in any given fiscal period may vary based on a variety of factors, the productivity of our individual sales representatives remains within a relatively narrow range and, consequently, our sales volume over the longer term generally correlates to the size of our sales force. The following table sets forth the average number of licensed term life insurance sales representatives and the number of term life insurance policies issued during the periods presented, as well as the annualized ratio of new policies issued to the number of licensed sales representatives:

 

     Six Months Ended
June 30,


   Year Ended
December 31,

     2009

   2008

   2008

   2007

   2006

Average number of term life insurance sales representatives

   100,590    98,028    99,361    97,103    96,998

Number of new policies issued

   115,225    121,350    241,173    244,733    245,520

Annualized ratio of new policies issued per year to licensed sales representatives

   2.3x    2.5x    2.4x    2.5x    2.5x

 

Our ability to increase the size of our sales force is largely based on the success of our recruiting efforts and our ability to train and motivate recruits to obtain licenses to sell life insurance. We believe that recruitment levels are an important advance indicator of sales force trends, and growth in recruiting is usually indicative of growth in the overall size of the sales force. However, recruiting results do not always result in proportionate increases in the size of our licensed sales force. For example, in the past, spikes in recruitment levels at times have been followed by declines in the percentage of recruits obtaining licenses. In addition, the average time period it takes for a recruit to obtain a license is approximately three months; accordingly, there is an inherent time lag between successful recruiting efforts and consequent increases in the number of licensed sales representatives.

 

Accuracy of our pricing assumptions.    Our pricing methodology is intended to provide us with appropriate profit margins for the risks we assume. We determine pricing classifications based on the coverage sought, such as the size and term of the policy, and certain policyholder attributes, such as age and health. Because we offer unisex rates for our term life insurance policies, our prices do not vary by gender. Pricing determinations are based upon our best estimates at the time of issuance of mortality and persistency rates, expected investment yields and other assumptions. Our results will be affected to the extent there is a variance between our pricing assumptions and actual experience.

 

Persistency.    We use historical experience to estimate pricing assumptions for persistency rates. Persistency is a measure of how long our insurance policies stay in force. As a general matter, persistency that is lower than our pricing assumptions adversely affects our results over the long term because we lose the recurring revenue stream associated with the policies that lapse. Determining the near term effects of changes in persistency is more complicated. Under our current future policy benefits (i.e., reserves) and DAC amortization method, when persistency is lower than our pricing assumptions, we must accelerate the amortization of deferred acquisition costs. The disproportionate increase in amortization expense is offset by a release of reserves associated with lapsed policies, which causes a reduction in benefits and claims expense. The reserves associated with any given policy will change over the term of such policy. As a general matter, reserves are lowest at the inception of a policy term (when claims experience is the lowest) and rise steadily to a peak before declining to zero at the expiration of the policy term. Accordingly, depending on when the lapse occurs in relation to the

 

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overall policy term, the reduction in benefits and claims expense may be greater or less than the increase in amortization expense and, consequently, the effects on earnings for a given period could be positive or negative. Persistency levels are meaningful to our results to the extent actual experience deviates from the persistency assumptions used to price our products. Historically, our persistency rates at most policy durations have been stable and higher than pricing assumptions. Since late 2007, our persistency rate has declined at most policy durations, but has generally remained higher than pricing assumptions at later durations. We believe the decline in persistency is primarily attributable to the economic slowdown. However, a portion of this decline is attributable to the fact that we started issuing 20-year term policies in late 1986 and a significant volume of these policies began reaching the end of their initial term during 2007. The volume of policies reaching the end of their initial terms has stabilized, but will continue to cause our aggregate persistency rate to be lower in future periods than historical norms.

 

Mortality.    We use historical experience to estimate pricing assumptions for mortality. Our profitability is affected to the extent actual mortality rates differ from those used in our pricing assumptions. Although we currently mitigate a significant portion of our mortality exposure through reinsurance, we remain exposed to variances between actual mortality experience and our estimates on a significant percentage of our in force book, particularly legacy policies that were issued prior to our use of YRT reinsurance in 1994. In prior periods, we have benefited significantly from favorable mortality variances on policies in issue years prior to our use of YRT. Since the vast majority of these polices have reached the end of their initial term in recent years these benefits will not be significant in future periods. Another factor influencing our mortality risk is a contract provision in some of our existing policies that permits policyholders to convert to new coverage at the expiration of the policy term without completion of a medical examination and satisfaction of other underwriting criteria applicable to new policies. These converted policies tend to have high mortality experience. In connection with the Citi reinsurance transactions, Citi will be entitled to receive a substantial portion of the net premiums and Citi will assume the obligation to pay policy claims in respect of policies issued pursuant to these conversion features through December 31, 2016. The net premiums and policy claims in respect of policies converted after 2016 will not be for the account of Citi. Variances between actual mortality experience and the assumptions and estimates used by our reinsurers also affect the cost and potentially the availability of reinsurance.

 

Reinsurance.    We use reinsurance extensively, which has a significant effect on our results of operations. In evaluating our comparative results, it is important to understand and consider the relative levels and mix of reinsurance treaties in effect during each of the comparative periods. Prior to 1991, we primarily reinsured on a co-insurance basis approximately 50% of the policies issued each year. Co-insurance is a form of reinsurance under which the reinsurer receives a specified percentage of the direct premiums, pays a specified percentage of claims and benefits, shares in the initial and ongoing maintenance expenses and maintains a proportionate share of the future policy benefit reserves and related assets. In a co-insurance type of reinsurance arrangement, the reinsurer assumes substantially all of the risks and rewards associated with the percentage of the reinsured block of policies subject to the reinsurance treaty, although the primary insurer, known as the “ceding insurer,” remains ultimately liable to policyholders in the event the reinsurer fails to perform its obligations. Accordingly, co-insurance effectively reduces the size of the ceding company’s in force book in proportion to the percentage of the in force book subject to co-insurance.

 

We retained 100% of the risks and rewards of policies issued between January 1992 and June 1994, other than for a small number of policies with a face amount exceeding $1,000,000, for which we reinsured the coverage in excess of such amount.

 

Since June 1994, we have reinsured between 70% and 90% of the mortality risk on our U.S. term life insurance policies on a YRT basis. We have not generally reinsured the mortality risk on Canadian term life insurance polices, except for policies issued between April 2000 and December 2003. YRT reinsurance permits us to fix future mortality exposure at contractual rates by policy class. To the extent actual mortality experience is more or less favorable than the contractual rate, the reinsurer will earn incremental profits or bear the incremental cost, as applicable. In contrast to co-insurance, which is intended to eliminate all risks (other than

 

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counterparty risk of the reinsurer) and rewards associated with a specified percentage of the block of policies subject to the reinsurance arrangement, the YRT reinsurance arrangements we enter into are intended only to reduce volatility associated with variances between estimated and actual mortality rates.

 

The table below reflects the portion of our term life insurance in force book subject to YRT and co-insurance reinsurance as a percentage of the total face amount of our in force block as of the dates presented:

 

       As of June 30,

    As of December 31,

 
       2009

    2008

    2008

    2007

    2006

 

Reinsurance

                                

YRT

     61.0   59.0   60.7   58.3   58.6

Co-insurance

     3.4   4.0   3.6   4.5   5.5

 

The following summarizes the effect of our reinsurance arrangements on ceded premiums and benefits and claims on our combined statement of income:

 

   

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

 

   

Benefits and claims.    Benefits and claims include incurred claim amounts and changes in future policy benefit reserves. Both co-insurance and YRT reinsurance reduce incurred claims in direct proportion to the percentage ceded. Co-insurance reduces the change in reserves in direct proportion to the ceding percentage. YRT reduces the change in reserves in an increasing amount over time with increases in the period that the policy has been in force.

 

Except for the Citi reinsurance transactions, we have no current intention to enter into co-insurance arrangements in the near term, and our legacy co-insurance arrangements will not materially affect our results for periods following this offering. We expect to continue to use YRT reinsurance at or near historical levels. We may alter our reinsurance practices at any time due to the unavailability of YRT reinsurance at attractive rates or the availability of alternatives to reduce our risk exposure.

 

Reinsurance does not relieve us of our direct liability to our policyholders, even when the reinsurer is liable to us. We, as the insurer, are required to pay the full amount of death benefits even in circumstances where we are entitled to receive payments from the reinsurer. Due to factors such as insolvency, adverse underwriting results or inadequate investment returns, our reinsurers may not be able to pay the reinsurance recoverables they owe to us on a timely basis or at all. Reinsurers might refuse or fail to pay losses that we cede to them or might delay payment. Any such failure to pay by our reinsurers could have a material adverse effect on our business, financial condition and results of operations.

 

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Investment and Savings Products.    Results in our Investment and Savings Products segment are driven by sales of mutual funds and variable annuities, the value of assets in client accounts for which we earn ongoing service and distribution fees and the number of fee generating accounts we administer. The table below sets forth the aggregate investment value of sales of investment and savings products, asset values for accounts that generate asset-based revenues and the number of fee-generating accounts for the periods presented:

 

    Six Months Ended
June 30,

  Year Ended
December 31,

    2009

  2008

  2008

  2007

  2006

    (in thousands)

Product sales

                             

Mutual funds

  $ 872,520   $ 1,640,339   $ 2,808,957   $ 3,432,883   $ 3,155,787

Variable annuities

    456,076     606,246     1,157,479     1,297,623     1,103,820
   

 

 

 

 

Total sales for which we earn sales-based revenues

    1,328,596     2,246,585     3,966,436     4,730,506     4,259,607
   

 

 

 

 

Segregated funds

    131,057     318,011     491,953     458,962     405,080
   

 

 

 

 

Total

  $ 1,459,653   $ 2,564,596   $ 4,458,389   $ 5,189,468   $ 4,664,687
   

 

 

 

 

Average asset values

                             

Mutual funds

  $ 17,658,873   $ 26,882,289   $ 24,209,867   $ 28,006,958   $ 25,081,017

Variable annuities

    4,904,820     6,389,503     6,004,225     6,625,010     5,620,547

Segregated funds

    1,614,309     2,099,779     1,949,788     1,742,081     1,194,159
   

 

 

 

 

Total

  $ 24,178,002   $ 35,371,571   $ 32,163,879   $ 36,374,049   $ 31,895,723
   

 

 

 

 

Average number of fee generating accounts

                             

Recordkeeping accounts

    2,876     3,148     3,082     3,208     3,190

Custodial accounts

    2,083     2,268     2,223     2,302     2,258

 

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

 

   

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

 

   

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

 

   

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

 

   

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

 

Sales.    We earn commissions and fees, such as dealer re-allowances, and marketing and support fees, based on sales of mutual fund products and variable annuities. Sales of investment and savings products are influenced by the overall demand for investment products in North America, as well as by the size and productivity of our sales force. We generally experience a slight degree of seasonality in our Investment and Savings Products segment results due to our high concentration of sales of retirement account products. These accounts are typically funded in February through April, coincident with the tax return preparation season.

 

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While we believe the size of our sales force is a factor in driving sales volume in this segment, there are a number of other variables that may have a significantly greater effect on sales volume in any given fiscal period. During the fourth quarter of 2008 and the six months ended June 30, 2009, we experienced lower sales of our investment and savings products as a result of consumers seeking safety from market turbulence and uncertainty. Even though the capital markets have stabilized in recent months, unemployment and other factors continue to dampen demand for investment and savings products, particularly among our middle income clients. It is difficult to determine how long these conditions will continue or how long it will take for market conditions to return to historically normal levels.

 

Asset values.    We earn marketing and distribution fees (so-called “trail commissions” or, with respect to U.S. mutual funds, “12b-1 fees”) on mutual fund, variable annuity and segregated funds products based on asset values in client accounts. Our investment and savings products primarily consist of funds comprised of equity securities. Asset values are influenced by new product sales, ongoing contributions to existing accounts, redemptions and changes in equity markets, net of expenses. The table below reflects the changes in asset values during the periods presented:

 

     Six Months Ended
June 30,

    Year Ended
December 31,

 
     2009

    2008

    2008

    2007

    2006

 
     (in thousands)  

Asset values (beginning of period)

   $ 24,406,787      $ 37,300,483      $ 37,300,483      $ 34,190,353      $ 30,030,368   

Inflows

     1,431,084        2,522,981        4,380,508        5,088,212        4,594,395   

Redemptions

     (1,521,332     (2,179,234     (4,156,318     (4,171,136     (3,731,035

Change in market value, net

     1,864,667        (3,555,601     (13,117,885     2,193,054        3,296,626   
    


 


 


 


 


Asset values (end of period)

   $ 26,181,206      $ 34,088,629      $ 24,406,788      $ 37,300,483      $ 34,190,354   
    


 


 


 


 


 

Accounts.    We earn recordkeeping fees for administrative functions we perform on behalf of several of our mutual fund providers and custodial fees for services as a non-bank custodian for certain of our mutual fund clients’ retirement plan accounts. Our aggregate number of fee generating accounts has been declining in recent periods due primarily to lower sales of funds for which we provide a recordkeeping function.

 

Corporate and Other Distributed Products.    In addition to our term life insurance and investment and savings products, we earn revenues and pay commissions and referral fees from the distribution of loans, various other insurance products, prepaid legal services and other products, all of which are originated by third parties. Our New York life insurance subsidiary, NBLIC, also underwrites a mail-order student life policy and a short-term disability benefit policy, which is a state-mandated policy for certain employees in the states of New York and New Jersey, neither of which is distributed by our sales force, and also has in force policies from several discontinued lines of insurance.

 

In addition, our Corporate and Other Distributed Products segment is affected by unallocated corporate income and expenses, printing operations, net investment income (other than net investment income allocated to our Term Life Insurance segment), administrative and sales force expenses (other than expenses that are allocated to our Term Life Insurance or Investment and Savings Products segments) and realized gains and losses on our invested asset portfolio.

 

In prior years, the sale of loan products has enabled us to help our clients consolidate their debt and has provided a source of significant compensation for our sales force, but has not been a significant source of earnings for us. For example, loan sales accounted for approximately 1% of our combined pre-tax earnings for each of the years ended December 31, 2008, 2007 and 2006, respectively. Our loan business is in a period of significant transition. Consistent with steps taken by other lenders generally, beginning in 2008, our lenders

 

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began implementing more rigorous credit standards, including more restrictive loan-to-value ratio requirements and more restrictive underwriting criteria, which adversely affected the number of loans that we sold in the second half of 2008 and they continue to do so in 2009. We anticipate these rigorous standards will be maintained in the near term and may become more restrictive in the future. In addition, the number of our sales representatives in the United States who are authorized to sell mortgage loans has decreased and we expect will continue to decrease due to the introduction of individual licensing requirements required by the recently enacted SAFE Act. Please see the section entitled “Risk Factors — Risks Related to our Loan Business.”

 

Critical Accounting Policies

 

Our accounting policies are described in Note 2 — “Summary of Significant Accounting Policies” to our combined financial statements appearing elsewhere in this prospectus. The accounting policies discussed in this section are those that we consider to be most critical to an understanding of our financial statements. The application of these policies requires significant judgment with respect to inherently uncertain matters. As is the case with other companies that have life insurance operations, the most significant items on the balance sheet are based on fair value determinations, accounting estimates and actuarial determinations which are susceptible to changes in future periods and which affect our results of operations.

 

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

 

Fair value is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. Fair value measurements are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our view of market assumptions in the absence of observable market information. All invested assets carried at fair value are classified and disclosed 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. These models are primarily industry-standard models that consider various inputs, such as interest rate, credit spread and foreign exchange rates for the underlying financial instruments. 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-backed and asset-backed securities and certain non-exchange-traded derivatives, such as currency swaps and forwards.

 

   

Level 3.    Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Level 3 is comprised 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. In limited instances, this category may also use non-binding broker quotes. This category primarily consists of non-agency mortgage-backed securities and certain less liquid fixed maturity corporate securities.

 

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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 that is significant to the fair value measurement. The following table sets forth the fair value and hierarchy classifications of our invested asset portfolio as of June 30, 2009 on an actual and pro forma basis after giving effect to the Citi reinsurance transactions and the other concurrent transactions:

 

       As of June 30, 2009

 
       Actual

    Pro Forma

 
       $

     %

    $

     %

 
       (dollars in thousands)  

Level 1

     $ 11,008      1              

Level 2

       5,140,683      87              

Level 3

       732,785      12              
      

          
        

Total

     $ 5,884,476      100              
      

          
        

 

As shown in the table above, the vast majority of our investment securities are valued using Level 2 inputs. These fair values are obtained primarily from industry-standard pricing methodologies using market observable information. Because many fixed income 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 like-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.

 

Where specific market information is unavailable for certain securities, pricing models produce estimates of fair value primarily using Level 2 inputs along with certain Level 3 inputs. These models include matrix pricing. The pricing matrix uses current treasury rates and credit spreads received from third-party sources to estimate fair value. The credit spreads incorporate the issuer’s industry- or issuer-specific credit characteristics and the security’s time to maturity, if warranted. Remaining unpriced securities are valued using an estimate of fair value based on indicative market prices that include significant unobservable inputs not based on, nor corroborated by, market information, including the utilization of non-binding broker quotes.

 

Changes in the fair value of trading securities are included in net investment income in the period in which the change occurred. We also elected the fair value option for equity investments that are not in the Russell 3000 Index. Changes in the fair value of such investments are also recorded in the net investment income.

 

Unrealized gains and losses on our available-for-sale securities are included as a separate component of accumulated other comprehensive income, unless a decline is deemed to be other-than-temporary.

 

Other-than-temporary impairments on investment securities.

 

Unrealized gains and losses on our available-for-sale portfolio are included as a separate component of accumulated other comprehensive income. For periods through December 31, 2008, if a decline in the fair value of an available-for-sale security was judged to be other-than-temporary, a charge was recorded as a realized loss for the portion of the loss deemed to be caused by the credit deterioration of the issuer.

 

In the first quarter of 2009, we adopted FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” which amends the recognition guidance for other-than-temporary

 

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impairments, or OTTI, of debt securities and expands the financial statement disclosures for OTTI on debt and equity securities. As a result, our 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 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 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 rest of the impairment is recognized in accumulated other comprehensive income. The credit loss component recognized in earnings is identified as the amount of principal cash flows not expected to be received over the remaining term of the security. As a result of the adoption of the FSP, our net income before income taxes for the six months ended June 30, 2009 was higher by $25.4 million than it would have been had the FSP not been adopted.

 

Determining whether a decline in the current fair value of invested assets is an other-than-temporary decline in value is both objective and subjective and can involve a variety of assumptions and estimates, particularly for investments that are not actively traded in established markets. Management evaluates a number of factors when determining the impairment status of individual securities. These include the economic condition of various industry segments and geographic locations and other areas of identified risks.

 

For certain securitized financial assets with contractual cash flows, including asset-backed securities, Emerging Issues Task Force, or EITF, Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continued to Be Held by a Transferor in Securitized Financial Assets”, or EITF Issue No. 99-20, requires us to periodically update our best estimate of cash flows over the life of the security. If the fair value of a securitized financial asset is less than its cost or amortized cost and there has been a decrease in the present value of the estimated cash flows since the last revised estimate, considering both timing and amount, an other-than-temporary impairment charge is recognized. Estimating future cash flows is a quantitative and qualitative process that incorporates information received from third party sources along with certain assumptions and judgments regarding the future performance of the underlying collateral. Projections of expected future cash flows may change based upon new information regarding the performance of the underlying collateral. In addition, we consider our intent and ability to retain a security that has a fair value below its cost until recovery, or since the adoption of FSP 115-2 and FAS 124-2 in the first quarter of 2009, the intent to sell or whether it is more-likely-than-not we would be required to sell the investment before the expected recovery of the amortized cost basis. Securities subject to EITF Issue No. 99-20 that are in an unrealized loss position are reviewed at least quarterly for other-than-temporary impairment.

 

Other categories of fixed income securities (i.e., those not subject to EITF Issue No. 99-20) that are in an unrealized loss position are also reviewed at least quarterly to determine if an other-than-temporary impairment is present based on certain quantitative and qualitative factors. We consider a number of factors in determining whether the impairment is other-than-temporary. These include: (1) actions taken by rating agencies, (2) default by the issuer, (3) the significance of the decline, (4) the intent and ability to hold the investment until recovery or since the adoption of FSP 115-2 and FAS 124-2 in the first quarter of 2009, the intent to sell or whether it is more-likely-than-not we would be required to sell the investment before the expected recovery of the amortized cost basis, (5) the time period during which the decline has occurred, (6) an economic analysis of the issuer, (7) the financial strength, liquidity, and recoverability of the issuer, and (8) an analysis of the underlying collateral. A review is performed each quarter to evaluate the need for any other-than-temporary impairments. Although no set formula is used in this process, the investment performance, collateral position, and continued viability of the issuer are significant measures that are considered. Other-than-temporary analysis of our equity securities primarily focuses on the severity of the unrealized losses as well as the length of time the security’s fair value has been below amortized cost.

 

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The table below sets forth other-than-temporary impairments recognized in earnings through the periods presented:

 

     For the six months ended
June 30,


   For the year ended
December 31,

         2009    

       2008    

   2008

   2007

   2006

     (in thousands)

Other-than-temporary impairments

   $ 34,851    $ 19,229    $ 114,022    $ 6,334    $ 2,178

 

For additional information about impairments on our invested asset portfolio, see Note 4 — “Investments — Other-Than-Temporary Impairment” to our combined financial statements appearing elsewhere in this prospectus.

 

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

 

Deferred policy acquisition costs, or DAC.    The costs of acquiring new business are deferred to the extent that they vary with, and are primarily related to, the acquisition of such new business. These costs mainly include commissions and policy issue expenses. The recovery of such costs is dependent on the future profitability of the related policies, which, in turn, is dependent principally upon investment returns, mortality, persistency and the expense of administering the business, as well as upon certain economic variables, such as inflation. Deferred policy acquisition costs are subject to recoverability testing on an annual basis or when circumstances indicate that recoverability is uncertain. We make certain assumptions regarding persistency, expenses, interest rates and claims. GAAP requires that assumptions for these types of products 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 premium income. Acquisition costs for Canadian segregated funds are amortized over the life of the policies in relation to estimated gross profits before amortization. Due to the inherent uncertainties in making assumptions about future events, materially different experience from expected results in persistency or mortality could result in a material increase or decrease of deferred acquisition cost amortization in a particular period.

 

Future policy benefits (reserves).    We calculate and maintain reserves for the estimated future payment of claims to our policyholders based on actuarial assumptions and in accordance with industry practice and GAAP. Many factors can affect these reserves, including mortality trends, investment yields and persistency. Similar to the DAC discussion above, the assumptions used to establish reserves cannot be modified over the policy term unless recoverability testing deems them to be inadequate. Therefore, the reserves we establish are based on estimates, assumptions and our analysis of historical experience. Our results depend significantly upon the extent to which our actual claims experience is consistent with the assumptions we used in determining our reserves and pricing our products. Our reserve assumptions and estimates require significant judgment and, therefore, are inherently uncertain. We cannot determine with precision the ultimate amounts that we will pay for actual claims or the timing of those payments. Liabilities for future policy benefits on our term life insurance products have been computed using a net level method, including assumptions as to investment yields, mortality, persistency, and other assumptions based on our experience.

 

Reinsurance.    We use reinsurance extensively. We account for reinsurance under the provision of SFAS No. 113, “Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts”, or SFAS No. 113. We determine if a contract provides indemnification against loss or liability in relation to the amount of

 

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insurance risk to which the reinsurer is subject. We review all contractual terms, particularly those that may limit the amount of insurance risk to which the reinsurer is subject, that may delay the timely reimbursement of claims. If we determine that the possibility of a significant loss from insurance risk will occur only under remote circumstances, we record the contract under the deposit method of accounting with the net amount receivable reflected in other assets on our combined balance sheets. The reinsurance contracts in effect at June 30, 2009 meet the risk transfer provisions of SFAS No. 113. Ceded policy reserves and claims liabilities relating to insurance ceded under these contracts are shown as due from reinsurers in our combined balance sheets. We believe that one of the Citi reinsurance transactions (a 10% YRT transaction with an experience refund provision) will have limited transfer of insurance risk and that there will be only a remote chance of loss under the contract. We will record the transaction under the deposit method of accounting. We believe the other Citi reinsurance transactions will meet the risk transfer provisions of SFAS 113. Please see the pro forma combined financial statements included elsewhere in this prospectus.

 

Ceded premiums are treated as a reduction of direct premiums and are recognized when due to the assuming company. Ceded claims are treated as a reduction of direct benefits and are recognized when the claim is incurred on a direct basis. Ceded policy reserve changes are also treated as a reduction of benefits and are recognized during the applicable financial reporting period. Under YRT arrangements, the ceded reserve is determined by matching the expected reinsurance premiums less reinsurance claims to the direct premiums collected from the policyholder.

 

We used co-insurance for policies issued prior to 1991 and are entering into co-insurance arrangements with Citi in connection with this offering. Expense allowances in the early years of our existing co-insurance treaties that exceeded the ultimate allowances payable in later years were deferred and amortized over the lives of the policies. Amortization of these deferred allowances is treated as a reduction of direct amortization of deferred acquisition costs. Ceded future policy benefit reserves for co-insurance are determined in the same manner as direct policy reserves.

 

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

 

Change in DAC and reserve estimation approach.    In connection with our review of our reserving methodology in 2008, we determined that while our then existing DAC and reserve estimation approach was acceptable under GAAP, it was not typical of the approach used by other insurance companies. Accordingly, we revised our estimates of DAC and the reserve for future policy benefits on our term life insurance business. The revised estimates are based on a policy-by-policy approach rather than on an aggregate basis by issue year, which was the case under the prior approach. Under this estimation approach, if policies lapse at a rate other than what was originally assumed, the DAC and future policy benefits are immediately revised, whereas under the estimation approach used prior to this change, the financial impact of such variances was recorded prospectively over the remaining life of the aggregate block of policies.

 

This revision is accounted for prospectively in accordance with Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections”, or SFAS No. 154. The impact of this change in 2008 was a pre-tax loss of approximately $191.7 million. Due to this change in our DAC and reserve estimation approach, our combined financial statements and financial information for our Term Life Insurance segment for periods prior to 2008 are not directly comparable to financial statements prepared for 2008 and periods following this change.

 

 

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The impact of this change on individual line items of our combined statement of income for the year ended December 31, 2008 is set forth below under “— Results of Operations — Fiscal Year Ended December 31, 2008 as compared to the Fiscal Year Ended December 31, 2007 — Term Life Insurance Segment.” The adjustments relating to the change in estimates is set forth in the table below. Following the table is an overview of the factors that resulted in the adjustments to DAC, future policy benefit reserves and due from reinsurers resulting from the change in our DAC and reserve estimation approach.

 

     Adjustments for Change
in DAC and Reserve
Estimation Approach


 
     (in thousands)  

Change in estimates

  

Due from reinsurers

   $ (48,653

DAC

     179,391   

Future policy benefits

     (322,997
    


Total

   $ (192,259
    


 

Impact on DAC.    Under the new approach, the DAC balance is adjusted to reflect differences between pricing assumptions and actual persistency. For example, if actual persistency is lower than our pricing assumptions for a given period, we would reduce the DAC balance (to remove the asset associated with the policies that lapsed in excess of the lapses implicit in our pricing assumptions) and, conversely, if persistency is higher than our pricing assumptions for a given period, we would increase the DAC balance. Under this approach, the relationship between expected future premium revenues and the DAC balance remains relatively constant over time. Therefore the percentage of net premiums needed to amortize the DAC balance is a relatively fixed percentage.

 

Under the prior approach, the DAC balance was not immediately adjusted for variances between pricing assumptions and actual persistency and, accordingly, the relationship between expected future premium revenues and the DAC balance varied from year-to-year with variances in actual persistency and pricing assumptions. Under the prior approach, the percentage of net premiums needed to amortize the DAC balance would be adjusted to account for these variations. For example, if actual persistency was lower than our pricing assumptions for a given period, we would expect lower future net premiums and would therefore increase the percentage of those future net premiums needed to amortize the DAC balance and, conversely, if persistency was higher than our pricing assumptions, we would expect higher future net premiums and would therefore decrease the percentage of those future net premiums needed to amortize the DAC balance.

 

In periods prior to the change, actual persistency was generally higher than our historical pricing assumptions, which did not change or “unlock” the DAC immediately for reporting periods in which actual persistency differed from expected pricing persistency, but rather resulted in annual reductions in the percentage of net premiums needed to amortize the DAC balance. As a result of the change, the cumulative effect of these historical variations between actual persistency and our pricing assumptions resulted in a $179.4 million increase in the DAC balance as of December 31, 2008. Because the DAC balance was increased under the new approach, a higher percentage of expected future net premiums will be required to amortize the DAC balance, which will result in higher amortization in future periods under the new estimation approach than we would have had under the prior estimation approach.

 

Impact on future policy benefits (reserves).    Under the new approach, the policy reserve balance is adjusted to reflect differences between pricing assumptions and actual persistency. For example, if actual persistency is lower than our pricing assumptions for a given period, we would decrease the reserve balance and, conversely, if persistency is higher than our pricing assumptions for a given period, we would increase the reserve balance. Under this approach, the relationship between expected future premium revenues and the reserve balance remains relatively constant at any given point in time. Therefore the percentage of expected future net premiums needed to fund the reserve balance is a relatively fixed percentage.

 

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Under the prior approach, the reserve balance was not immediately adjusted for variances between pricing assumptions and actual persistency and, accordingly, the relationship between expected future net premiums and the reserve balance varied from year-to-year with variances in actual persistency and pricing assumptions. If actual persistency was lower than our pricing assumptions, the percentage of net premiums needed to fund the smaller claim obligation associated with a fewer number of polices in force would decrease and, conversely, if actual persistency was higher than our pricing assumptions, the percentage of net premiums needed to fund the additional claim obligation associated with a higher number of polices in force would increase. These annual adjustments to the percentage of net premiums needed to fund the reserves would effectively spread the impact of the variation between pricing assumptions and actual persistency over the remaining term of the policies.

 

As indicated above, in historical periods prior to the change, actual persistency was generally higher than our pricing assumptions, which did not change or “unlock” the reserve balance, but resulted in annual increases in the percentage of net premiums needed to fund the additional claim obligations. As a result of adopting the new approach, the cumulative effect of these historical variations between actual persistency and our pricing assumptions resulted in a $323.0 million increase in the reserve balance at December 31, 2008. The higher reserve balance will require a lower percentage of expected future net premiums to fund the net policy reserve balance and our benefits and claims will be lower in periods following the change than would be the case under the prior approach.

 

Impact on due from reinsurers.    Due from reinsurers includes ceded reserves for co-insurance and YRT reinsurance. Co-insurance reserves increased approximately $35 million as a result of persistency as described under Impact on future policy benefits. Persistency had a minimal impact on YRT reserves since actual persistency has been closer to pricing persistency for the issue years in which YRT reinsurance has been used. Due to the non-level nature of YRT, the change from the prior aggregate approach to the new policy-by-policy approach resulted in a decrease in YRT reserves of approximately $83 million, which, together with the $35 million increase in co-insurance reserves, resulted in a $48.7 million decrease in the due from reinsurers.

 

Impact on premiums.    The change in our DAC and reserve estimation approach necessitated a change in the treatment for premiums and other corresponding items. These adjustments are set forth in the table below:

 

     Adjustments for Change
in DAC and Reserve
Estimation Approach


 
     (in thousands)  

Ceded premiums

   $ (57,810

Ceded benefit reserves

     46,826   

Ceded allowances

     8,801   

Direct premium accruals

     6,870   

Direct benefit reserves

     (3,435

Expense accruals

     (712
    


Total

   $ 540   
    


 

We pay ceded premiums on an annual basis. Prior to the change, we recorded co-insurance premiums on a monthly basis. Under the revised method, we record ceded premiums at the time the annual premium obligation to the reinsurer is due. The change in approach resulted in a $57.8 million increase in ceded premiums in the fourth quarter of 2008, which was offset by a corresponding change in ceded benefit reserves of $46.8 million and related expense allowance accruals of $8.8 million. A minor change occurred in the estimation of direct premiums due from policyholders of $6.9 million to account for definitional differences, offset by corresponding changes to direct benefit reserves of $3.4 million and related expense accruals of $0.7 million. In total, the impact on premiums changes was $0.5 million. Ceded premiums recorded in periods following the change are not expected to be materially different than ceded premiums that would have been recorded under the prior approach.

 

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Accounting for reinstatements.    Effective January 1, 2007, we adopted the American Institute of Certified Public Accountants’ Statement of Position 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts” (SOP 05-1). SOP 05-1 provides accounting guidance on internal replacements of insurance contracts and investment contracts other than those specifically described in SFAS No. 97 Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments (SFAS No. 97). Prior to our adoption of SOP 05-1, we treated reinstatements as a continuation of the original policy. In accordance with SOP 05-1, we now treat policy reinstatements as terminations and new issues. The adoption of SOP 05-1 required us to change our original pricing assumptions for in force policies to account for the increase in terminations, which effectively lowered our persistency assumptions. This change effectively resulted in lower benefit reserves and DAC balances as of January 1, 2007. DAC amortization will be higher for periods following the adoption of SOP 05-1 than would be the case under the prior approach due to the increased percentage of expected future net premiums needed to amortize DAC. Conversely, reserve changes will be lower for periods following the adoption of SOP 05-1 than would be the case under the prior approach due to the decrease in the percentage of expected future net premiums needed to fund future claims. The adoption of SOP 05-1 resulted in an increase to 2007 opening retained earnings of $19.7 million after tax.

 

Goodwill.    Goodwill represents an acquired company’s acquisition cost over the fair value of the net tangible and intangible assets acquired. Goodwill is subject to annual impairment tests or periodic testing if circumstances indicate impairment may have occurred. Goodwill is allocated to our reporting units and an impairment is deemed to exist if the carrying value of a reporting unit exceeds its estimated fair value. In performing a goodwill review, we are required to make an assessment of fair value of goodwill and other indefinite-lived intangible assets. When determining fair value, we use various assumptions, including projections of future cash flows and discount rates.

 

We perform an impairment test for goodwill annually and whenever an impairment indicator exists. The first step of the impairment test compares the fair value of a reporting unit to its carrying amount to identify potential impairment. If the carrying amount of a reporting unit exceeds its fair value, we proceed to the second step of the impairment analysis. The second step compares the implied fair value of reporting unit goodwill with the carrying amount to measure the amount of impairment loss, if any.

 

We performed goodwill impairment testing for each reporting unit as of July 1, 2008. The results of the first step of the impairment test showed no indication of impairment in any reporting unit and, accordingly, we did not perform the second step of the impairment test. Due to market deterioration, we performed another impairment test of goodwill as of December 31, 2008. Step one indicated impairment of the term life insurance reporting unit and, accordingly, the second step of the testing was performed. Based on the results of the second step of testing, we determined that the entire carrying value of goodwill in the term life reporting unit was not supportable and, accordingly, recorded a goodwill impairment charge for the reporting unit. The deterioration in the financial markets and economic outlook were significant factors in making this determination. Accordingly, in 2008, we recorded a pre-tax impairment charge of $195.0 million in the Corporate and Other Distributed Products segment.

 

Income taxes.    Our federal income tax return is consolidated into Citi’s federal income tax return. The method of allocation between companies is pursuant to our tax sharing agreement with Citi. Allocation is based upon separate return calculations with credit for net losses as utilized. Allocations are calculated and settled quarterly. In establishing a provision for income tax expense, we must make judgments and interpretations about the applicability of inherently complex tax laws of the jurisdictions in which we transact business. We must also make estimates about when in the future certain items will affect 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 of events that have been recognized in the financial statements or tax returns, based upon enacted tax laws and rates. Deferred tax assets are recognized subject to management’s judgment that realization is more likely than not.

 

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Foreign currency translation.    Assets and liabilities denominated in Canadian dollars are translated into U.S. dollars using period-end spot foreign exchange rates. As of June 30, 2009, approximately 8% of our combined assets (excluding assets in respect of Canadian segregated funds) were translated from Canadian dollars. Revenues and expenses are translated monthly at amounts that approximate weighted average exchange rates, with resulting gains and losses included in stockholder’s equity. Approximately 13% and 15% of total revenues for the six months ended June 30, 2009 and the year ended December 31, 2008, respectively, were translated from Canadian dollars.

 

Revenues

 

Our revenues are primarily derived from term life insurance premiums, commissions, marketing and support fees, and other fees from the sale of investment and savings products and investment income. Our revenues consist of the following:

 

   

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

 

   

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

 

   

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

 

   

Realized investment gains (losses), including OTTI.    Reflects the difference between amortized cost and amounts realized on sale of investment securities, as well as OTTI charges.

 

   

Other revenues, net.    Reflects revenues generated from the fees charged for access to our sales force website to cover operating costs, printing revenues primarily from the sale of printed materials, net interest income and revenues from other miscellaneous sources.

 

Benefits and Expenses

 

Our primary expenses are benefits to policyholders and changes in reserve balances, amortization of deferred costs associated with the sale of term life insurance, including sales commissions paid to our sales representatives and underwriting expenses, indirect costs associated with the sale of term life insurance that are not deferred and other operating expenses and sales commissions paid to our sales representatives on savings and other financial products. Our operating expenses consist of the following items:

 

   

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

 

   

Amortization of DAC.    Represents the amortization of capitalized costs associated with the sale of an insurance policy, including sales commissions, medical examination and other underwriting costs and other acquisition-related costs, are amortized over the initial term of the policy.

 

   

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

 

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

 

   

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

 

   

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

 

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

 

Results of Operations

 

Set forth below is management’s explanation of changes in our results of operations for the six-month periods ended June 30, 2009 and 2008, respectively, and for the years ended December 31, 2008, 2007 and 2006, respectively. The explanations of changes in our combined results for each comparative period are intended to highlight how relative changes in the performance of each operating segment affected our company as a whole. Following the discussion of combined results for each period is a more detailed discussion of changes in the comparative information for each of our operating segments.

 

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Six Months Ended June 30, 2009 as Compared to Six Months Ended June 30, 2008

 

Consolidated Overview

 

     Six Months Ended
June 30,


    Change

 
     2009

    2008

    $

     %

 
     (dollars in thousands)  

Revenues

                               

Direct premiums

   $ 1,045,651      $ 1,038,601      $ 7,050       1

Ceded premiums

     (296,011     (282,396     (13,614    5
    


 


 


      

Net premiums

     749,640        756,205        (6,565    -1

Net investment income

     172,140        158,352        13,788       9

Commissions and fees

     162,406        261,887        (99,481    -38

Other, net

     26,498        26,924        (426    -2

Realized investment gains (losses), including OTTI

     (20,261     (12,879     (7,382    57
    


 


 


      

Total revenues

     1,090,423        1,190,489        (100,066    -8

Benefits and Expenses

                               

Benefits and claims

     297,194        306,695        (9,501    -3

Amortization of DAC

     183,598        159,587        24,011       15

Insurance commissions

     18,466        12,249        6,217       51

Insurance expenses

     76,291        78,867        (2,576    -3

Sales commissions

     80,578        142,798        (62,220    -44

Other operating expenses

     61,187        82,626        (21,439    -26
    


 


 


      

Total benefits and expenses

     717,314        782,822        (65,508    -8
    


 


 


      

Income before income taxes

     373,109        407,667        (34,558    -8

Income taxes

     128,432        138,611        (10,179    -7
    


 


 


      

Net income

   $ 244,677      $ 269,056      $ (24,379    -9
    


 


 


      

 

Income before income taxes.    Income before income taxes decreased $34.6 million, or 8%, to $373.1 million for the six months ended June 30, 2009 from $407.7 million for the six months ended June 30, 2008. The decrease was primarily attributable to a $32.1 million decline in Investment and Savings Products due to adverse market and economic conditions. The remaining decreases were attributable to a $0.6 million decline in Term Life Insurance, and a $2.0 million decline in Corporate and Other Distributed Products.

 

Total revenues.    Total revenues decreased $100.1 million, or 8%, to $1,090.4 million for the six months ended June 30, 2009 from $1,190.5 million for the six months ended June 30, 2008. The decrease was attributable to a $69.5 million decline in Investment and Savings Products due to adverse market and economic conditions and a $49.0 million decline in Corporate and Other Distributed Products, due primarily to declines in sales commissions from the sale of loan products, realized investment losses from impairments in our invested asset portfolio and a decreased allocation of net investment income. These declines were partially offset by a $18.4 million increase in Term Life Insurance due primarily to an increased allocation of net investment income.

 

Total benefits and expenses.    Total benefits and expenses decreased $65.5 million, or 8%, to $717.3 million for the six months ended June 30, 2009 from $782.8 million for the six months ended June 30, 2008. The decrease was attributable to a $47.1 million decline in Corporate and Other Distributed Products, due primarily to declines in sales commissions from the sale of loan products and a $37.4 million decline in Investment and Savings Products due to declines in sales commissions. These declines were partially offset by an $19.0 million increase in Term Life Insurance due primarily to higher amortization of deferred acquisition costs.

 

Income taxes.    Income taxes decreased $10.2 million, or 7%, to $128.4 million for the six-month period ended June 30, 2009 from $138.6 million for the six-month period ended June 30, 2008. The effective tax rate was 34.4% and 34.0% for the six-month periods ended June 30, 2009 and 2008, respectively.

 

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Term Life Insurance Segment

 

Our Term Life Insurance results for the six months ended June 30, 2009 are not directly comparable to results for the six months ended June 30, 2008 due to a change in our DAC and reserve estimation approach implemented at the end of the fourth quarter of 2008. For information about this change, please see the section entitled “— Critical Accounting Policies — Change in DAC and Reserve Estimation Approach.”

 

     Six Months Ended
June 30,

    Change

 
     2009

    2008

    $

     %

 
     (dollars in thousands)  

Revenues

                               

Direct premiums

   $ 1,004,059      $ 996,059      $ 8,000       1

Ceded premiums

     (289,334     (274,514     (14,820    5
    


 


 


      

Net premiums

     714,725        721,544        (6,820    -1

Allocated investment income

     144,809        119,528        25,281       21

Other, net

     16,226        16,258        (32    *   
    


 


 


      

Total revenues

     875,761        857,330        18,429       2

Benefits and Expenses

                               

Benefits and claims.

     275,546        285,058        (9,512    -3

Amortization of DAC.

     179,427        154,998        24,429       16

Acquisition and operating expenses, net of deferrals

     78,788        74,723        4,065       5
    


 


 


      

Total benefits and expenses

     533,761        514,778        18,982       4
    


 


 


      

Segment income before income taxes

   $ 341,999      $ 342,552      $ (553    *   
    


 


 


      

*   Less than 1%

 

In force book.    The following table reflects changes in our in force book of term life insurance policies for the periods presented:

 

     Six Months Ended
June 30,

    Change

 
     2009

    2008

    $

     %

 
     (dollars in millions)  

Face amount in force (beginning of period)

   $ 633,467      $ 632,086      $ 1,381       *   

Issued face amount

     39,730        44,777        (5,047    -11

Terminations and other changes

     (33,820     (36,230     (2,410    -7
    


 


 


      

Face amount in force (end of period)

   $ 639,377      $ 640,633      $ (1,256    *   
    


 


 


      

*   Less than 1%

 

The in force book remained relatively unchanged, decreasing $1.3 billion, or less than 1%, to $639.4 billion as of June 30, 2009 from $640.6 billion as of June 30, 2008. Issued face amount decreased $5.0 billion, or approximately 11%, due to slightly lower sales force productivity and lower average size of policies issued. Terminations and other changes decreased by $2.4 billion. The decrease in the value of the Canadian dollar, as measured against the U.S. dollar and as applied to our total book of in force policies, resulted in a $5.0 billion decrease in terminations and other changes, which was partially offset by an increase in lapses.

 

Net premiums.    Net premiums decreased $6.8 million, or 1%, to $714.7 million for the six months ended June 30, 2009 from $721.5 million for the six months ended June 30, 2008. Direct premiums increased $8.0 million, or 1%, to $1.0 billion for the 2009 period from $996.1 million for the 2008 period, which was attributable to a less than 1% increase in the size of our in force book. The increase was more than offset by an

 

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increase in ceded premiums. The increase in ceded premiums of $14.8 million, or 5%, to $289.3 million for the 2009 period from $274.5 million for the 2008 period was due to higher ceded YRT premiums, which increase over time with increases in the aging of policies as well as an overall increase in the percentage of the in force block subject to YRT reinsurance.

 

Allocated investment income.    Allocated investment income increased $25.3 million, or 21%, to $144.8 million for the six months ended June 30, 2009 from $119.5 million for the six months ended June 30, 2008. Of this increase, $13.7 million resulted from an increase in the percentage of invested assets allocated to Term Life Insurance to 84 % of total invested assets for the 2009 period from 75% for the 2008 period. This increased allocation was caused by an increase in the amount needed to support the required statutory reserves and targeted capital of our insurance subsidiaries. The remaining $11.6 million increase resulted from a higher yield and growth in the book value of invested assets.

 

Other, net.    Other, net remained relatively unchanged.

 

Benefits and claims.    Benefits and claims decreased $9.5 million, or 3%, to $275.5 million for the six months ended June 30, 2009 from $285.1 million for the six months ended June 30, 2008. This decrease was primarily attributable to a $11.3 million, or 5%, decrease (improvement) in actual claims experience and was partially offset by an increase in future policy benefit reserves of $1.8 million. The minor increase in reserves resulted from a lower percentage of expected future net premiums needed to fund future claims as a result of our change in DAC and reserve estimation approach in the fourth quarter of 2008, offset by actual persistency that was higher than our pricing assumptions on older blocks of insurance, which caused a greater increase in the reserve balance in the 2009 period.

 

Amortization of DAC.    Amortization of DAC increased $24.4 million, or 16%, to $179.4 million for the six months ended June 30, 2009 from $155.0 million for the six months ended June 30, 2008. The change in amortization of DAC was primarily attributable to a higher percentage of net premiums needed to amortize the higher DAC balance resulting from the change in our DAC and reserve estimation approach in the fourth quarter of 2008. The increase in actual persistency during the 2009 period relative to pricing assumptions did not materially affect DAC amortization because the higher persistency was predominantly on older blocks of insurance, which had relatively small amounts of unamortized DAC.

 

Acquisition and operating expenses, net of deferrals.    Acquisition and operating expenses, net of deferrals increased $4.1 million, or 5%, to $78.8 million for the six months ended June 30, 2009 from $74.7 million for the six months ended June 30, 2008. This increase resulted from a $8.2 million increase in sales commissions during the 2009 period that could not be deferred in accordance with U.S. GAAP. These commissions related to a special incentive compensation payment to the sales force. This increase was offset by a $1.5 million decrease in renewal commissions attributable to the runoff of pre-1990 policy issues and by a $2.6 million decrease in other expenses due primarily to higher incentive compensation accruals for the 2008 period and lower compensation costs in the 2009 period associated with headcount reductions.

 

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Investments and Savings Products Segment

 

     Six Months Ended
June 30,

   Change

 
     2009

   2008

   $

     %

 
     (dollars in thousands)  

Revenues

                             

Commissions and fees

   $ 136,124    $ 205,293    $ (69,169    -34

Other, net

     4,973      5,288      (315    -6
    

  

  


      

Total revenues

     141,097      210,581      (69,484    -33

Expenses

                             

Commission expenses, including amortization of DAC

     68,287      105,271      (36,984    -35

Other operating expenses

     32,398      32,844      (446    -1
    

  

  


      

Total expenses

     100,685      138,115      (37,430    -27
    

  

  


      

Segment income before income taxes

   $ 40,411    $ 72,466    $ (32,055    -44
    

  

  


      

 

Commissions and fees.

 

The following table sets forth a breakdown of our commissions and fees and the aggregate investment value of sales of investment and savings products that generate sales-based revenue, asset values for accounts that generate asset-based revenues and the number of fee-generating accounts:

 

     Six Months Ended
June 30,

   Change

 
     2009

   2008

   $

     %

 
     (in thousands)  

Revenue source

                             

Sales-based revenues

   $ 57,411    $ 94,952    $ (37,541    -40

Asset-based revenues

     56,840      86,713      (29,873    -34

Account-based revenues

     21,873      23,628