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Section 1: 10-Q (10-Q)

pri-10q_20160331.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 001-34680

 

Primerica, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

27-1204330

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

1 Primerica Parkway

Duluth, Georgia

 

30099

(Address of principal executive offices)

 

(ZIP Code)

(770) 381-1000

(Registrant’s telephone number, including area code)

Not applicable.

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No

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

 

Large accelerated filer

x

Accelerated filer

o

 

 

 

 

Non-accelerated filer

o  (Do not check if a smaller reporting company)

Smaller reporting company

¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

As of April 30, 2016

Common Stock, $0.01 Par Value

 

47,045,782 shares

 

 

 

 

 

 

 


 

 

TABLE OF CONTENTS

 

 

 

Page

PART I – FINANCIAL INFORMATION

 

1

Item 1. Financial Statements (unaudited).

 

1

Condensed Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015

 

1

Condensed Consolidated Statements of Income for the three months ended March 31, 2016 and 2015

 

2

Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2016 and 2015

 

3

Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2016 and 2015

 

4

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015

 

5

Notes to Condensed Consolidated Financial Statements

 

6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

20

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

34

Item 4. Controls and Procedures.

 

34

 

PART II – OTHER INFORMATION

 

35

Item 1. Legal Proceedings.

 

35

Item 1A. Risk Factors.

 

35

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

36

Item 6. Exhibits.

 

36

 

Signatures

 

39

 

 

 

 

i


PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

PRIMERICA, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

 

 

(Unaudited)

 

 

 

 

 

 

 

March 31, 2016

 

 

December 31, 2015

 

 

 

(In thousands)

 

Assets

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

Fixed-maturity securities available-for-sale, at fair value (amortized cost: $1,640,210 in 2016

   and $1,690,043 in 2015)

 

$

1,705,705

 

 

$

1,731,459

 

Fixed-maturity securities held-to-maturity, at amortized cost (fair value: $424,007 in 2016 and

   $371,742 in 2015)

 

 

404,860

 

 

 

365,220

 

Equity securities available-for-sale, at fair value (cost: $40,159 in 2016 and $39,969 in 2015)

 

 

49,554

 

 

 

47,839

 

Trading securities, at fair value (cost: $7,626 in 2016 and $5,383 in 2015)

 

 

7,620

 

 

 

5,358

 

Policy loans

 

 

29,825

 

 

 

28,627

 

Total investments

 

 

2,197,564

 

 

 

2,178,503

 

Cash and cash equivalents

 

 

175,717

 

 

 

152,294

 

Accrued investment income

 

 

17,930

 

 

 

17,080

 

Due from reinsurers

 

 

4,160,266

 

 

 

4,110,628

 

Deferred policy acquisition costs, net

 

 

1,559,833

 

 

 

1,500,259

 

Premiums and other receivables

 

 

204,406

 

 

 

193,841

 

Intangible assets, net (accumulated amortization: $72,680 in 2016 and $71,828 in 2015)

 

 

57,467

 

 

 

58,318

 

Deferred income taxes

 

 

31,796

 

 

 

30,112

 

Other assets

 

 

343,701

 

 

 

304,356

 

Separate account assets

 

 

2,264,108

 

 

 

2,063,899

 

Total assets

 

$

11,012,788

 

 

$

10,609,290

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Future policy benefits

 

$

5,518,834

 

 

$

5,431,711

 

Unearned premiums

 

 

594

 

 

 

628

 

Policy claims and other benefits payable

 

 

243,813

 

 

 

238,157

 

Other policyholders’ funds

 

 

352,650

 

 

 

356,123

 

Notes payable

 

 

372,643

 

 

 

372,552

 

Surplus note

 

 

404,079

 

 

 

364,424

 

Income taxes

 

 

177,457

 

 

 

148,125

 

Other liabilities

 

 

418,469

 

 

 

416,417

 

Payable under securities lending

 

 

87,383

 

 

 

71,482

 

Separate account liabilities

 

 

2,264,108

 

 

 

2,063,899

 

Commitments and contingent liabilities (see Commitments and Contingent Liabilities note)

 

 

 

 

 

 

 

 

Total liabilities

 

 

9,840,030

 

 

 

9,463,518

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock ($0.01 par value; authorized 500,000 in 2016 and 2015; issued and

   outstanding 47,295 shares in 2016 and 48,297 shares in 2015)

 

 

473

 

 

 

483

 

Paid-in capital

 

 

137,855

 

 

 

180,250

 

Retained earnings

 

 

989,685

 

 

 

952,804

 

Accumulated other comprehensive income (loss), net of income tax:

 

 

 

 

 

 

 

 

Unrealized foreign currency translation gains (losses)

 

 

(3,933

)

 

 

(19,801

)

Net unrealized investment gains (losses):

 

 

 

 

 

 

 

 

Net unrealized investment gains not other-than-temporarily impaired

 

 

48,747

 

 

 

32,107

 

Net unrealized investment losses other-than-temporarily impaired

 

 

(69

)

 

 

(71

)

Total stockholders’ equity

 

 

1,172,758

 

 

 

1,145,772

 

Total liabilities and stockholders’ equity

 

$

11,012,788

 

 

$

10,609,290

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

1


PRIMERICA, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income – Unaudited

 

 

Three months ended March 31,

 

 

 

 

2016

 

 

2015

 

 

 

 

(In thousands, except per-share amounts)

Revenues:

 

 

 

 

 

 

 

 

 

Direct premiums

 

$

597,130

 

 

$

577,458

 

 

Ceded premiums

 

 

(395,333

)

 

 

(397,540

)

 

Net premiums

 

 

201,797

 

 

 

179,918

 

 

Commissions and fees

 

 

128,821

 

 

 

132,835

 

 

Investment income net of investment expenses

 

 

25,392

 

 

 

23,648

 

 

Interest expense on surplus note

 

 

(4,154

)

 

 

(2,475

)

 

Net investment income

 

 

21,238

 

 

 

21,173

 

 

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

   temporary impairment losses

 

 

(783

)

 

 

1,284

 

 

Other, net

 

 

11,889

 

 

 

9,636

 

 

Total revenues

 

 

362,962

 

 

 

344,846

 

 

 

 

 

 

 

 

 

 

 

 

Benefits and expenses:

 

 

 

 

 

 

 

 

 

Benefits and claims

 

 

90,977

 

 

 

82,500

 

 

Amortization of deferred policy acquisition costs

 

 

43,129

 

 

 

36,213

 

 

Sales commissions

 

 

66,643

 

 

 

68,457

 

 

Insurance expenses

 

 

33,311

 

 

 

34,348

 

 

Insurance commissions

 

 

4,147

 

 

 

3,190

 

 

Interest expense

 

 

7,173

 

 

 

8,676

 

 

Other operating expenses

 

 

47,370

 

 

 

44,653

 

 

Total benefits and expenses

 

 

292,750

 

 

 

278,037

 

 

Income before income taxes

 

 

70,212

 

 

 

66,809

 

 

Income taxes

 

 

25,036

 

 

 

23,408

 

 

Net income

 

$

45,176

 

 

$

43,401

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.92

 

 

$

0.82

 

 

Diluted earnings per share

 

$

0.92

 

 

$

0.82

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares used in computing earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

 

48,550

 

 

 

52,643

 

 

Diluted

 

 

48,574

 

 

 

52,691

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures:

 

 

 

 

 

 

 

 

 

Total impairment losses

 

$

(2,027

)

 

$

(237

)

 

Impairment losses recognized in other comprehensive income

   before income taxes

 

 

-

 

 

 

-

 

 

Net impairment losses recognized in earnings

 

 

(2,027

)

 

 

(237

)

 

Other net realized investment gains (losses)

 

 

1,244

 

 

 

1,521

 

 

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

  temporary impairment losses

 

$

(783

)

 

$

1,284

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per share

 

$

0.17

 

 

$

0.16

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

2


 

 

 

PRIMERICA, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Loss) – Unaudited

 

 

Three months ended March 31,

 

 

 

2016

 

 

2015

 

 

 

(In thousands)

 

Net income

 

$

45,176

 

 

$

43,401

 

Other comprehensive income (loss) before income taxes:

 

 

 

 

 

 

 

 

Unrealized investment gains (losses):

 

 

 

 

 

 

 

 

Change in unrealized holding gains/(losses) on investment securities

 

 

24,717

 

 

 

15,661

 

Reclassification adjustment for realized investment (gains) losses

   included in net income

 

 

887

 

 

 

(1,670

)

Foreign currency translation adjustments:

 

 

 

 

 

 

 

 

Change in unrealized foreign currency translation gains (losses) before

    income tax expense (benefit)

 

 

16,036

 

 

 

(20,566

)

Total other comprehensive income (loss) before income taxes

 

 

41,640

 

 

 

(6,575

)

Income tax expense (benefit) related to items of other comprehensive

   income (loss)

 

 

9,130

 

 

 

4,667

 

Other comprehensive income (loss), net of income taxes

 

 

32,510

 

 

 

(11,242

)

Total comprehensive income

 

$

77,686

 

 

$

32,159

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

3


PRIMERICA, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity – Unaudited

 

 

Three months ended March 31,

 

 

 

2016

 

 

2015

 

 

 

(In thousands)

 

Common stock:

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

483

 

 

$

522

 

Repurchases of common stock

 

 

(12

)

 

 

(9

)

Net issuance of common stock

 

 

2

 

 

 

3

 

Balance, end of period

 

 

473

 

 

 

516

 

 

 

 

 

 

 

 

 

 

Paid-in capital:

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

180,250

 

 

 

353,337

 

Share-based compensation

 

 

10,580

 

 

 

15,307

 

Net issuance of common stock

 

 

(2

)

 

 

(3

)

Repurchases of common stock

 

 

(52,973

)

 

 

(44,781

)

Adjustments to paid-in capital, other

 

 

-

 

 

 

136

 

Balance, end of period

 

 

137,855

 

 

 

323,996

 

 

 

 

 

 

 

 

 

 

Retained earnings:

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

952,804

 

 

 

795,740

 

Net income

 

 

45,176

 

 

 

43,401

 

Dividends

 

 

(8,295

)

 

 

(8,517

)

Balance, end of period

 

 

989,685

 

 

 

830,624

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss):

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

12,235

 

 

 

95,527

 

Change in foreign currency translation adjustment, net of income tax expense (benefit)

 

 

15,868

 

 

 

(20,336

)

Change in net unrealized investment gains (losses) during the period, net of income taxes:

 

 

 

 

 

 

 

 

Change in net unrealized investment gains (losses) not-other-than temporarily

   impaired, net of income tax expense (benefit)

 

 

16,640

 

 

 

9,094

 

Change in net unrealized investment losses other-than-temporarily impaired, net

   of income tax expense (benefit)

 

 

2

 

 

 

-

 

Balance, end of period

 

 

44,745

 

 

 

84,285

 

Total stockholders’ equity

 

$

1,172,758

 

 

$

1,239,421

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

4


PRIMERICA, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows – Unaudited

 

 

Three months ended March 31,

 

 

 

2016

 

 

2015

 

 

 

(In thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

45,176

 

 

$

43,401

 

Adjustments to reconcile net income to cash provided by (used in) operating

   activities:

 

 

 

 

 

 

 

 

Change in future policy benefits and other policy liabilities

 

 

60,985

 

 

 

47,672

 

Deferral of policy acquisition costs

 

 

(86,925

)

 

 

(75,434

)

Amortization of deferred policy acquisition costs

 

 

43,129

 

 

 

36,213

 

Change in income taxes

 

 

20,855

 

 

 

18,576

 

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

 

 

783

 

 

 

(1,284

)

Accretion and amortization of investments

 

 

(597

)

 

 

(438

)

Depreciation and amortization

 

 

3,139

 

 

 

2,633

 

Change in due from reinsurers

 

 

(28,825

)

 

 

(6,956

)

Change in premiums and other receivables

 

 

(12,919

)

 

 

456

 

Trading securities sold, matured, or called (acquired), net

 

 

(2,268

)

 

 

365

 

Share-based compensation

 

 

7,483

 

 

 

8,943

 

Change in other operating assets and liabilities, net

 

 

(15,099

)

 

 

(10,809

)

Net cash provided by (used in) operating activities

 

 

34,917

 

 

 

63,338

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Available-for-sale investments sold, matured or called:

 

 

 

 

 

 

 

 

Fixed-maturity securities — sold

 

 

25,104

 

 

 

23,278

 

Fixed-maturity securities — matured or called

 

 

86,609

 

 

 

72,979

 

Equity securities

 

 

-

 

 

 

1,659

 

Available-for-sale investments acquired:

 

 

 

 

 

 

 

 

Fixed-maturity securities

 

 

(55,886

)

 

 

(122,264

)

Equity securities

 

 

(99

)

 

 

(625

)

Purchases of property and equipment and other investing activities, net

 

 

(7,761

)

 

 

(1,635

)

Cash collateral received (returned) on loaned securities, net

 

 

15,901

 

 

 

5,411

 

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

 

 

(15,901

)

 

 

(5,411

)

Net cash provided by (used in) investing activities

 

 

47,967

 

 

 

(26,608

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Dividends paid

 

 

(8,295

)

 

 

(8,517

)

Common stock repurchased

 

 

(49,945

)

 

 

(38,749

)

Excess tax benefits on share-based compensation

 

 

405

 

 

 

3,456

 

Tax withholdings on share-based compensation

 

 

(3,040

)

 

 

(6,041

)

Cash proceeds from stock options exercised

 

 

-

 

 

 

136

 

Net cash provided by (used in) financing activities

 

 

(60,875

)

 

 

(49,715

)

 

 

 

 

 

 

 

 

 

Effect of foreign exchange rate changes on cash

 

 

1,414

 

 

 

(2,388

)

Change in cash and cash equivalents

 

 

23,423

 

 

 

(15,373

)

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

 

152,294

 

 

 

191,997

 

Cash and cash equivalents, end of period

 

$

175,717

 

 

$

176,624

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

5


PRIMERICA, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — Unaudited

(1) Description of Business, Basis of Presentation, and Summary of Significant Accounting Policies

Description of Business. Primerica, Inc. (the "Parent Company"), together with its subsidiaries (collectively, "we", "us" or the "Company"), is a leading distributor of financial products to middle income households in the United States and Canada. We assist our clients in meeting their needs for term life insurance, which we underwrite, and mutual funds, annuities and other financial products, which we distribute primarily on behalf of third parties. Our primary subsidiaries include the following entities: Primerica Financial Services, Inc. ("PFS"), a general agency and marketing company; Primerica Life Insurance Company ("Primerica Life"), our principal life insurance company; Primerica Financial Services (Canada) Ltd., a holding company for our Canadian operations, which includes Primerica Life Insurance Company of Canada ("Primerica Life Canada") and PFSL Investments Canada Ltd. ("PFSL Investments Canada"); and PFS Investments Inc. ("PFS Investments"), an investment products company and broker-dealer. Primerica Life, domiciled in Massachusetts, owns National Benefit Life Insurance Company ("NBLIC"), a New York insurance company. We established Peach Re, Inc. ("Peach Re") and Vidalia Re, Inc. (“Vidalia Re”) as special purpose financial captive insurance companies and wholly owned subsidiaries of Primerica Life. Peach Re and Vidalia Re have each entered into separate coinsurance agreements with Primerica Life whereby Primerica Life has ceded certain level premium term life insurance policies to Peach Re and Vidalia Re (respectively, the “Peach Re Coinsurance Agreement” and the “Vidalia Re Coinsurance Agreement”).

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

The accompanying unaudited condensed consolidated financial statements contain all adjustments, generally consisting of normal recurring accruals, which are necessary to fairly present the balance sheets as of March 31, 2016 and December 31, 2015 and the statements of income, comprehensive income (loss), stockholders' equity and cash flows for the three months ended March 31, 2016 and 2015. Results of operations for interim periods are not necessarily indicative of results for the entire year or of the results to be expected in future periods.

These unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are sufficient to make the information not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto that are included in our Annual Report on Form 10-K for the year ended December 31, 2015 ("2015 Annual Report").

Use of Estimates. The most significant items that involve a greater degree of accounting estimates and actuarial determinations subject to change in the future are the valuation of investments, deferred policy acquisition costs ("DAC"), liabilities for future policy benefits and unpaid policy claims, and income taxes. Estimates for these and other items are subject to change and are reassessed by management in accordance with U.S. GAAP. Actual results could differ from those estimates.

Consolidation. The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and those entities required to be consolidated under applicable accounting standards. All material intercompany profits, transactions, and balances among the consolidated entities have been eliminated.

Reclassifications. Certain reclassifications have been made to prior-period amounts to conform to current-period reporting classifications. These reclassifications had no impact on net income or total stockholders' equity.

Subsequent Events. The Company has evaluated subsequent events for recognition and disclosure for occurrences and transactions after the date of the unaudited condensed consolidated financial statements dated as of March 31, 2016.

Significant Accounting Policies. All significant accounting policies remain unchanged from the 2015 Annual Report.

New Accounting Principles. In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2015-03, Interest — Imputation of Interest (Subtopic 835-30) – Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). Prior to the adoption of ASU 2015-03, debt issuance costs related to a recognized debt liability were presented as a deferred charge, or asset, within the balance sheet. ASU 2015-03 requires the presentation of debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. We adopted ASU 2015-03 during the three months ended March 31, 2016 and the amendments in the update were applied retrospectively, which resulted in the deduction of debt issuance costs of approximately $2.8 million from other assets and a corresponding reduction in the carrying amounts of the notes payable and surplus note of approximately $2.0 million and $0.8 million, respectively, in our consolidated balance sheets as of December 31, 2015. This update had no impact on our results of operations.

 

 

6


In February 2016, FASB issued Accounting Standards Update No. 2016-02 (“ASU 2016-02”), Leases (ASC 842). ASU 2016-02 intends to enhance transparency and comparability among organizations by requiring lessees to recognize lease assets and lease liabilities on the balance sheet. The amendments in ASU 2016-02 are effective for the Company beginning in fiscal year 2019, with early adoption permitted. The Company intends to adopt the amendments in ASU 2016-02 beginning in the first quarter of 2019, and we are currently in the process of evaluating its impact on the Company’s consolidated financial statements.

 

In March 2016, the FASB issued Accounting Standards Update No 2016-09 (“ASU 2016-09”) Compensation—Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 intends to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. While we are still in the process of evaluating the guidance in ASU 2016-09, we anticipate that its most notable impact on the Company’s financial statements will involve the change in accounting for the income tax consequences associated with share-based payment transactions in the income statement. The amendments in ASU 2016-09 require that the tax effect of the difference between the cumulative compensation cost of a share-based award recognized for financial reporting purposes and the deduction of the award for tax purposes (“excess tax benefits or deficiencies”) be recognized as income tax expense or benefit in the income statement. Under current U.S. GAAP, the Company recognizes excess tax benefits or deficiencies as an adjustment to additional paid-in capital in the statement of stockholders’ equity. The amendments in ASU 2016-09 that require a change in the accounting for excess tax benefits and deficiencies in the income statement are effective prospectively, with early adoption permitted. The Company intends to adopt the amendments in ASU 2016-09 beginning in the first quarter of 2017. The impact on the income tax consequences of share-based payment transactions from adopting the amendments in ASU 2016-09 will be affected by future market prices of our common stock when we deduct the cost of share-based payment transactions for income tax purposes, and therefore, we are unable to quantify the impact at this time.

 

Future Application of Accounting Standards. Recent accounting guidance not discussed here and in the 2015 Annual Report is not applicable, is immaterial to our financial statements, or did not or is not expected to have a material impact on our business.

 

(2) Segment and Geographical Information

Segments. We have two primary operating segments - Term Life Insurance and Investment and Savings Products. We also have a Corporate and Other Distributed Products segment.

Results of operations by segment were as follows:

 

 

Three months ended March 31,

 

 

 

2016

 

 

2015

 

 

 

(In thousands)

 

Revenues:

 

 

 

 

 

 

 

 

Term life insurance segment

 

$

206,278

 

 

$

182,196

 

Investment and savings products segment

 

 

125,034

 

 

 

129,074

 

Corporate and other distributed products segment

 

 

31,650

 

 

 

33,576

 

Total revenues

 

$

362,962

 

 

$

344,846

 

Income (loss) before income taxes:

 

 

 

 

 

 

 

 

Term life insurance segment

 

$

46,080

 

 

$

36,076

 

Investment and savings products segment

 

 

31,689

 

 

 

35,044

 

Corporate and other distributed products segment

 

 

(7,557

)

 

 

(4,311

)

Total income before income taxes

 

$

70,212

 

 

$

66,809

 

 

Total assets by segment were as follows:

 

 

March 31, 2016

 

 

December 31, 2015

 

 

 

(In thousands)

 

Assets:

 

 

 

 

 

 

 

 

Term life insurance segment

 

$

5,742,576

 

 

$

5,638,682

 

Investment and savings products segment(1)

 

 

2,367,439

 

 

 

2,157,548

 

Corporate and other distributed products segment

 

 

2,902,773

 

 

 

2,813,060

 

Total assets

 

$

11,012,788

 

 

$

10,609,290

 

 

(1) The Investment and Savings Products segment includes assets held in separate accounts. Excluding separate accounts, the Investment and Savings Products segment assets were approximately $103.5 million and $93.8 million as of March 31, 2016 and December 31, 2015, respectively.

Segment Measurement Change. In the third quarter of 2015, the Company changed its basis for allocating net investment income, interest expense and invested assets between the Term Life Insurance segment and the Corporate and Other Distributed Products segment in measuring segment results and total assets by segment. As a result of this change in segment measurement, the amounts of net investment income and interest expense that have been reclassified from the Term Life Insurance segment to the Corporate and Other Distributed Products segment, were approximately $15.9 million and $4.1 million, respectively, for the three months ended

 

7


March 31, 2015. For additional discussion regarding this segment measurement change, see Note 3 (Segment and Geographical Information) to our consolidated financial statements within our 2015 Annual Report.

See “Management's Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this report for more information regarding the results of our operating segments.

Geographical Information. Results of operations by country and long-lived assets, primarily tangible assets reported in Other assets in our unaudited condensed consolidated balance sheets, were as follows:

 

 

Three months ended March 31,

 

 

 

2016

 

 

2015

 

 

 

(In thousands)

 

Revenues by country:

 

 

 

 

 

 

 

 

United States

 

$

305,015

 

 

$

286,141

 

Canada

 

 

57,947

 

 

 

58,705

 

Total revenues

 

$

362,962

 

 

$

344,846

 

Income before income taxes by country:

 

 

 

 

 

 

 

 

United States

 

$

54,958

 

 

$

48,856

 

Canada

 

 

15,254

 

 

 

17,953

 

Total income before income taxes

 

$

70,212

 

 

$

66,809

 

 

 

 

March 31, 2016

 

 

December 31, 2015

 

 

 

(In thousands)

 

Long-lived assets by country:

 

 

 

 

 

 

 

 

United States

 

$

28,756

 

 

$

28,621

 

Canada

 

 

859

 

 

 

787

 

Total long-lived assets

 

$

29,615

 

 

$

29,408

 

 

(3) Investments

Available-for-sale Securities. The period-end cost or amortized cost, gross unrealized gains and losses, and fair value of available-for-sale fixed-maturity and equity securities follow:

 

 

March 31, 2016

 

 

 

Cost or amortized cost

 

 

Gross unrealized gains

 

 

Gross unrealized losses

 

 

Fair value

 

 

 

(In thousands)

 

Securities available-for-sale, carried at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

 

$

16,675

 

 

$

565

 

 

$

-

 

 

$

17,240

 

Foreign government

 

 

111,706

 

 

 

7,937

 

 

 

(858

)

 

 

118,785

 

States and political subdivisions

 

 

41,093

 

 

 

2,892

 

 

 

(565

)

 

 

43,420

 

Corporates

 

 

1,243,942

 

 

 

62,343

 

 

 

(18,400

)

 

 

1,287,885

 

Mortgage- and asset-backed securities

 

 

226,794

 

 

 

11,872

 

 

 

(291

)

 

 

238,375

 

Total fixed-maturity securities(1)

 

 

1,640,210

 

 

 

85,609

 

 

 

(20,114

)

 

 

1,705,705

 

Equity securities

 

 

40,159

 

 

 

10,034

 

 

 

(639

)

 

 

49,554

 

Total fixed-maturity and equity securities

 

$

1,680,369

 

 

$

95,643

 

 

$

(20,753

)

 

$

1,755,259

 

 

 

(1)

Includes approximately $0.1 million of other-than-temporary impairment (“OTTI”) losses related to corporates and mortgage- and asset-backed securities recognized in accumulated other comprehensive income.

 

 

 

December 31, 2015

 

 

 

Cost or amortized cost

 

 

Gross unrealized gains

 

 

Gross unrealized losses

 

 

Fair value

 

 

 

(In thousands)

 

Securities available-for-sale, carried at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

 

$

20,233

 

 

$

448

 

 

$

(22

)

 

$

20,659

 

Foreign government

 

 

114,656

 

 

 

7,082

 

 

 

(1,522

)

 

 

120,216

 

States and political subdivisions

 

 

38,995

 

 

 

2,111

 

 

 

(541

)

 

 

40,565

 

Corporates

 

 

1,276,965

 

 

 

49,008

 

 

 

(24,211

)

 

 

1,301,762

 

Mortgage- and asset-backed securities

 

 

239,194

 

 

 

9,818

 

 

 

(755

)

 

 

248,257

 

Total fixed-maturity securities(1)

 

 

1,690,043

 

 

 

68,467

 

 

 

(27,051

)

 

 

1,731,459

 

Equity securities

 

 

39,969

 

 

 

8,252

 

 

 

(382

)

 

 

47,839

 

Total fixed-maturity and equity securities

 

$

1,730,012

 

 

$

76,719

 

 

$

(27,433

)

 

$

1,779,298

 

 

8


 

(1)

Includes approximately $0.1 million of OTTI related to corporates and mortgage- and asset-backed securities recognized in accumulated other comprehensive income.

All of our available-for-sale mortgage- and asset-backed securities represent variable interests in variable interest entities ("VIEs"). We are not the primary beneficiary of these VIEs because we do not have the power to direct the activities that most significantly impact the entities’ economic performance. The maximum exposure to loss as a result of our involvement in these VIEs equals the carrying value of the securities.

The scheduled maturity distribution of the available-for-sale fixed-maturity portfolio at March 31, 2016 follows:

 

 

Amortized cost

 

 

Fair value

 

 

 

(In thousands)

 

Due in one year or less

 

$

71,107

 

 

$

71,731

 

Due after one year through five years

 

 

675,707

 

 

 

711,733

 

Due after five years through 10 years

 

 

618,931

 

 

 

632,263

 

Due after 10 years

 

 

47,671

 

 

 

51,603

 

 

 

 

1,413,416

 

 

 

1,467,330

 

Mortgage- and asset-backed securities

 

 

226,794

 

 

 

238,375

 

Total fixed-maturity securities

 

$

1,640,210

 

 

$

1,705,705

 

 

Expected maturities may differ from scheduled contractual maturities because issuers of securities may have the right to call or prepay obligations with or without call or prepayment penalties.

Unrealized Gains and Losses on Investments. The net effect on stockholders’ equity of unrealized gains and losses on investments was as follows:

 

 

 

March 31, 2016

 

 

December 31, 2015

 

 

 

(In thousands)

 

Net unrealized investment gains including OTTI:

 

 

 

 

 

 

 

 

Fixed-maturity and equity securities