Primerica 2010 Annual Report - Direct Selling News

interest rate risk and business risk. For eachcategory, the capital requirement is determinedby applying factors to various asset, premiumand reserve items, with the factor being higherfor those items with greater underlying risk andlower for less risky items. The formula isintended to be used by insurance regulators asan early warning tool to identify possibleweakly capitalized companies for purposes ofinitiating further regulatory action. If aninsurer’s RBC falls below specified levels, theinsurer would be subject to different degrees ofregulatory action depending upon the level.These actions range from requiring the insurerto propose actions to correct the capitaldeficiency to placing the insurer underregulatory control.In Canada, an insurer’s minimum capitalrequirement is overseen by OSFI anddetermined as the sum of the capitalrequirements for five categories of risk: assetdefault risk, mortality/morbidity/lapse risks,changes in interest rate environment risk,segregated funds risk and foreign exchangerisk.As of December 31, 2010, Primerica Life andNBLIC had combined statutory capital, andPrimerica Life Canada had statutory capital, inexcess of the applicable thresholds.NAIC Pronouncements and Reviews.Although we and our insurance subsidiaries aresubject to state insurance regulation, in manyinstances the state regulations emanate fromNAIC model statutes and pronouncements.Certain changes to NAIC model statutes andpronouncements, particularly as they affectaccounting issues, may take effectautomatically in the various states withoutaffirmative action by the states. Although withrespect to some financial regulations andguidelines, states sometimes defer to theinterpretation of the insurance department ofthe state of domicile, neither the action of thedomiciliary state nor the action of the NAIC isbinding on a non-domiciliary state. Accordingly,a state could choose to follow a differentinterpretation. Also, regulatory actions withprospective impact can potentially have asignificant impact on currently sold products. Inaddition, accounting and actuarial groupswithin the NAIC have studied whether tochange the accounting standards that relate tocertain reinsurance credits, and if changes weremade, whether they should be appliedretrospectively, prospectively only, or in aphased-in manner. A requirement to reduce thereserve credits on ceded business, if appliedretroactively, would have a negative impact onour statutory capital. The NAIC is also currentlyworking on reforming state regulation invarious areas, including comprehensive reformsrelating to insurance reserves.The NAIC also has established guidelines toassess the financial strength of insurancecompanies for U.S. state regulatory purposes.The NAIC conducts annual reviews of thefinancial data of insurance companies primarilythrough the application of 12 financial ratiosprepared on a statutory basis. The annualstatements are submitted to state insurancedepartments to assist them in monitoringinsurance companies in their state.Statutory Accounting Principles. Statutoryaccounting principles (“SAP”) is a basis ofaccounting developed by U.S. insuranceregulators to monitor and regulate the solvencyof insurance companies. In developing SAP,insurance regulators were primarily concernedwith evaluating an insurer’s ability to pay all itscurrent and future obligations to policyholders.As a result, statutory accounting focuses onconservatively valuing the assets and liabilitiesof insurers, generally in accordance withstandards specified by the insurer’s domiciliaryjurisdiction. Uniform statutory accountingpractices are established by the NAIC andgenerally adopted by regulators in the variousU.S. jurisdictions. These accounting principlesand related regulations determine, amongother things, the amounts our insurancesubsidiaries may pay to us as dividends anddiffer somewhat from GAAP, which aredesigned to measure a business on a goingconcernbasis. GAAP gives consideration tomatching of revenue and expenses and, as aresult, certain expenses are capitalized whenincurred and then amortized over the life of theassociated policies. The valuation of assets andliabilities under GAAP is based in part upon bestestimate assumptions made by the insurer.Stockholders’ equity represents both amountsPrimerica 2010 Annual Report 31