Primerica 2010 Annual Report - Direct Selling News

The financial strength ratings of our insurancesubsidiaries are subject to periodic reviewusing, among other things, the ratings agencies’proprietary capital adequacy models, and aresubject to revision or withdrawal at any time.Insurance financial strength ratings aredirected toward the concerns of policyholdersand are not intended for the protection ofinvestors or as a recommendation to buy, holdor sell securities. Our financial strength ratingswill affect our competitive position relative toother insurance companies. If the financialstrength ratings of our insurance subsidiariesfall below certain levels, some of ourpolicyholders may move their business to ourcompetitors.In addition, the standards used by ratingsagencies in determining financial strength aredifferent from capital requirements set byinsurance regulators. We may need to takeactions in response to changing standards setby any of the ratings agencies, as well asstatutory capital requirements, which couldhave a material adverse effect on our business,financial condition and results of operations.Credit deterioration in, and the effectsof interest rate fluctuations on, ourinvested asset portfolio couldmaterially adversely affect ourbusiness, financial condition and resultsof operations.A large percentage of our invested assetportfolio is invested in fixed-income securities;as a result, credit deterioration and interestrate fluctuations could materially affect thevalue and earnings of our invested assetportfolio. Fixed-income securities decline invalue if there is no active trading market for thesecurities or the market’s impression of, or theratings agencies’ views on, the credit quality ofan issuer worsens. During periods of decliningmarket interest rates, any interest income wereceive on variable interest rate investmentswould decrease. In addition, during suchperiods, we would be forced to reinvest thecash we receive as interest or return ofprincipal on our investments in lower-yieldinghigh-grade instruments or in lower-creditinstruments to maintain comparable returns.Issuers of fixed-income securities could alsodecide to prepay their obligations to borrow atlower market rates, which would increase thepercentage of our portfolio that we would haveto reinvest in lower-yielding investments ofcomparable credit quality or in lower qualityinvestments offering similar yields. If interestrates generally increase, the market value ofour fixed rate income portfolio decreases.Additionally, if the market value of any securityin our invested asset portfolio decreases, wemay realize losses if we deem the value of thesecurity to be other-than-temporarily-impaired.To the extent that any fluctuations in fair valueare significant or we recognize impairmentsthat are material, it could have a materialadverse effect on our business, financialcondition and results of operations.Valuation of our investments and thedetermination of whether a decline inthe fair value of our invested assets isother-than-temporary are based onmethodologies and estimates that mayprove to be incorrect.GAAP requires that when the fair value of anyof our invested assets declines and such declineis deemed to be other-than-temporary, werecognize a loss in either accumulated othercomprehensive income or on our statement ofincome based on certain criteria in the periodthat such determination is made. Determiningthe fair value of certain invested assets,particularly those that do not trade on a regularbasis, requires an assessment of available dataand the use of assumptions and estimates.Once it is determined that the fair value of anasset is below its carrying value, we mustdetermine whether the decline in fair value isother-than-temporary, which is based onsubjective factors and involves a variety ofassumptions and estimates. For information onour valuation methodology, see Notes 1 and 4to our consolidated and combined financialstatements included elsewhere in this reportand “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations —Critical Accounting Policies — Investments.”44 Freedom Lives Here