Selected Financial Data Not required in accordance with General Instruction I(2)(a).
Pretax earnings from the Acquisitions Division increased $1.8 million in 1998 as compared to 1997. Earnings from the Acquisitions Division are normally expected to decline over time (due to the lapsing of policies resulting from deaths of insureds or terminations of coverage) unless new acquisitions are made. In October 1998, the Division acquired approximately 260,000 policies from Lincoln National Corporation. The policies represent the payroll deduction business originally marketed and underwritten by Aetna. This acquisition resulted in a $1.6
The Dental Division's 1998 pretax earnings increased $0.1 million as compared to 1997. A decrease in earnings related to the loss of a large customer at December 31, 1997 was more than offset by increases in other areas.
The Financial Institutions Division began operating through the Company in late 1997. The Division's 1998 pretax earnings were $0.4 million as compared to the Division's earnings from the latter part of 1997 which were insignificant.
The Corporate and Other segment consists of net investment income and realized investment gains not identified with the preceding business segments. Pretax losses for this segment were $1.1 million in 1998 as compared to pretax gains of $0.6 million in 1997 primarily due to decreased net investment income on capital.
to the Year 2000 problem total $3.9 million, with an additional $1.3 million estimated to be required to support continued testing activity. PLC's Year 2000 efforts have not adversely affected its normal procurement and development of information technology.
Although PLC believes that a process is in place to successfully address Year 2000 issues, there can be no assurances that PLC's efforts will be successful, that interactions with other service providers with Year 2000 issues will not impair the Company's operations, or that the Year 2000 issue will not otherwise adversely affect the Company.
Statements of Share-Owners' Equity for the years ended December 31, 1998, 1997, and 1996........................................
Statements of Cash Flows for the years ended December 31, 1998, 1997, and 1996
The Company was founded in 1978 as American Foundation Life Insurance Company. Effective March 1, 1999, the Company's name was changed to Protective Life and Annuity Insurance Company. Since 1983, all outstanding shares of the Company's common stock have been owned by Protective Life Insurance Company ("Protective"), which is a wholly-owned subsidiary of Protective Life Corporation ("PLC"), an insurance holding company domiciled in the state of Delaware. All outstanding shares of the Company's preferred stock are owned by PLC.
o Fixed maturities (bonds and redeemable preferred stocks) -- at current market value.
As prescribed by SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," certain investments are recorded at their market values with the resulting unrealized gains and losses, net of income tax, reported as a component of share-owners' equity. The market values of fixed maturities increase or decrease as interest rates fall or rise. Therefore, although the adoption of SFAS No. 115 does not affect the Company's operations, its reported share-owners' equity will fluctuate significantly as interest rates change.
Total investments............................... $426,832,267 $ 90,930,332 Deferred policy acquisition costs............... 133,275,451 1,692,285 All other assets................................ 30,970,142 12,433,784 ---------------------------- $591,077,860 $105,056,401 ============================
Deferred income taxes........................... $ 2,562,284 $ 1,623,298 All other liabilities........................... 466,085,568 78,692,149 ---------------------------- 468,647,852 80,315,447 Share-owners' equity............................ 122,430,008 24,740,954 ---------------------------- $591,077,860 $105,056,401 ============================
The cost to acquire blocks of insurance representing the present value of future profits from such blocks of insurance is also included in deferred policy acquisition costs. The Company amortizes the present value of future profits over the premium payment period, including accrued interest of approximately 5.75%. The unamortized present value of future profits was approximately $131.2 million at December 31, 1998. During 1998, $132.5 million of present value of future profits on acquisitions made during the year was capitalized and $1.3 million was amortized.
INCOME TAXES The Company uses the asset and liability method of accounting for income taxes. Income tax provisions are generally based on income reported for financial statement purposes. Deferred federal income taxes arise from the recognition of temporary differences between the bases of assets and liabilities determined for financial reporting purposes and the bases determined for income tax purposes. Such temporary differences are principally related to the deferral of policy acquisition costs and the provision for future policy benefits and expenses.
The reconciliations of net income and share-owners' equity prepared in conformity with statutory reporting practices to that reported in the accompanying consolidated financial statements are as follows:
In 1998, the Company established an allowance for uncollectible amounts on investments totaling $500,000 at December 31, 1998. Additions and reductions to the allowance are included in realized investment gains (losses). Without such additions/reductions, the Company had net realized investment gains of $627,769 in 1998.
Rating 1998 1997 -------- ------- AAA 4.4% 26.8% AA 6.7 1.7 A 43.7 24.3 BBB 43.1 37.4 BB or Less 2.1 9.8 -------- ------- 100.0% 100.0% ======== =======
At December 31, 1998 and 1997, the Company had bonds which were rated less than investment grade of $7.7 million and $6.7 million, respectively, having an amortized cost of $7.8 million and $6.8 million, respectively.
Many of the mortgage loans have call provisions after three to ten years. Assuming the loans are called at their next call dates, approximately $0.5 million would become due in 2000 to 2003.
At December 31, 1998, the Company had no problem mortgage loans or foreclosed properties. At December 31, 1997, the Company's problem mortgage loans and foreclosed properties totaled $0.4 million. Since the Company's mortgage loans are collateralized by real estate, any assessment of impairment is based upon the estimated fair value of the real estate. Based on the Company's evaluation of its mortgage loan portfolio, the Company does not expect any material losses on its mortgage loans.
During 1998 Protective made a capital contribution of $95,374,516 consisting of corporate bonds.
Prior to November 1998, the Company's preferred stock had a provision for an annual minimum cumulative dividend, when and if declared, of $50.00 per share, and additional dividends to the extent the Company's statutory earnings for the immediately preceding year exceeded $1.0 million. The minimum dividend and any accumulation was to be paid before any dividend on any other class of capital stock was paid. The additional dividends were noncumulative and were in preference to any other dividend on any other class of capital stock. Dividends of $100,000 were declared and paid in each of 1998, 1997 and 1996 on the preferred stock. As of December 31, 1998, all cumulative preferred dividends have been paid. Effective November 3, 1998, the Company's articles of incorporation were amended such that the provision for an annual minimum cumulative dividend was removed.
During 1996, the Company's articles of incorporation were amended such that the preferred stock is redeemable at $1,000 per share solely at the Company's discretion. At December 31, 1995, the preferred stock was reported as "Redeemable Preferred Stock", whereas at December 31, 1996, it is reported as a component of share-owners' equity.
Receivables from related parties consisted of receivables from affiliates under control of PLC in the amount of $287,629 at December 31, 1998 and $183,009 at December 31, 1997. The Company routinely receives from or pays to affiliates under the control of PLC reimbursements for expenses incurred on one another's behalf. Receivables and payables among affiliates are generally settled monthly.
The Company has an additional business segment herein referred to as Corporate and Other. The Corporate and Other segment primarily consists of net investment income and expenses not attributable to the Divisions above (including net investment income on capital).
The Company has reinsured approximately $7.6 billion, $133 million, and $163 million in face amount of life insurance risks with other insurers representing $12.6 million, $0.7 million, and $0.9 million of premium income for 1998, 1997, and 1996, respectively. The Company has also reinsured accident and health risks representing $0.9 million, $2.3 million, and $1.9 million of premium income for 1998, 1997, and 1996, respectively. In 1998 and 1997, policy and claim reserves relating to insurance ceded of $21.9 million and $7.5 million respectively are included in reinsurance receivables. Should any of the reinsurers be unable to meet its obligation at the time of the claim, obligation to pay such claim would remain with the Company. At December 31, 1998 and 1997, the Company had paid $0.5 million and $0.2 million, respectively, of ceded benefits which are recoverable from reinsurers.
The carrying amount and estimated market values of the Company's financial instruments at December 31 are as follows: