The Company’s Home Office is located at 2801 Highway 280 South, Birmingham, Alabama. This campus includes the original 142,000 square-foot building which was completed in 1976, a second contiguous 220,000 square-foot building which was completed in 1985, and a third contiguous 315,000 square-foot building that was completed in January 2003. In addition, parking is provided for approximately 2,760 vehicles. In 2000, the Company entered into an arrangement, with an unrelated party, for the construction of the third building. The unrelated party owns the building and leases it to the Company. The lease is accounted for as an operating lease under SFAS No. 13 “Accounting For Leases”. Lease payments are based on current LIBOR interest rates and the cost of the building. At the end of the lease term, February 1, 2007, the Company may purchase the building for the original building cost of approximately $75 million. Based upon current interest rates, annual lease payments are estimated to be $1.5 million. Were the Company not to purchase the building, a payment of approximately $66 million would be due at the end of the lease term.
The Company leases administrative and marketing office space in approximately 25 cities including approximately 24,173 square feet in Birmingham (excluding the home office building), with most leases being for periods of three to ten years. The aggregate annualized rent is approximately $8.1 million.
INCOME STATEMENT DATA (3) Premiums and policy fees............... $1,670,312 $1,561,717 $1,389,820 $1,175,898 $ 861,027 Reinsurance ceded...................... (934,435) (751,396) (771,151) (686,108) (462,297) --------------------------------------------------------------------------------------------------------------------------- Net of reinsurance ceded 735,877 810,321 618,669 489,790 398,730 Net investment income.................. 1,030,752 1,022,953 880,141 730,149 667,968 Realized investment gains (losses)..... Derivative financial instruments... 12,550 28,308 (1,114) 9,013 (2,279) All other investments.............. 58,064 910 (8,740) (16,056) 1,222 Other income........................... 120,282 100,196 120,647 151,833 89,680 --------------------------------------------------------------------------------------------------------------------------- Total revenues..................... 1,957,525 1,962,688 1,609,603 1,364,729 1,155,321 Benefits and expenses.................. 1,632,113 1,697,645 1,400,007 1,153,054 954,660 Income tax expense..................... 108,362 87,688 68,538 74,321 70,976 Income (loss) from discontinued operations (1)..................... (30,522) 16,122 21,642 Change in accounting principle (2)..... (7,593) -------------------------------------------------------------------------------- Net income............................. $ 217,050 $ 177,355 $ 102,943 $ 153,476 $ 151,327 ===========================================================================================================================
December 31 ------------------------------------------------------------------------------- 2003 2002 2001 2000 1999 -------------------------------------------------------------------------------------------------------------------------- (dollar in thousands) BALANCE SHEET DATA Total assets........................... $24,573,991 $21,933,111 $19,718,824 $15,145,633 $12,994,164 Total debt............................. $ 461,329 $ 406,110 $ 376,211 $ 306,125 $ 236,023 Total stable value contract and annuity account balances(5)................ $ 4,847,518 $ 4,198,070 $ 3,907,892 $ 3,385,092 $ 2,915,417 Liabilities related to variable interest entities........................... $ 400,000 Subordinated debt securities........... $ 221,650 $ 215,000 $ 175,000 $ 190,000 $ 190,000 Share-owners' equity................... $ 2,002,144 $ 1,720,702 $ 1,400,144 $ 1,114,058 $ 865,223 --------------------------------------------------------------------------------------------------------------------------
In 2003, the Company’s net income increased 22.4% to $217.1 million or $3.07 per diluted share, compared to $177.4 million or $2.52 per share in 2002. Included in 2003 net income were net realized investment gains of $0.28 per share compared to gains of $0.04 per share in 2002.
The Life Marketing segment’s pretax operating income was $159.2 million in 2003, an increase of 26.8% over the $125.6 million reported in 2002. The increase was primarily attributable to an increase in business-in-force.
The Acquisitions segment’s pretax operating income was $95.2 million in 2003, up slightly from the $95.1 million reported in 2002. Increased earnings from recently completed transactions were offset by the expected declining earnings from older acquired blocks of business.
The Annuities segment’s pretax operating income was $13.4 million in 2003, a decline of $2.3 million from the $15.7 million reported in 2002. The decrease is primarily due to interest spread compression and low sales of fixed annuities caused by lower interest rates in 2003.
Establishing an adequate liability for the Company’s obligations to its policyholders requires the use of assumptions. Liabilities for future policy benefits on traditional life insurance products require the use of assumptions relative to future investment yields, mortality, persistency and other assumptions based on the Company’s historical experience, modified as necessary to reflect anticipated trends and to include provisions for possible adverse deviation.
Determining the Company’s obligations to employees under its defined benefit pension plan and stock-based compensation plans requires the use of estimates. The calculation of the liability related to the Company’s defined benefit pension plan requires assumptions regarding the appropriate weighted average discount rate, estimated rate of increase in the compensation of its employees and the expected long-term rate of return on the plan’s assets. Accounting for other stock-based compensation plans may require the use of option pricing models to estimate the Company’s obligations. Assumptions used in such models relate to equity market volatility, the risk-free interest rate at the date of grant, as well as the expected exercise date.
The following table sets forth for the periods shown the amount of premiums and policy fees, net of reinsurance (premiums and policy fees), and the percentage change from the prior period:
Year Ended Percentage Increase December 31 Amount (Decrease) ----------------------------------------------------------------------------- (in thousands) 2001 $618,669 26.3% 2002 810,321 31.0 2003 735,877 (9.2) -----------------------------------------------------------------------------
Percentage Earned on Year Ended Average Cash December 31 Amount Increase and Investments ----------------------------------------------------------------------------------- (in thousands) 2001 $ 880,141 20.5% 7.3% 2002 1,022,953 16.2 7.0 2003 1,030,752 0.8 6.4 -----------------------------------------------------------------------------------
The percentage earned on average cash and investments was 7.0% in 2002 and 6.4% in 2003, due to the overall decline in interest rates on new investments.
Realized investment gains and losses related to derivative financial instruments primarily represent changes in the fair values of certain derivative financial instruments. Realized investment gains and losses related to derivatives include periodic settlements related to interest rate swaps intended to mitigate the risks associated with corporate debt and certain investments, but do not qualify as hedges under SFAS No. 133.
The sales of investments that have occurred generally result from portfolio management decisions to maintain proper matching of assets and liabilities. Realized investment gains related to all other investments in 2002 of $80.1 million were largely offset by realized investment losses of $79.2 million. Realized investment gains related to all other investments in 2003 of $93.4 million were largely offset by realized investment losses of $35.3 million. During 2002 and 2003, the Company recorded other-than-temporary impairments in its investments of $30.2 million and $22.3 million, respectively.
Each quarter the Company reviews investments with material unrealized losses and tests for other-than-temporary impairments. Management analyzes various factors to determine if any specific other than temporary asset impairments exist. Once a determination has been made that a specific other-than-temporary impairment exists, a realized loss is recognized and the cost basis of the impaired asset is adjusted to its fair value. An other-than-temporary impairment loss is recognized based upon all relevant facts and circumstances for each investment. With respect to unrealized losses due to issuer-specific events, the Company considers the creditworthiness and financial performance of the issuer and other available information. With respect to unrealized losses that are not due to issuer-specific events, such as losses due to interest rate fluctuations, general market conditions or industry-related events, the Company considers its intent and ability to hold the investment to allow for a market recovery or to maturity together with an assessment of the likelihood of full recovery. See also “Liquidity and Capital Resources - Investments” included herein.
The following table sets forth other income for the periods shown:
Other income consists primarily of revenues of the Company’s broker-dealer subsidiary, direct response businesses, service contract businesses, investment advisory fees from variable insurance products, and revenues of the Company’s noninsurance subsidiaries.
Consistent with the Company’s segment reporting in the Notes to Consolidated Financial Statements, management evaluates the results of the Company’s segments on a before-income-tax basis as adjusted for certain items which management believes are not indicative of the Company’s core operations. Segment operating income (loss) excludes net realized investment gains and losses and the related amortization of deferred policy acquisition costs and gains (losses) on derivative instruments because fluctuations in these items are due to changes in interest rates and other financial market factors instead of mortality and morbidity. Periodic settlements of interest rate swaps associated with corporate debt and certain investments are included in realized gains and losses but are considered part of operating income because the interest rate swaps are hedging items affecting operating income. Also, segment operating income (loss) excludes any net gains or losses on disposals of businesses, discontinued operations, and the cumulative effect of changes in accounting principles. Although the items excluded from segment operating income (loss) may be significant components in understanding and assessing the Company’s overall financial performance, management believes that operating segment income (loss) enhances an investor’s understanding of the Company’s results of operations by highlighting the income (loss) attributable to the normal, recurring operations of the insurance business (i.e., mortality and morbidity), consistent with industry practice. However, the Company’s segment operating income (loss) measures may not be comparable to similarly titled measures reported by other companies. Segment operating income (loss) should not be construed as a substitute for net income (loss) determined in accordance with accounting principles generally accepted in the United States of America (GAAP). “Total income from continuing operations before income tax” is a GAAP measure to which the non-GAAP measure “total operating income” may be compared. Unlike total operating income, total income before income tax includes net realized investment gains and losses, the related amortization of deferred policy acquisition costs and gains (losses) on derivative instruments. In the Annuities and Stable Value Products segments operating income excludes realized investment gains and losses and related amortization. In the Corporate and Other segment operating income includes derivative gains related to corporate debt and investments.
Year Ended December 31 -------------------------------------------------------- 2003 2002 2001 --------------------------------------------------------------------------------------------------------------------- (in thousands) Operating income (loss)1 Life Marketing $159,157 $125,550 $ 89,574 Acquisitions 95,150 95,097 68,040 Annuities 13,373 15,694 16,934 Stable Value Products 38,911 42,272 33,150 Asset Protection (12,760) (23,378) 33,960 Corporate and Other 1,001 5,643 (10,895) --------------------------------------------------------------------------------------------------------------------- Realized investment gains (losses) Annuities 22,733 2,277 1,139 Stable Value Products 9,756 (7,061) 7,218 Corporate and Other 38,125 34,002 (18,211) Less derivative gains related to corporate debt and investments2 Corporate and Other (21,087) (23,072) (10,317) Related amortization of deferred policy acquisition costs Annuities (18,947) (1,981) (996) --------------------------------------------------------------------------------------------------------------------- Income (loss) before income tax Life Marketing 159,157 125,550 89,574 Acquisitions 95,150 95,097 68,040 Annuities 17,159 15,990 17,077 Stable Value Products 48,667 35,211 40,368 Asset Protection (12,760) (23,378) 33,960 Corporate and Other 18,039 16,573 (39,423) --------------------------------------------------------------------------------------------------------------------- Total income before income tax $325,412 $265,043 $209,596 ---------------------------------------------------------------------------------------------------------------------
The Life Marketing segment’s 2002 pretax operating income was $125.6 million, $36.0 million above 2001. In the third quarter of 2002, the Company discovered that it had overpaid the reinsurance premiums due on certain life insurance policies, and indicated that it would be seeking recovery of approximately $94.5 million from several reinsurance companies. At December, 31, 2002, the Company had recorded cash and receivables totaling $69.7 million, which reflected the amounts received at that date, and the Company’s estimate of amounts to be recovered in the future, based upon the information then available.
The corresponding increase in premiums and policy fees resulted in $62.5 million of additional amortization of deferred policy acquisition costs in 2002. The amortization of deferred policy acquisition costs took into account the amortization relating to the increase in premiums and policy fees as well as the additional amortization required should the remainder of the overpayment not be collected. The Life Marketing segment’s pretax operating income thereby increased $7.2 million which is the difference between the premiums recorded and the amount of such additional amortization.
Because the overpayments were made over a period of 10 years beginning in 1992, and had the effect of reducing the amortization of deferred policy acquisition costs during that period, the Company believes that no prior period results were materially understated and that no operating trends were materially affected as a result.
In addition to the increase from reinsurance recoveries, an increase of $7.2 million in 2002 is attributable to favorable mortality experience, and an increase of $21.6 million can be attributed to growth through sales.
The Company offers a guaranteed minimum death benefit feature (GMDB) on its variable annuity products. The Company’s accounting policy has been to calculate its total exposure to GMDB, and then apply a mortality factor to determine the amount of claims that could be expected to occur in the coming twelve months. The Company then accrues to that amount over four quarters. At December 31, 2003, the total GMDB reserve was $5.1 million. The total guaranteed amount payable under the GMDB feature based on variable annuity account balances at December 31, 2003, was $287.0 million, a decrease of $252.0 million from December 31, 2002, caused by an improvement in the equity markets.
In accordance with statutory accounting practices prescribed or permitted by regulatory authorities (which require the assumption that equity markets will significantly worsen), the Annuities segment reported GMDB related policy liabilities and accruals of $12.1 million at December 31, 2003, a decrease of $12.6 million from December 31, 2002.
Although positive performance in the equity markets in 2003 allowed the Company to decrease its GMDB related policy liabilities, the Annuities segment’s future results may be negatively affected by a slow economy. Volatile equity markets could negatively affect sales of variable annuities and the fees the segment assesses on variable annuity contracts. Lower interest rates have negatively affected sales of fixed annuities. In this segment, equity market volatility may create uncertainty regarding the level of future profitability in the variable annuity business and the related rate of amortization of deferred policy acquisition costs.
The segment had a pretax operating loss of $12.8 million in 2003. The loss included the $28.4 million charge discussed above. Pretax operating income for the segment’s core lines of business was $17.0 million in 2003 as compared to $18.4 million in 2002. Lower credit insurance results in 2003, caused by reduced sales, were partially offset by improved results on service contract lines in 2003. The vehicle service contract line of business improved to contribute pretax operating income of $3.7 million in 2003, as compared to a pretax operating loss of $2.8 million in 2002, due to improving loss ratios caused by the affect of increasing prices in 2000 through 2003. The marine service contract line’s pretax operating income improved to $6.0 million in 2003, $1.2 million better than in 2002. Other continuing lines of business contributed $7.3 million of pretax operating income. Included in the pretax operating loss in 2003, was the sale of an inactive charter which contributed $6.9 million of income. All other items decreased operating income by $8.3 million in 2003.
In 2003, the segment had pretax operating income of $1.0 million, $4.6 million less than 2002. The decreases in pretax operating income included a $3.0 million increase in interest expense, a $2.0 million decrease in net settlements on derivatives relating to corporate debt and investments, an increase of $3.9 million in expenses related to employee incentive plans and other corporate expenses, and a $1.6 million charge related to the early extinguishment of debt. These decreases were partially offset by a $5.8 million increase in investment income in the segment.
On January 1, 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The adoption of SFAS No. 133 resulted in a cumulative $7.6 million charge to net income, net of $4.1 million income tax, or $0.11 per share on both a basic and diluted basis.
The following table sets forth net income from continuing operations before cumulative effect of change in accounting principle and related per share information for the periods shown:
Year Ended Per Share Percentage December 31 Amount Diluted Increase/ (Decrease) ------------------------------------------------------------------------------ (in thousands) 2001 $141,058 $2.01 (3.4)% 2002 177,355 2.52 25.4 2003 217,050 3.07 21.8 ------------------------------------------------------------------------------
Net income from continuing operations before cumulative effect of change in accounting principle per share - diluted in 2002 of $2.52 reflects improved operating earnings in the Life Marketing, Acquisitions, Stable Value Products and Corporate and Other segments and higher realized investment gains, which were partially offset by lower operating earnings in the Annuities and Asset Protection segments. Net income from continuing operations before cumulative effect of change in accounting principle per share - diluted in 2003 of $3.07 reflects improved operating earnings in the Life Marketing, Acquisitions, and Asset Protection segments and higher realized investment gains, which were partially offset by lower operating earnings in the Stable Value Products, Annuities, and Corporate and Other segments.
A ratings downgrade could adversely affect the Company’s ability to compete.
The Company’s results may fluctuate from period to period due to fluctuations in policy claims received by the Company. Certain of the Company’s businesses may experience higher claims if the economy is growing slowly or in recession, or equity markets decline.
The Company could be forced to sell investments at a loss to cover policyholder withdrawals.
Many of the products offered by the Company and its insurance subsidiaries allow policyholders and contract holders to withdraw their funds under defined circumstances. The Company and its insurance subsidiaries manage their liabilities and configure their investment portfolios so as to provide and maintain sufficient liquidity to support anticipated withdrawal demands and contract benefits and maturities. While the Company and its life insurance subsidiaries own a significant amount of liquid assets, a certain portion of their assets are relatively illiquid. If the Company or its subsidiaries experience unanticipated withdrawal or surrender activity, the Company or its subsidiaries could exhaust their liquid assets and be forced to liquidate other assets, perhaps on unfavorable terms. If the Company or its subsidiaries are forced to dispose of assets on unfavorable terms, it could have an adverse effect on the Company’s financial condition.
Financial services companies are frequently the targets of litigation, including class action litigation, which could result in substantial judgments.
The Company’s reinsurers could fail to meet assumed obligations, increase rates or be subject to adverse developments that could affect the Company.
The Company’s ability to compete is dependent on the availability of reinsurance. Premium rates charged by the Company are based, in part, on the assumption that reinsurance will be available at a certain cost. Under certain reinsurance agreements, the reinsurer may increase the rate it charges the Company for the reinsurance, though the Company does not anticipate increases to occur with respect to existing reinsurance contracts. Therefore, if the cost of reinsurance were to increase or if reinsurance were to become unavailable, or if a reinsurer should fail to meet its obligations, the Company could be adversely affected.
New accounting rules or changes to existing accounting rules could negatively impact the Company’s reported financial results.
Year Ended December 31 ------------------------------------------- 2003 2002 2001 ---------------------------------------------------------------------------------------------------------------------- (in thousands) Adjusted net income: Income from continuing operations before cumulative effect of change in accounting principle $217,050 $177,355 $141,058 Add back amortization of goodwill, net of income tax 2,311 ---------------------------------------------------------------------------------------------------------------------- Adjusted income from continuing operations before 217,050 177,355 143,369 cumulative effect of change in accounting principle Loss from discontinued operations, net of income tax (9,977) Loss from sale of discontinued operations, net of income tax (20,545) ---------------------------------------------------------------------------------------------------------------------- Adjusted net income before cumulative effect 217,050 177,355 112,847 of change in accounting principle Cumulative effect of change in accounting principle, net of income tax (7,593) ---------------------------------------------------------------------------------------------------------------------- Adjusted net income $217,050 $177,355 $105,254 ----------------------------------------------------------------------------------------------------------------------
On January 1, 2003, the Company adopted SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of April 2002.” SFAS No. 145 rescinds SFAS No. 4, which required companies to treat the extinguishment of debt as an extraordinary item. SFAS No. 145 requires companies to apply APB Opinion No. 30 when determining the accounting for the extinguishment of debt. The statement also rescinds and amends other statements to make various technical corrections and clarifications. SFAS No. 145 requires the Company to restate previously issued financial statements to reclassify losses related to the early extinguishment of debt from extraordinary losses to operating expenses. The Company’s 2002 financial statements have been restated, in accordance with SFAS No. 145, to reclassify the $2.2 million charge, which resulted from the redemption of subordinate debentures.
In July 2003, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts.” SOP 03-1 is effective for fiscal years beginning after December 15, 2003. SOP 03-1 provides guidance related to the reporting and disclosure of certain insurance contracts and separate accounts, including the calculation of guaranteed minimum death benefits (GMDB). SOP 03-1 also addresses the capitalization and amortization of sales inducements to contract holders. Had the provision been effective at December 31, 2003, the Company would have reported a GMDB accrual $0.3 million higher than currently reported. Although the original intent of SOP 03-1 was to address the accounting for contract provisions not addressed by SFAS No. 97, such as guaranteed minimum death benefits within a variable annuity contract, it appears that SOP 03-1 contains language that may impact the accounting for universal life products in a material way. The life insurance industry and some insurance companies have filed letters with the American Institute of Certified Public Accountants seeking clarification, guidance, delay and/or revision to more appropriately reflect the underlying economic issues of universal life insurance products. The Company is currently evaluating the impact of SOP 03-1 on the accounting for its universal life products.
The Company’s operations usually produce a positive cash flow. This cash flow is used to fund an investment portfolio to finance future benefit payments. Since future benefit payments largely represent medium- and long-term obligations reserved using certain assumed interest rates, the Company’s investments are predominantly in medium- and long-term, fixed-rate investments such as bonds and mortgage loans.
The Company’s investment portfolio consists primarily of fixed maturity securities (bonds and redeemable preferred stocks) and commercial mortgage loans. The Company generally purchases its investments with the intent to hold to maturity by purchasing investments that match future cash flow needs. However, the Company may sell any of its investments to maintain proper matching of assets and liabilities. Accordingly, the Company has classified $12.9 billion of its fixed maturities and certain other securities as “available for sale.”
As of December 31, 2003, the Company consolidated a special-purpose entity, in accordance with FIN 46, whose investments are managed by the Company. These investments with a market value of $425.0 million at December 31, 2003 have been classified as “trading” securities by the Company. No realized or unrealized gains (losses) were recognized in 2003 on the trading portion of the Company’s investments.
At December 31, 2002, the Company’s fixed maturity investments had a market value of $11.7 billion, which was 3.9% above amortized cost of $11.2 billion. The Company estimated the market value of its mortgage loans to be $2.8 billion at December 31, 2002, which was 12.2% above amortized cost of $2.5 billion.
December 31 ------------------------------------------------------------------------- 2003 2002 ---------------------------------------------------------------------------------------------------------------------- (in thousands) Publicly issued bonds $11,377,474 65.3 % $9,694,132 62.6% Privately issued bonds 1,975,273 11.3 1,968,106 12.7 Redeemable preferred stock 3,164 0.0 1,827 0.0 ---------------------------------------------------------------------------------------------------------------------- Fixed maturities 13,355,911 76.6 11,664,065 75.3 Equity securities 46,731 0.3 64,523 0.4 Mortgage loans 2,733,722 15.7 2,518,152 16.3 Investment real estate 18,126 0.1 20,711 0.1 Policy loans 502,748 2.9 543,161 3.5 Other long-term investments 249,494 1.4 222,490 1.5 Short-term investments 519,419 3.0 448,399 2.9 ---------------------------------------------------------------------------------------------------------------------- Total investments $17,426,151 100.0% $15,481,501 100.0% ----------------------------------------------------------------------------------------------------------------------
Included in 2003 in the above table, are $420.1 million of fixed maturities and $4.8 million of short-term investments classified by the Company as trading securities.
Percent At December 31 Amount Change ---------------------------------------------------------------- (in millions) Fixed maturities $11,092.5 (4.9)% Mortgage loans 2,690.5 (4.8) Fixed maturities $12,608.0 (5.6)% Mortgage loans 2,816.1 (4.8) ----------------------------------------------------------------
The Company participates in securities lending, primarily as an investment yield enhancement, whereby securities that are held as investments are loaned to third parties for short periods of time. The Company requires collateral of 102% of the market value of the loaned securities to be separately maintained. The loaned securities’ market value is monitored, on a daily basis, with additional collateral obtained as necessary. At December 31, 2003, securities with a market value of $324.5 million were loaned under these agreements. As collateral for the loaned securities, the Company receives short-term investments, which are recorded in “short-term investments” with a corresponding liability recorded in “other liabilities” to account for the Company’s obligation to return the collateral.
The Company monitors the overall credit quality of the Company’s portfolio within general guidelines. The following table shows the Company’s available for sale fixed maturities by credit rating at December 31, 2003.
Not included in the table above are $409.2 million of investment grade and $10.9 million of less than investment grade fixed maturities classified by the Company as trading securities.
Limiting bond exposure to any creditor group is another way the Company manages credit risk. The following table summarizes the Company’s ten largest fixed maturity exposures to an individual creditor group as of December 31, 2003.
Creditor Market Value -------------------------------------------------------------------------- (in millions) Berkshire Hathaway $71.7 Citigroup 68.0 Kinder Morgan Partners 67.4 Duke Energy 64.9 Progress Energy 64.5 Verizon 64.1 Cox Communications 63.5 Wachovia 62.5 Public Service Enterprise Group 61.7 Constellation Energy Group 60.4 --------------------------------------------------------------------------
During 2003, the Company recorded pretax other than temporary impairments in its investments of $22.3 million. In 2002, the Company recorded pretax other than temporary impairments in its investments of $30.2 million.
The information presented below relates to investments at a certain point in time and is not necessarily indicative of the status of the portfolio at any time after December 31, 2003, the balance sheet date. Furthermore, since the timing of recognizing realized gains and losses is largely based on management’s decisions as to the timing and selection of investments to be sold, the tables and information provided below should be considered within the context of the overall unrealized gain (loss) position of the portfolio. At December 31, 2003, the Company had an overall net unrealized gain of $614.1 million.
At December 31, 2003, $24.5 million of securities in an unrealized loss position were securities issued in Company-sponsored commercial mortgage loan securitizations, including $19.2 million in an unrealized loss position greater than five years. The Company does not consider these unrealized positions to be other than temporary, because the underlying mortgage loans continue to perform consistently with the Company’s original expectations.
S&P or Equivalent Estimated % Market Amortized % Amortized Unrealized % Unrealized Designation Market Value Value Cost Cost Loss Loss ----------------------------------------------------------------------------------------------------------------------- (in thousands) AAA/AA/A $1,417,473 66.7% $1,449,428 65.7% $(31,955) 38.9% BBB 458,807 21.6 476,849 21.6 (18,042) 21.9 ----------------------------------------------------------------------------------------------------------------------- Investment grade 1,876,280 88.3 1,926,277 87.3 (49,997) 60.8 ----------------------------------------------------------------------------------------------------------------------- BB 131,833 6.2 142,421 6.5 (10,588) 12.9 B 101,665 4.8 108,791 4.9 (7,126) 8.6 CCC or lower 13,143 0.6 27,491 1.2 (14,348) 17.4 In or near default 1,120 0.1 1,351 0.1 (231) 0.3 ----------------------------------------------------------------------------------------------------------------------- Below investment grade 247,761 11.7 280,054 12.7 (32,293) 39.2 ----------------------------------------------------------------------------------------------------------------------- Total $2,124,041 100.0% $2,206,331 100.0% $(82,290) 100.0% -----------------------------------------------------------------------------------------------------------------------
At December 31, 2003, $21.1 million of below investment grade securities in an unrealized loss position were securities issued in Company-sponsored commercial mortgage loan securitizations, including $18.1 million in an unrealized loss position greater than five years. The Company does not consider these unrealized positions to be other than temporary, because the underlying mortgage loans continue to perform consistently with the Company’s original expectations.
During the year ended December 31, 2003, the Company recorded pretax other-than-temporary impairments in its investments of $22.3 million as compared to $30.2 million in the year ended December 31, 2002.
For several years the Company has offered a type of commercial mortgage loan under which the Company will permit a slightly higher loan-to-value ratio in exchange for a participating interest in the cash flows from the underlying real estate. As of December 31, 2003, approximately $382.7 million of the Company’s mortgage loans have this participation feature.
Many of the Company’s products contain surrender charges and other features that reward persistency and penalize the early withdrawal of funds. Certain stable value and annuity contracts have market-value adjustments that protect the Company against investment losses if interest rates are higher at the time of surrender than at the time of issue.
At December 31, 2003, the Company had policy liabilities and accruals of $9.7 billion. The Company’s life insurance products have a weighted average minimum credited interest rate of approximately 4.6%.
At December 31, 2002, the Company had $4.0 billion of stable value product account balances with an estimated fair value of $4.1 billion, and $3.7 billion of annuity account balances with an estimated fair value of $3.8 billion.
Estimated fair values were derived from the durations of the Company’s stable value and annuity account balances. While these estimated fair values generally provide an indication of how sensitive the fair values of the Company’s stable value and annuity account balances are to changes in interest rates, they do not represent management’s view of future market changes, and actual market results may differ from these estimates.
Combinations of interest rate swap contracts, futures contracts, and option contracts are sometimes used to mitigate or eliminate certain financial and market risks, including those related to changes in interest rates for certain investments, primarily outstanding mortgage loan commitments and mortgage-backed securities. Interest rate swap contracts generally involve the exchange of fixed and variable rate interest payments between two parties, based on a common notional principal amount and maturity date. Interest rate futures generally involve exchange traded contracts to buy or sell treasury bonds and notes in the future at specified prices. Interest rate options allow the holder of the option to receive cash or purchase, sell or enter into a financial instrument at a specified price within a specified period of time. The Company used interest rate swap contracts, swaptions (options to enter into interest rate swap contracts), caps, and floors to modify the interest characteristics of certain investments, its Senior Notes, Medium-Term Notes, and subordinated debt securities. Swap contracts are also used to alter the effective durations of assets and liabilities. The Company uses foreign currency swaps to reduce its exposure to currency exchange risk on certain stable value contracts denominated in foreign currencies, primarily the European euro and the British pound.
In September 2000, the Company entered into a transaction to facilitate the Company’s possible entry into the institutional money management business involving a total return swap with respect to $400 million - of a portfolio of investments held by an unrelated special purpose entity - that are managed by the Company. The Company, in effect, has retained the investment risk with respect to the $400 million. As of December 31, 2003, this unrelated special-purpose entity was required to be consolidated due to the implementation of FIN 46. At December 31, 2003, this special-purpose entity held interest rate swaps in its portfolio and a related total return swap. The swaps are recorded on the Company’s balance sheet at fair value.
Cash outflows related to stable value contracts (primarily maturing contracts, scheduled interest payments, and expected withdrawals) were approximately $1,100.1 million during 2003. Cash outflows related to stable value contracts are estimated to be approximately $1,106.1 million in 2004. The Company’s asset/liability management programs and procedures take into account maturing contracts and expected withdrawals. Accordingly, the Company does not expect stable value contract related cash outflows to have an unusual effect on the future operations and liquidity of the Company.
While the Company generally anticipates that the cash flow of its subsidiaries will be sufficient to meet their investment commitments and operating cash needs, the Company recognizes that investment commitments scheduled to be funded may, from time to time, exceed the funds then available. Therefore, the Company has arranged sources of credit for its insurance subsidiaries to use when needed. The Company expects that the rate received on its investments will equal or exceed its borrowing rate. Additionally, the Company may, from time to time, sell short-duration stable value products to complement its cash management practices.
The Company has also used securitization transactions involving its commercial mortgage loans to increase its liquidity.
On August 17, 2001, a special purpose finance subsidiary of the Company, PLC Capital Trust III, issued $100 million of 7.5% Trust Originated Preferred Securities (“TOPrSSM”). The 7.5% TOPrS are guaranteed on a subordinated basis by the Company. This guarantee, considered together with the other obligations of the Company with respect to the 7.5% TOPrS, constitutes a full and unconditional guarantee by the Company of PLC Capital Trust III’s obligations with respect to the 7.5% TOPrS.
On September 25, 2002, a special purpose finance subsidiary of the Company, PLC Capital Trust IV, issued $115 million of 7.25% TOPrS. The 7.25% TOPrS are guaranteed on a subordinated basis by the Company. This guarantee, considered together with the other obligations of the Company with respect to the 7.25% TOPrS, constitutes a full and unconditional guarantee by the Company of PLC Capital Trust IV’s obligations with respect to the 7.25% TOPrS.
On October 25, 2002, the Company caused PLC Capital Trust I, a special purpose finance subsidiary of the Company, to redeem $75 million of 8.25% Trust Originated Preferred Securities it issued in 1997. In a related transaction the Company redeemed its subordinated debentures which were held by PLC Capital Trust I. The redemption resulted in a charge of $2.2 million, primarily comprised of unamortized deferred debt issue costs.
A life insurance company’s statutory capital is computed according to rules prescribed by the National Association of Insurance Commissioners (NAIC), as modified by the insurance company’s state of domicile. Statutory accounting rules are different from accounting principles generally accepted in the United States of America and are intended to reflect a more conservative view by, for example, requiring immediate expensing of policy acquisition costs. The NAIC’s risk-based capital requirements require insurance companies to calculate and report information under a risk-based capital formula. The achievement of long-term growth will require growth in the statutory capital of the Company’s insurance subsidiaries. The subsidiaries may secure additional statutory capital through various sources, such as retained statutory earnings or equity contributions by the Company.
2004 2005-2006 2007-2008 After 2008 --------------------------------------------------------------------------------------------------------------- (in thousands) Long-term debt $ 75,000 $ 25,000 $361,329 Subordinated debt securities 221,650 Stable value products 1,156,511 2,018,613 $1,378,341 123,066 Note payable 2,234 Operating lease obligation 1,530 3,061 66,255 Other property lease obligations 5,730 9,459 5,646 9,313 Mortgage loan commitments 578,546 Liabilities related to variable interest entities 400,000 ---------------------------------------------------------------------------------------------------------------
December 31 ------------------------------------ 2003 2002 ---------------------------------------------------------------------------------------------------------------------- (dollars in thousands) Assets Investments: Fixed maturities, at market (amortized cost: 2003 - $12,743,213; 2002 - $11,221,365) $13,355,911 $11,664,065 Equity securities, at market (cost: 2003 - $45,379; 2002 - $66,820) 46,731 64,523 Mortgage loans 2,733,722 2,518,152 Investment real estate, net of accumulated depreciation (2003 - $1,377; 2002 - $1,137) 18,126 20,711 Policy loans 502,748 543,161 Other long-term investments 249,494 222,490 Short-term investments 519,419 448,399 ---------------------------------------------------------------------------------------------------------------------- Total investments 17,426,151 15,481,501 Cash 136,698 101,953 Accrued investment income 189,232 181,966 Accounts and premiums receivable, net of allowance for uncollectible amounts (2003 - $2,617; 2002 - $2,825) 57,944 61,425 Reinsurance receivables 2,350,606 2,368,068 Deferred policy acquisition costs 1,861,020 1,707,253 Goodwill 47,312 47,312 Property and equipment 45,640 41,324 Other assets 238,581 309,791 Assets related to separate accounts Variable annuity 2,045,038 1,513,824 Variable universal life 171,408 114,364 Other 4,361 4,330 ---------------------------------------------------------------------------------------------------------------------- $24,573,991 $21,933,111 ======================================================================================================================
Net Unrealized Accumulated Additional Stock Unallocated Gains Gain/ Total Common Paid-In Treasury Held In Stock in Retained (Losses) on (Loss) Share-Owners' (dollars in thousands) Stock Capital Stock Trust ESOP Earnings Investments Hedging Equity ---------------------------------------------------------------------------------------------------------------------------------------------
The accompanying consolidated financial statements of Protective Life Corporation and subsidiaries (the Company) are prepared on the basis of accounting principles generally accepted in the United States of America. Such accounting principles differ from statutory reporting practices used by insurance companies in reporting to state regulatory authorities. (See also Note 9.)
On January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 revises the standards for accounting for acquired goodwill and other intangible assets. The standard replaces the requirement to amortize goodwill with one that calls for an annual impairment test, among other provisions. The Company has performed an impairment test and determined that its goodwill was not impaired at October 31, 2003, and 2002. The following table illustrates adjusted income from continuing operations before cumulative effect of change in accounting principle as if this pronouncement was adopted as of January 1, 2001:
Year Ended December 31 ----------------------------------------- 2003 2002 2001 ---------------------------------------------------------------------------------------------------------------------- Adjusted net income: Income from continuing operations before cumulative effect of change in accounting principle $217,050 $177,355 $141,058 Add back amortization of goodwill, net of income tax 2,311 ---------------------------------------------------------------------------------------------------------------------- Adjusted income from continuing operations before cumulative effect of change in accounting principle 217,050 177,355 143,369 Loss from discontinued operations, net of income tax (9,977) Loss from sale of discontinued operations, net of income tax (20,545) ---------------------------------------------------------------------------------------------------------------------- Adjusted net income before cumulative effect of change in accounting principle 217,050 177,355 112,847 Cumulative effect of change in accounting principle, net of income tax (7,593) ---------------------------------------------------------------------------------------------------------------------- Adjusted net income $217,050 $177,355 $105,254 ----------------------------------------------------------------------------------------------------------------------
In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. (FIN) 46, “Consolidation of Variable Interest Entities,” which was revised in December 2003. FIN 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated support from other parties. The effective date of FIN 46 is March 31, 2004, for the Company. However, FIN 46 shall be applied to entities that are considered special-purpose entities no later than as of the end of the first reporting period that ends after December 15, 2003 (December 31, 2003, for the Company). As such, the Company consolidated, as of December 31, 2003, a special-purpose entity whose investments are managed by the Company. The special-purpose entity was consolidated based on the determination that the Company was its primary beneficiary. The consolidation resulted in the Company’s reported assets and liabilities increasing by $430.6 million with an immaterial impact on the results of operations. The increase in assets was the result of the entity’s $430.6 million investment portfolio, while the increase in liabilities was due to $400.0 million of notes payable (reported in “liabilities related to variable interest entities”), $15.0 million of derivative liabilities (reported in “other liabilities”), and $15.6 million of minority interest (reported in “other liabilities”). Additionally, the Company deconsolidated, as of December 31, 2003, the special-purpose entities PLC Capital Trust III and PLC Capital Trust IV after determining the Company was not the primary beneficiary of these special-purpose entities. The deconsolidation resulted in a $6.6 million increase to “investments” and “subordinated debt securities”. The Company is currently evaluating the impact of FIN 46 on entities not considered to be special-purpose entities, which would be required to be consolidated as of March 31, 2004. Although the Company does not expect the implementation of the provisions of FIN 46, on March 31, 2004, to have a material impact on its results of operations, had the provisions been effective at December 31, 2003, the Company’s reported assets and liabilities would have increased by approximately $109 million.
On October 1, 2003, the Company adopted Derivatives Implementation Group Issue No. B36, “Embedded Derivatives: Modified Coinsurance Arrangements and Debt Instruments That Incorporate Credit Risk Exposures That Are Unrelated or Only Partially Related to the Creditworthiness of the Obligor under Those Instruments” (DIG B36). DIG B36 requires the bifurcation of embedded derivatives within certain modified coinsurance and funds withheld coinsurance arrangements that expose the creditor to credit risk of a company other than the debtor, even if the debtor owns as investment assets the third-party securities to which the creditor is exposed. The adoption did not have a material impact on its financial condition or results of operations.
On December 8, 2003, President Bush signed into law the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (Medicare Act). The Medicare Act introduces a prescription drug benefit for Medicare-eligible retirees in 2006, as well as a federal subsidy to plan sponsors that provide prescription drug benefits. In accordance with FASB Staff Position No. 106-1, the Company has elected to defer recognizing the effects of the Medicare Act for its postretirement plans under FASB Statement No. 106, “Employers’ Accounting for Postretirement Benefits Other than Pension,” until authoritative guidance on accounting for the federal subsidy is issued. The Company anticipates that the Medicare Act will not have a material impact on the financial results of the Company; therefore the costs reported in Note 11 to the Consolidated Financial Statements do not reflect these changes. The final accounting guidance could require changes to previously reported information.
Investment real estate - at cost, less allowances for depreciation computed on the straight-line method. With respect to real estate acquired through foreclosure, cost is the lesser of the loan balance plus foreclosure costs or appraised value.
The Company utilizes a risk management strategy that incorporates the use of derivative financial instruments, primarily to reduce its exposure to interest rate risk as well as currency exchange risk.
Combinations of interest rate swap contracts, futures contracts, and option contracts are sometimes used to mitigate or eliminate certain financial and market risks, including those related to changes in interest rates for certain investments, primarily outstanding mortgage loan commitments and mortgage-backed securities. Interest rate swap contracts generally involve the exchange of fixed and variable rate interest payments between two parties, based on a common notional principal amount and maturity date. Interest rate futures generally involve exchange traded contracts to buy or sell treasury bonds and notes in the future at specified prices. Interest rate options allow the holder of the option to receive cash or purchase, sell or enter into a financial instrument at a specified price within a specified period of time. The Company uses interest rate swap contracts, swaptions (options to enter into interest rate swap contracts), caps, and floors to modify the interest characteristics of certain investments, and its Senior Notes, Medium-Term Notes, and subordinated debt securities. Swap contracts are also used to alter the effective durations of assets and liabilities. The Company uses foreign currency swaps to reduce its exposure to currency exchange risk on certain stable value contracts denominated in foreign currencies, primarily the European euro and the British pound.
Derivative instruments expose the Company to credit and market risk. The Company minimizes its credit risk by entering into transactions with highly rated counterparties. The Company manages the market risk associated with interest rate and foreign exchange contracts by establishing and monitoring limits as to the types and degrees of risk that may be undertaken.
All derivatives are recognized on the balance sheet (in “other long-term investments” or “other liabilities”) at their fair value (primarily estimates from independent pricing services). On the date the derivative contract is entered into, the Company designates the derivative as (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair-value” hedge), (2) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash-flow” hedge), or (3) as a derivative either held for investment purposes or held as an instrument designed to mitigate the economic changes in value or cash flows of another instrument (“other” derivative). Changes in the fair value of a derivative that is highly effective as - and that is designated and qualifies as - a fair-value hedge, along with the loss or gain on the hedged asset or liability that is attributable to the hedged risk (including losses or gains on firm commitments), are recorded in current-period earnings. Changes in the fair value of a derivative that is highly effective as - and that is designated and qualified as - a cash-flow hedge are recorded in other comprehensive income, until earnings are affected by the variability of cash flows. Changes in the fair value of other derivatives are recognized in current earnings and reported in “Realized investment gains (losses) - derivative financial instruments” in the Company’s consolidated statements of income.
The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as fair-value or cash-flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the Company discontinues hedge accounting prospectively, as discussed below.
Fair-Value Hedges. During 2003, there were no fair value hedges outstanding. In 2002 and 2001, the Company designated, as fair value hedges, callable interest rate swaps used to modify the interest characteristics of certain callable Medium-Term Notes and stable value contracts. In assessing hedge effectiveness, the Company excludes the embedded call option’s time value component from each derivative’s total gain or loss. In 2002 and 2001, total measured ineffectiveness for the fair value hedging relationships was insignificant while the excluded time value component resulted in a pre-tax gain of $0 and $1.3 million, respectively. Both the measured ineffectiveness and the excluded time value component are reported in “Realized investment gains (losses) - Derivative financial instruments” in the Company’s consolidated statements of income.
Other Derivatives. The Company uses certain interest rate swaps, caps, floors, swaptions, options and futures contracts as economic hedges against the changes in value or cash flows of outstanding mortgage loan commitments and certain owned investments as well as certain debt and preferred security obligations of the Company. In 2003, 2002, and 2001, the Company recognized net pre-tax gains of $5.6 million, net pre-tax gains of $46.7 million, and net pre-tax losses of $0.5 million, respectively, representing the change in fair value of these derivative instruments as well as a realized gain or loss on contracts closed during the period.
The Company has entered into asset swap arrangements to, in effect, sell the equity options embedded in owned convertible bonds in exchange for an interest rate swap that converts the remaining host bond to a variable rate instrument. In 2003, 2002, and 2001, the Company recognized pre-tax gains of $3.0 million, $2.0 million, and $12.2 million, respectively, for the change in the asset swaps’ fair value and recognized a $0.1 million pre-tax gain, a $7.8 million pre-tax loss, and a $16.9 million pre-tax loss, respectively, to separately record the embedded equity options at fair value.
The Company has also entered into a total return swap in connection with a portfolio of investment securities managed by the Company for an unrelated party. The Company recognized a $2.9 million pre-tax gain, an $8.5 million pre-tax loss, and a $0.3 million pre-tax loss in 2003, 2002, and 2001, respectively, for the change in the total return swap’s fair value.
Commissions and other costs of acquiring traditional life and health insurance, credit insurance, universal life insurance, and investment products that vary with and are primarily related to the production of new business, have been deferred. Traditional life and health insurance acquisition costs are amortized over the premium-payment period of the related policies in proportion to the ratio of annual premium income to the present value of the total anticipated premium income. Credit insurance acquisition costs are being amortized in proportion to earned premium. Acquisition costs for universal life and investment products are amortized over the lives of the policies in relation to the present value of estimated gross profits before amortization. Under 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,” the Company makes certain assumptions regarding the mortality, persistency, expenses, and interest rates (equal to the rate used to compute liabilities for future policy benefits; currently 2.6% to 9.4%) it expects to experience in future periods. These assumptions are to be best estimates and are to be periodically updated whenever actual experience and/or expectations for the future change from that assumed. Additionally, relating to SFAS No. 115, these costs have been adjusted by an amount equal to the amortization that would have been recorded if unrealized gains or losses on investments associated with the Company’s universal life and investment products had been realized.
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 up to approximately 8%. The unamortized present value of future profits for all acquisitions was approximately $502.2 million and $542.5 million at December 31, 2003 and 2002, respectively. During 2003, no present value of profits was capitalized and $40.3 million was amortized. During 2002, $62.5 million of present value of future profits was capitalized (relating to acquisitions and adjustments made during the year), a $2.1 million reduction came from the sale of a small subsidiary, and $41.3 million was amortized.
The goodwill balance at December 31, 2003 and 2002 was $47.3 million. At October 31, 2003, and 2002, the Company evaluated its goodwill and determined that fair value had not decreased below carrying value and no adjustment to impair goodwill was necessary in accordance with SFAS No. 142.
The assets and liabilities related to separate accounts in which the Company does not bear the investment risk are valued at market and reported separately as assets and liabilities related to separate accounts in the accompanying consolidated financial statements.
The Company markets guaranteed investment contracts (GICs) to 401(k) and other qualified retirement savings plans, and fixed and floating rate funding agreements to the trustees of municipal bond proceeds, institutional investors, bank trust departments, and money market funds. Through its registered funding agreement-backed note program, the Company is able to offer secured notes to both institutional and retail investors. During the fourth quarter of 2003, the Company registered a funding agreement-backed notes program with the SEC. GICs are generally contracts that specify a return on deposits for a specified period and often provide flexibility for withdrawals at book value in keeping with the benefits provided by the plan. Stable value product account balances include GICs and funding agreements issued by the Company as well as the obligations of consolidated special purpose trusts or entities formed to purchase funding agreements issued by the Company. At December 31, 2003 and 2002 the Company had $2.8 billion and $2.2 billion, respectively of stable value product account balances marketed through structured programs. Most GICs and funding agreements written by the Company have maturities of three to seven years. At December 31, 2003, future maturities of stable value products were $1.2 billion in 2004, $2.0 billion in 2005-2006, $1.4 billion in 2007-2008, and $123.1 million after 2008.
Traditional life insurance products consist principally of those products with fixed and guaranteed premiums and benefits, and they include whole life insurance policies, term and term-like life insurance policies, limited payment life insurance policies, and certain annuities with life contingencies. Life insurance and immediate annuity premiums are recognized as revenue when due. Health and credit insurance premiums are recognized as revenue over the terms of the policies. Benefits and expenses are associated with earned premiums so that profits are recognized over the life of the contracts. This is accomplished by means of the provision for liabilities for future policy benefits and the amortization of deferred policy acquisition costs. Gross premiums in excess of net premiums related to immediate annuities are deferred and recognized over the life of the policy.
Liabilities for future policy benefits on traditional life insurance products have been computed using a net level method including assumptions as to investment yields, mortality, persistency, and other assumptions based on the Company’s experience, modified as necessary to reflect anticipated trends and to include provisions for possible adverse deviation. Reserve investment yield assumptions on December 31, 2003 were 6.98%. The liability for future policy benefits and claims on traditional life, health, and credit insurance products includes estimated unpaid claims that have been reported to the Company and claims incurred but not yet reported. Policy claims are charged to expense in the period in which the claims are incurred.
2003 2002 2001 ------------------------------------------------------------------------------------------ Balance beginning of year $116,214 $100,023 $110,064 Less reinsurance 54,765 33,723 25,830 ------------------------------------------------------------------------------------------ Net balance beginning of year 61,449 66,300 84,234 ------------------------------------------------------------------------------------------ Incurred related to: Current year 266,676 258,612 383,371 Prior year (1,783) (338) (1,080) ------------------------------------------------------------------------------------------ Total incurred 264,893 258,274 382,291 ------------------------------------------------------------------------------------------ Paid related to: Current year 261,311 243,206 312,748 Prior year (1,406) 22,528 81,220 ------------------------------------------------------------------------------------------ Total paid 259,905 265,734 393,968 ------------------------------------------------------------------------------------------ Other changes: Acquisitions and reserve transfers 0 2,609 (6,257) ------------------------------------------------------------------------------------------ Net balance end of year 66,437 61,449 66,300 Plus reinsurance 55,395 54,765 33,723 ------------------------------------------------------------------------------------------ Balance end of year $121,832 $116,214 $100,023 ------------------------------------------------------------------------------------------
On December 31, 2001, the Company completed the sale to Fortis, Inc. of substantially all of its Dental Division and discontinued other remaining Dental Division related operations, primarily other health insurance lines.
Net income per share - basic is net income divided by the average number of shares of Common Stock outstanding including shares that are issuable under various deferred compensation plans. Net income per share - diluted is adjusted net income divided by the average number of shares outstanding including all diluted, potentially issuable shares that are issuable under various stock-based compensation plans and stock purchase contracts.
2003 2002 2001 ------------------------------------------------------------------------------------------------------------ Cash paid during the year: Interest on debt $45,341 $ 39,553 $ 37,020 Income taxes 66,082 132,039 31,795 ------------------------------------------------------------------------------------------------------------ Noncash investing and financing activities: Reissuance of treasury stock to ESOP $ 877 $ 59 $ 879 Change in unallocated stock in ESOP 410 540 369 Stock-based compensation 10,204 3,239 3,589 Redemption of FELINE PRIDES (See Note 4) 113,414 ------------------------------------------------------------------------------------------------------------ Acquisitions and related reinsurance transactions: Assets acquired $ 0 $ 358,897 $2,554,202 Liabilities assumed 0 (489,412) (2,430,175) ------------------------------------------------------------------------------------------------------------ Net $ 0 $(130,515) $ 124,027 ------------------------------------------------------------------------------------------------------------
Each quarter the Company reviews investments with material unrealized losses and tests for other-than-temporary impairments. The Company analyzes various factors to determine if any specific other than temporary asset impairments exist. Once a determination has been made that a specific other-than-temporary impairment exists, a realized loss is incurred and the cost basis of the impaired asset is adjusted to its fair value. During 2003, 2002, and 2001, the Company recorded other-than-temporary impairments in its investments of $22.3 million, $30.2 million, and $12.6 million, respectively.
The amortized cost and estimated market value of the Company’s investments classified as available for sale at December 31 are as follows:
Estimated Amortized Estimated Cost Market Value -------------------------------------------------------------------- Due in one year or less $ 543,925 $ 553,842 Due after one year through five years 2,541,726 2,634,178 Due after five years through ten years 3,568,742 3,773,500 Due after ten years 5,668,688 5,974,259 -------------------------------------------------------------------- $12,323,081 $12,935,779 --------------------------------------------------------------------
At December 31, 2003, the average mortgage loan was $2.2 million, and the weighted average interest rate was 7.2%. The largest single mortgage loan was $19.6 million.
At December 31, 2003 and 2002, the Company had investments related to retained beneficial interests of mortgage loan securitizations of $283.6 million and $295.7 million, respectively.
2003 2002 2001 -------------------------------------------------------------------------------------- Statutory federal income tax 35.0% 35.0% 35.0% rate applied to pretax income Amortization of nondeductible goodwill 0.0 0.0 0.1 State income taxes 0.2 0.8 0.7 Dividends received deduction and tax-exempt income (1.5) (2.1) (1.8) Low-income housing credit (0.3) (0.4) (0.5) Other (0.1) (0.2) (0.8) -------------------------------------------------------------------------------------- 33.3% 33.1% 32.7% --------------------------------------------------------------------------------------
2003 2002 2001 ---------------------------------------------------------------------------------------------------- Deferred policy acquisition costs $ 86,911 $ 19,378 $ 81,947 Benefit and other policy liability changes 23,101 40,104 (75,422) Temporary differences of investment income (14,800) (30,933) 6,285 Other items (17,301) 7,892 (8,939) ---------------------------------------------------------------------------------------------------- $ 77,911 $ 36,441 $ 3,871 ----------------------------------------------------------------------------------------------------
2003 2002 ------------------------------------------------------------------------------------- Deferred income tax assets: $221,713 $244,814 Policy and policyholder liability reserves Other 24,790 7,489 ------------------------------------------------------------------------------------- 246,503 252,303 ------------------------------------------------------------------------------------- Deferred income tax liabilities: 485,361 398,450 Deferred policy acquisition costs Unrealized gains (losses) on investments 139,132 96,446 ------------------------------------------------------------------------------------- 624,493 494,896 ------------------------------------------------------------------------------------- Net deferred income tax liability $377,990 $242,593 -------------------------------------------------------------------------------------
Under pre-1984 life insurance company income tax laws, a portion of the Company’s gain from operations which was not subject to current income taxation was accumulated for income tax purposes in a memorandum account designated as Policyholders’ Surplus. The aggregate accumulation in this account at December 31, 2003, was approximately $70.5 million. Should the accumulation in the Policyholders’ Surplus account of the life insurance subsidiaries exceed certain stated maximums, or should distributions including cash dividends be made to Protective Life Corporation in excess of approximately $1.6 billion, such excess would be subject to federal income taxes at rates then effective. Deferred income taxes have not been provided on amounts designated as Policyholders’ Surplus. Under current income tax laws, the Company does not anticipate paying income tax on amounts in the Policyholders’ Surplus accounts.
Except for the 7.95% Senior Notes, limited amounts of the Senior and Medium-Term Notes may be redeemed upon the death of the beneficial owner of the notes.
In August 2001, a special purpose finance subsidiary of the Company, PLC Capital Trust III, issued $100 million of 7.5% TOPrS. The 7.5% TOPrS are guaranteed on a subordinated basis by the Company. This guarantee, considered together with the other obligations of the Company with respect to the 7.5% TOPrS, constitutes a full and unconditional guarantee by the Company of PLC Capital Trust III’s obligations with respect to the 7.5% TOPrS.
On September 25, 2002, a special purpose finance subsidiary of the Company, PLC Capital Trust IV, issued $115 million of 7.25% TOPrSSM. The 7.25% TOPrS are guaranteed on a subordinated basis by the Company. This guarantee, considered together with the other obligations of the Company with respect to the 7.25% TOPrS, constitutes a full and unconditional guarantee by the Company of PLC Capital Trust IV’s obligations with respect to the 7.25% TOPrS.
PLC Capital Trust IV was formed solely to issue securities and use the proceeds thereof to purchase subordinated debentures of the Company. The sole assets of PLC Capital Trust IV are $118.6 million of Protective Life Corporation 7.25% Subordinated Debentures due 2032, Series E. The Company has the right under the subordinated debentures to extend interest payment periods up to five consecutive years, and, as a consequence, dividends on the 7.25% TOPrS may be deferred (but will continue to accumulate, together with additional dividends on any accumulated but unpaid dividends at the dividend rate) by PLC Capital Trust IV during any such extended interest payment period. The 7.25% TOPrS are redeemable by PLC Capital Trust IV at any time on or after September 25, 2007.
PLC Capital Trust V was formed solely to issue securities and use the proceeds thereof to purchase subordinated debentures of the Company. The sole assets of PLC Capital Trust V are $103.1 million of Protective Life Corporation 6.125% Subordinated Debentures due 2034, Series F. The Company has the right under the subordinated debentures to extend interest payment periods up to five consecutive years, and, as a consequence, dividends on the 6.125% TOPrS may be deferred (but will continue to accumulate, together with additional dividends on any accumulated but unpaid dividends at the dividend rate) by PLC Capital Trust V during any such extended interest payment period. The 6.125% TOPrS are redeemable by PLC Capital Trust V at any time on or after January 27, 2009.
The Company uses interest rate swap agreements to convert a portion of its debt and preferred securities from a fixed interest or dividend rate to a floating rate. These interest rate swap agreements do not qualify as hedges of the corresponding long-term debt or subordinated debt securities, under FAS 133. All net interest settlements and mark-to-market adjustments for these interest rate swap agreements are recorded as Realized investment gains (losses) - Derivative financial instruments. Interest expense on all debt, including dividends on preferred securities, totaled $43.6 million, $40.7 million and $39.3 million in 2003, 2002, and 2001, respectively.
(unaudited) 2002 ------------------------------------------------------------ Total revenues $2,003,158 Net income 179,981 Net income per share - basic 2.57 Net income per share - diluted 2.55 ------------------------------------------------------------
In 2000, the Company entered into an arrangement with an unrelated party for the construction of a building contiguous to its existing home office complex. The unrelated party owns the building and leases it to the Company. The lease is accounted for as an operating lease under SFAS No. 13 “Accounting For Leases”. Lease payments commenced upon completion, which occurred January 31, 2003, and is based on current LIBOR interest rates and the cost of the building. At the end of the lease term, February 1, 2007, the Company may purchase the building for the original building cost of approximately $75 million. Based upon current interest rates, annual lease payments are estimated to be $1.5 million. Were the Company not to purchase the building, a payment of approximately $66 million would be due at the end of the lease term.
Outstanding Issued Shares Treasury Shares Shares -------------------------------------------------------------------------------------------- Balance, December 31, 2000 69,333,117 4,775,550 64,557,567 Reissuance of treasury stock (180,606) 180,606 Repurchase of treasury stock 101,844 (101,844) Redemption of FELINE PRIDES 3,918,843 3,918,843 -------------------------------------------------------------------------------------------- Balance, December 31, 2001 73,251,960 4,696,788 68,555,172 Reissuance of treasury stock (150,177) 150,177 Repurchase of treasury stock 29,455 (29,455) -------------------------------------------------------------------------------------------- Balance, December 31, 2002 73,251,960 4,576,066 68,675,894 Reissuance of treasury stock (315,807) 315,807 -------------------------------------------------------------------------------------------- Balance, December 31, 2003 73,251,960 4,260,259 68,991,701 --------------------------------------------------------------------------------------------
The Company has a Rights Agreement that provides rights to owners of the Company’s Common Stock to purchase Series A Junior Participating Cumulative Preferred Stock, or in certain circumstances, either Common Stock or common stock of an acquiring company at one-half the market price of such Common Stock or common stock, as the case may be. The rights will become exercisable if certain events occur with respect to the Company, including the acquisition by a person or group of 15% or more of the Company’s Common Stock. The Company can redeem the rights at $.01 per right in certain circumstances, including redemption until 10 business days following a public announcement that 15% or more of the Company’s Common Stock has been acquired by a person or group.
Share owners have authorized 4,000,000 shares of Preferred Stock, $1.00 par value. Other terms, including preferences, voting, and conversion rights, may be established by the Board of Directors. In connection with the Rights Agreement, 400,000 of these shares have been designated as Series A Junior Participating Cumulative Preferred Stock, $1.00 par value, and were unissued at December 31, 2003. The remaining 3,600,000 shares of Preferred Stock, $1.00 par value, were also unissued at December 31, 2003.
The Company sponsors a deferred compensation plan for certain of its agents. A trust was established to aid the Company in meeting its obligations under the plan. Company Common Stock owned by the trust is accounted for as treasury stock.
The Company has an Employee Stock Ownership Plan (ESOP). The stock is used to match employee contributions to the Company’s 401(k) and Stock Ownership Plan (401(k) Plan) and to provide other employee benefits. The stock held by the ESOP that has not yet been used is the unallocated stock shown as a reduction to share-owners’ equity. The ESOP shares are dividend-paying and are considered outstanding for earnings per share calculations. Dividends on the shares are used to pay the ESOP’s note to Protective Life. If certain events associated with a change in control of the Company occur, any unallocated shares held by the ESOP will become allocable to employee 401(k) accounts.
Performance Estimated Year Awarded Shares P-SARs Fair Value ----------------------------------------------------------------- 2003 148,730 $3,900 2002 192,360 5,700 2001 153,490 40,000 4,900 2000 3,330 513,618 3,700 -----------------------------------------------------------------
Performance shares are equivalent in value to one share of Company Common Stock times the award earned percentage payout. P-SARs convert to the equivalent of one stock appreciation right (SAR) if earned times the award percentage payout. Of the 2000 P-SARs awarded, 87,778 have been canceled and 135,764 have been converted to 145,910 SARs. The remaining 290,076 P-SARs will convert to SARs in 2004 if earned. The 40,000 P-SARs awarded in 2001 were not earned and have been canceled. The P-SARs, if earned and converted to SARs, expire 10 years after the grant date. At December 31, 2003, the total outstanding performance shares and P-SARs related to these performance-based plans measured at maximum payouts were 660,610 and 456,286, respectively.
The Company will pay an amount equal to the difference between the specified base price of the Company’s Common Stock and the market value at the exercise date for each SAR.
At December 31, 2003, approximately $529.8 million of consolidated share-owners’ equity, excluding net unrealized gains on investments, represented net assets of the Company’s insurance subsidiaries that cannot be transferred to Protective Life Corporation. In addition, the Company’s insurance subsidiaries are subject to various state statutory and regulatory restrictions on the insurance subsidiaries’ ability to pay dividends to Protective Life Corporation. In general, dividends up to specified levels are considered ordinary and may be paid thirty days after written notice to the insurance commissioner of the state of domicile unless such commissioner objects to the dividend prior to the expiration of such period. Dividends in larger amounts are considered extraordinary and are subject to affirmative prior approval by such commissioner. The maximum amount that would qualify as ordinary dividends to the Company by its insurance subsidiaries in 2004 is estimated to be $293.8 million.
Financial statements prepared in conformity with accounting principles generally accepted in the United States of America differ in some respects from the statutory accounting practices prescribed or permitted by insurance regulatory authorities. The most significant differences are as follows: (a) acquisition costs of obtaining new business are deferred and amortized over the approximate life of the policies rather than charged to operations as incurred; (b) benefit liabilities are computed using a net level method and are based on realistic estimates of expected mortality, interest, and withdrawals as adjusted to provide for possible unfavorable deviation from such assumptions; (c) deferred income taxes are not subject to statutory limitations as to amounts recognized and are recognized through earnings as opposed to being charged to share-owners’ equity; (d) the Asset Valuation Reserve and Interest Maintenance Reserve are restored to share-owners’ equity; (e) furniture and equipment, agents’ debit balances, and prepaid expenses are reported as assets rather than being charged directly to surplus (referred to as nonadmitted assets); (f) certain items of interest income, such as mortgage and bond discounts, are amortized differently; and (g) bonds are recorded at their market values instead of amortized cost. The National Association of Insurance Commissioners (NAIC) has adopted the Codification of Statutory Accounting Principles (Codification). Codification changed statutory accounting rules in several areas and was effective January 1, 2001. The adoption of Codification did not have a material effect on the Company’s insurance subsidiaries’ statutory capital.
Net Income Share-Owners' Equity ------------------------------------- ------------------------------------------ 2003 2002 2001 2003 2002 2001 -------------------------------------------------------------------------------------------------------------------------- In conformity with statutory reporting practices 1 $274,244 $ (2,418) $163,181 $1,135,942 $ 852,645 $ 775,138 -------------------------------------------------------------------------------------------------------------------------- In conformity with generally accepted accounting principles $217,050 $177,355 $102,943 $2,002,144 $1,720,702 $1,400,144 --------------------------------------------------------------------------------------------------------------------------
o The Annuities segment manufactures, sells, and supports fixed and variable annuity products. These products are primarily sold through stockbrokers, but are also sold through financial institutions and the Life Marketing segment’s sales force.
o The Stable Value Products segment markets guaranteed investment contracts to 401(k) and other qualified retirement savings plans, and sells funding agreements to special purpose entities that in turn issue notes or certificates in smaller, transferable denominations. The segment also markets fixed and floating rate funding agreements directly to the trustees of municipal bond proceeds, institutional investors, bank trust departments, and money market funds. During the fourth quarter of 2003, the Company registered a funding agreement-backed notes program with the SEC.
o The Asset Protection segment markets extended service contracts and credit life and disability insurance to protect consumers’ investments in automobiles and watercraft.
The Company uses the same accounting policies and procedures to measure operating segment income and assets as it uses to measure its consolidated net income and assets. Operating segment income is generally income before income tax, adjusted to exclude any pretax minority interest in income of consolidated subsidiaries. Premiums and policy fees, other income, benefits and settlement expenses, and amortization of deferred policy acquisition costs are attributed directly to each operating segment. Net investment income is allocated based on directly related assets required for transacting the business of that segment. Realized investment gains (losses) and other operating expenses are allocated to the segments in a manner which most appropriately reflects the operations of that segment.
The tables on the following pages set forth total operating segment income and assets for the periods shown. Adjustments represent the recognition of income tax expense, income from discontinued operations, and cumulative effect of change in accounting principle. Asset adjustments represent the inclusion of assets related to discontinued operations.
-------------------------------------------------------------------------------------------------------------------------------- Corporate Asset and Total Protection Other Adjustments Consolidated -------------------------------------------------------------------------------------------------------------------------------- Premiums and policy fees $459,579 $ 38,131 $1,670,312 Reinsurance ceded (196,858) (3,805) (934,435) -------------------------------------------------------------------------------------------------------------------------------- Net of reinsurance ceded 262,721 34,326 735,877 Net investment income 39,201 56,734 1,030,752 Realized investment gains (losses) 38,125 70,614 Other income 42,238 6,698 120,282 -------------------------------------------------------------------------------------------------------------------------------- Total revenues 344,160 135,883 1,957,525 -------------------------------------------------------------------------------------------------------------------------------- Benefits and settlement expenses 189,981 31,520 1,151,574 Amortization of deferred policy acquisition costs 84,653 1,211 225,107 Other operating expenses 82,286 85,113 255,432 -------------------------------------------------------------------------------------------------------------------------------- Total benefits and expenses 356,920 117,844 1,632,113 -------------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before income tax (12,760) 18,039 325,412 Less: realized investment gains (losses) 38,125 Add back: derivative gains related to corporate debt and investments 21,087 -------------------------------------------------------------------------------------------------------------------------------- Operating income (loss) (12,760) 1,001 Income tax expense $108,362 108,362 -------------------------------------------------------------------------------------------------------------------------------- Net income $ 217,050 ================================================================================================================================
-------------------------------------------------------------------------------------------------------------------------------- Corporate Asset and Total Protection Other Adjustments Consolidated -------------------------------------------------------------------------------------------------------------------------------- Premiums and policy fees $506,304 $ 55,357 $1,561,717 Reinsurance ceded (202,575) (19,260) (751,396) -------------------------------------------------------------------------------------------------------------------------------- Net of reinsurance ceded 303,729 36,097 810,321 Net investment income 44,296 50,963 1,022,953 Realized investment gains (losses) 34,002 29,218 Other income 30,867 2,445 100,196 -------------------------------------------------------------------------------------------------------------------------------- Total revenues 378,892 123,507 1,962,688 -------------------------------------------------------------------------------------------------------------------------------- Benefits and settlement expenses 220,341 34,436 1,167,085 Amortization of deferred policy acquisition costs 86,129 1,479 267,662 Other operating expenses 95,800 71,019 262,898 -------------------------------------------------------------------------------------------------------------------------------- Total benefits and expenses 402,270 106,934 1,697,645 -------------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before income tax (23,378) 16,573 265,043 Less: realized investment gains (losses) 34,002 Add back: derivative gains related to corporate debt and investments 23,072 -------------------------------------------------------------------------------------------------------------------------------- Operating income (loss) (23,378) 5,643 Income tax expense $87,688 87,688 -------------------------------------------------------------------------------------------------------------------------------- Net income $ 177,355 ================================================================================================================================
Operating Segment Income for the Year Ended December 31, 2001 -------------------------------------------------------------------------------------------------------------------------------- Life Stable Value Marketing Acquisitions Annuities Products -------------------------------------------------------------------------------------------------------------------------------- Premiums and policy fees $542,406 $243,915 $ 28,145 Reinsurance ceded (421,411) (61,482) -------------------------------------------------------------------------------------------------------------------------------- Net of reinsurance ceded 120,995 182,433 28,145 Net investment income 179,346 187,535 167,905 $261,079 Realized investment gains (losses) 1,139 7,218 Other income 59,882 682 10,547 -------------------------------------------------------------------------------------------------------------------------------- Total revenues 360,223 370,650 207,736 268,297 -------------------------------------------------------------------------------------------------------------------------------- Benefits and settlement expenses 190,538 238,877 137,204 222,306 Amortization of deferred policy acquisition costs and goodwill 41,868 20,501 24,021 1,662 Other operating expenses 38,243 43,232 29,434 3,961 -------------------------------------------------------------------------------------------------------------------------------- Total benefits and expenses 270,649 302,610 190,659 227,929 -------------------------------------------------------------------------------------------------------------------------------- Income from continuing operations before income tax 89,574 68,040 17,077 40,368 Less: realized investment gains (losses) 1,139 7,218 Add back: related amortization of deferred policy acquisition cost 996 -------------------------------------------------------------------------------------------------------------------------------- Operating income 89,574 68,040 16,934 33,150
-------------------------------------------------------------------------------------------------------------------------------- Corporate Asset and Total Protection Other Adjustments Consolidated -------------------------------------------------------------------------------------------------------------------------------- Premiums and policy fees $524,281 $51,073 $1,389,820 Reinsurance ceded (274,220) (14,038) (771,151) -------------------------------------------------------------------------------------------------------------------------------- Net of reinsurance ceded 250,061 37,035 618,669 Net investment income 48,940 35,336 880,141 Realized investment gains (losses) (18,211) (9,854) Other income 46,636 2,900 120,647 -------------------------------------------------------------------------------------------------------------------------------- Total revenues 345,637 57,060 1,609,603 -------------------------------------------------------------------------------------------------------------------------------- Benefits and settlement expenses 154,893 28,806 972,624 Amortization of deferred policy acquisition costs and goodwill 60,756 1,805 150,613 Other operating expenses 96,028 65,872 276,770 -------------------------------------------------------------------------------------------------------------------------------- Total benefits and expenses 311,677 96,483 1,400,007 -------------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before income tax 33,960 (39,423) 209,596 Less: realized investment gains (losses) (18,211) Add back: derivative gains related to corporate debt and investments 10,317 -------------------------------------------------------------------------------------------------------------------------------- Operating income (loss) 33,960 (10,895) Income tax expense $ 68,538 68,538 Discontinued operations, net of income tax (30,522) (30,522) Change in accounting principle, net of income tax (7,593) (7,593) -------------------------------------------------------------------------------------------------------------------------------- Net income $ 102,943 ================================================================================================================================
-------------------------------------------------------------------------------------------------------------------------------- Corporate Asset and Total Protection Other Adjustments Consolidated -------------------------------------------------------------------------------------------------------------------------------- Investments and other assets $1,022,886 $2,968,396 $60,261 $22,665,659 Deferred policy acquisition costs 175,661 6,933 1,861,020 Goodwill 36,875 83 47,312 -------------------------------------------------------------------------------------------------------------------------------- Total assets $1,235,422 $2,975,412 $60,261 $24,573,991 --------------------------------------------------------------------------------------------------------------------------------
Operating Segment Assets December 31, 2002 -------------------------------------------------------------------------------------------------------------------------------- Life Stable Value Marketing Acquisitions Annuities Products -------------------------------------------------------------------------------------------------------------------------------- Investments and other assets $4,195,265 $4,565,298 $4,823,710 $3,930,669 Deferred policy acquisition costs 973,631 435,177 93,140 4,908 Goodwill 10,354 -------------------------------------------------------------------------------------------------------------------------------- Total assets $5,179,250 $5,000,475 $4,916,850 $3,935,577 --------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------- Corporate Asset and Total Protection Other Adjustments Consolidated -------------------------------------------------------------------------------------------------------------------------------- Investments and other assets $1,081,912 $1,500,049 $ 81,643 $20,178,546 Deferred policy acquisition costs 192,695 7,702 1,707,253 Goodwill 36,875 83 47,312 -------------------------------------------------------------------------------------------------------------------------------- Total assets $1,311,482 $1,507,834 $ 81,643 $21,933,111 --------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001 ------------------------------------------------------------------------------------------------------ Weighted average discount rate 6.75% 7.25% 7.50% Rates of increase in compensation level 4.50 5.00 5.25 Expected long-term rate of return on assets 8.50 8.50 8.50 ------------------------------------------------------------------------------------------------------
Plan assets by category as of December 31 were as follows:
The Company also sponsors an unfunded excess benefits plan, which is a nonqualified plan that provides defined pension benefits in excess of limits imposed on qualified plans by federal tax law. At December 31, 2003 and 2002, the projected benefit obligation of this plan totaled $18.1 million and $17.2 million, respectively, of which $15.5 million and $14.4 million, respectively, have been recognized in the Company’s financial statements.
2003 2002 2001 -------------------------------------------------------------------------------------------------- Service cost $ 485 $ 455 $ 686 Interest cost 1,182 1,178 1,121 Amortization of prior service cost 16 16 19 Amortization of transition asset 37 Recognized net actuarial loss 118 71 233 Cost of divestiture and special termination benefits 81 1,807 -------------------------------------------------------------------------------------------------- Net pension cost $1,882 $1,720 $3,903 --------------------------------------------------------------------------------------------------
The Company reinsures certain of its risks with, and assumes risks from, other insurers under yearly renewable term, coinsurance, and modified coinsurance agreements. Under yearly renewable term agreements, the Company generally pays specific premiums to the reinsurer and receives specific amounts from the reinsurer as reimbursement for certain expenses. Coinsurance agreements are accounted for by passing a portion of the risk to the reinsurer. Generally, the reinsurer receives a proportionate part of the premiums less commissions and is liable for a corresponding part of all benefit payments. Modified coinsurance is accounted for similarly to coinsurance except that the liability for future policy benefits is held by the original company, and settlements are made on a net basis between the companies. A substantial portion of the Company’s new life insurance and credit insurance sales is being reinsured. The Company reviews the financial condition of its reinsurers.
The Company’s unaudited consolidated quarterly operating data for the years ended December 31, 2003 and 2002, are presented below. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of quarterly results have been reflected in the data which follow. It is also management’s opinion, however, that quarterly operating data for insurance enterprises are not indicative of results to be achieved in succeeding quarters or years. In order to obtain a more accurate indication of performance, there should be a review of operating results, changes in share-owners’ equity, and cash flows for a period of several quarters. Certain reclassifications have been made in previously reported quarterly data to make the amounts comparable to those of the fourth quarter of 2003. Such reclassifications had no effect on previously reported net income.
First Second Third Fourth Quarter Quarter Quarter Quarter ----------------------------------------------------------------------------------------------------------------------- 2003 $ 387,094 $ 397,652 $ 424,590 $ 460,976 Premiums and policy fees Reinsurance ceded (189,417) (205,268) (237,996) (301,754) ----------------------------------------------------------------------------------------------------------------------- Net of reinsurance ceded 197,677 192,384 186,594 159,222 Net investment income 257,701 262,744 248,915 261,392 Realized investment gains (losses) (6,058) 33,858 17,994 24,820 Other income 25,309 39,981 26,128 28,864 ----------------------------------------------------------------------------------------------------------------------- Total revenues 474,629 528,967 479,631 474,298 Benefits and expenses 418,590 439,675 400,839 373,009 ----------------------------------------------------------------------------------------------------------------------- Income from continuing operations before income tax 56,039 89,292 78,792 101,289 Income tax expense 18,334 29,916 26,383 33,729 ----------------------------------------------------------------------------------------------------------------------- Net income $ 37,705 $ 59,376 $ 52,409 $ 67,560 ======================================================================================================================= Net income per share - basic $ .54 $ .85 $ .75 $ .96 Average shares outstanding - basic 69,956,505 70,004,109 70,091,080 70,079,471 Net income per share - diluted $ .53 $ .85 $ .74 $ .95 Average shares outstanding - diluted 70,483,448 70,561,795 70,722,885 70,806,034 -----------------------------------------------------------------------------------------------------------------------
First Second Third Fourth Quarter Quarter Quarter Quarter ----------------------------------------------------------------------------------------------------------------------- Premiums and policy fees $ 377,444 $ 376,970 $ 392,131 $ 415,172 Reinsurance ceded (176,683) (200,312) (121,744) (252,657) ----------------------------------------------------------------------------------------------------------------------- Net of reinsurance ceded 200,761 176,658 270,387 162,515 Net investment income 243,232 250,023 260,967 268,731 Realized investment gains (losses) 2,714 18,936 6,359 1,209 Other income 25,804 29,033 23,927 21,432 ----------------------------------------------------------------------------------------------------------------------- Total revenues 472,511 474,650 561,640 453,887 Benefits and expenses 410,226 393,168 484,004 410,247 ----------------------------------------------------------------------------------------------------------------------- Income from continuing operations before income tax 62,285 81,482 77,636 43,640 Income tax expense 20,679 27,052 26,661 13,296 ----------------------------------------------------------------------------------------------------------------------- Net income $ 41,606 $ 54,430 $ 50,975 $ 30,344 ======================================================================================================================= Net income per share - basic $ .60 $ .77 $ .73 $ .44 Average shares outstanding - basic 69,893,453 69,893,332 69,948,982 69,959,056 Net income per share - diluted $ .59 $ .77 $ .73 $ .43 Average shares outstanding - diluted 70,383,580 70,486,576 70,491,409 70,488,160 -----------------------------------------------------------------------------------------------------------------------
As discussed in Note 1 of the Notes to the Consolidated Financial Statements, effective December 31, 2003, the Company adopted FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities (FIN 46R),” effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” and effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities.”