Properties Protective’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 and a second contiguous 220,000 square-foot building which was completed in 1985. In addition, parking is provided for approximately 1,200 vehicles. During 2000, Protective began construction of a third contiguous building which will have approximately 315,000 square feet and parking for approximately 1,560 vehicles. The third building is expected to be completed during 2002. Protective has financed the construction under an operating lease arrangement.
Critical Accounting Policies In the conduct of business, Protective makes certain assumptions regarding the mortality, persistency, expenses and interest rates, (or other factors appropriate to the type of business) it expects to experience in future periods. Similar assumptions are also used to estimate the amounts of deferred policy acquisition costs, policy liabilities and accruals, and various other items. Protective’s actual experience, as well as changes in estimates, are components of Protective’s statements of income.
YEAR ENDED DECEMBER 31 (IN THOUSANDS) 2001 2000 ---- ---- Operating Income (Loss)(1) Life Insurance Life Marketing $ 92,016 $ 75,806 Acquisitions 69,251 53,624 Retirement Savings and Investment Products Stable Value Contracts 33,150 31,208 Annuities 15,093 13,584 Specialty Insurance Products Credit Products 35,731 34,826 Corporate and Other (22,446) (19,417) --------------------------------------------------------------------------------- Total operating income 222,795 189,631 --------------------------------------------------------------------------------- Realized Investment Gains (Losses) Stable Value Contracts 7,218 (6,556) Annuities 1,139 410 Unallocated (16,198) (8,453) Related Amortization of Deferred Policy Acquisition Costs Annuities (996) (410) --------------------------------------------------------------------------------- Total realized investment gains (losses), net (8,837) (15,009) -------------------------------------------------------------------------------- Income (Loss) Before Income Tax Life Insurance Life Marketing 92,016 75,806 Acquisitions 69,251 53,624 Retirement Savings and Investment Products Stable Value Contracts 40,368 24,652 Annuities 15,236 13,584 Specialty Insurance Products Credit Products 35,731 34,826 Corporate and Other (22,446) (19,417) Unallocated Realized Investment Gains (Losses) (16,198) (8,453) --------------------------------------------------------------------------------- Total income from continuing operations before income tax $213,958 $174,622 ---------------------------------------------------------------------------------
The Acquisitions segment’s 2001 pretax operating income was $69.3 million, $15.6 million above 2000. The 2001 coinsurance of a block of life insurance policies and the October 2001 acquisition of two small life insurance companies resulted in a $15.9 million increase in earnings. Earnings on older acquired blocks declined $0.3 million.
Discontinued Operations On December 31, 2001, Protective completed the sale to Fortis, Inc. of substantially all of its Dental Benefits Division (Dental Division) and discontinued certain other remaining Dental Division related operations, primarily other health insurance lines. In 2000, income from discontinued operations, net of income tax, was $10.9 million. In 2001, the loss from discontinued operations was $10.7 million (primarily due to the non-performance of reinsurers) and the loss from sale of discontinued operations was $17.8 million, both net of income tax.
NET INCOME --------------------------------------- YEAR ENDED PERCENTAGE DECEMBER 31 AMOUNT INCREASE (DECREASE) ------------------------------------------------------------------------------ (IN THOUSANDS)
Recently Issued Accounting Standards For additional information regarding recently issued accounting standards see Note A to the consolidated financial statements included herein.
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Protective Life Insurance Company and Subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note A of the Notes to the Consolidated Financial Statements, effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities”.
YEAR ENDED DECEMBER 31 ------------------------------------------- 2001 2000 1999 ---- ---- ---- REVENUES Premiums and policy fees................................................ $1,389,819 $1,175,943 $ 861,021 Reinsurance ceded....................................................... (771,151) (686,108) (462,297) ---------- ---------- --------- Net of reinsurance ceded.............................................. 618,668 489,835 398,724 Net investment income................................................... 839,103 692,081 617,829 Realized investment gains (losses): Derivative financial instruments..................................... (1,718) 2,157 3,425 All other investments................................................ (6,123) (16,756) 1,335 Other income............................................................ 38,578 35,194 22,599 ----------- ----------- ----------- 1,488,508 1,202,511 1,043,912 ----------- ----------- ----------- BENEFITS AND EXPENSES Benefits and settlement expenses (net of reinsurance ceded: 2001 - $609,996; 2000 - $538,291; 1999 - $344,474)........................... 972,624 760,778 629,656 Amortization of deferred policy acquisition costs ..................... 147,058 143,180 96,689 Amortization of goodwill............................................... 2,827 2,514 Other operating expenses (net of reinsurance ceded: 2001 - $167,243; 2000 - $223,498; 1999 - $150,570).................................... 152,041 121,417 130,954 ----------- ----------- ----------- 1,274,550 1,027,889 857,299 ----------- ----------- ----------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX....................... 213,958 174,622 186,613 INCOME TAX EXPENSE Current................................................................. 118,421 12,180 43,945 Deferred................................................................ (47,964) 49,298 24,046 ----------- ----------- ----------- 70,457 61,478 67,991 ----------- ----------- ----------- Net income from continuing operations before cumulative effect of change in accounting principle....................................................... 143,501 113,144 118,622 Income (loss) from discontinued operations, net of income tax ............. (10,748) 10,891 9,636 Loss from sale of discontinued operations, net of income tax .............. (17,754) ----------- ----------- ----------- Net income before cumulative effect of change in accounting principle...... 114,999 124,035 128,258 Cumulative effect of change in accounting principle, net of income tax..... (8,341) ----------- ----------- ----------- NET INCOME................................................................. $ 106,658 $ 124,035 $ 128,258 =========== =========== ===========
PROTECTIVE LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF SHARE-OWNER'S EQUITY (Dollars in thousands, except per share amounts)
CASH FLOWS FROM FINANCING ACTIVITIES Borrowings under line of credit arrangements and long-term debt........................ 2,574,954 2,197,800 4,351,177 Capital contribution from PLC.......................................................... 134,000 81,000 Principal payments on line of credit arrangements and long-term debt................... (2,457,979) (2,197,823) (4,351,203) Principal payment on surplus note to PLC............................................... (4,000) (4,000) (4,000) Dividends to share owner............................................................... (1,000) Investment product deposits and change in universal life deposits...................... 1,735,653 1,811,484 1,300,736 Investment product withdrawals......................................................... (1,315,179) (1,553,282) (1,190,903) ------------ ----------- ----------- Net cash provided by financing activities................................................... 666,449 335,179 105,807 ------------ ----------- ----------- INCREASE IN CASH............................................................................ 73,649 33,517 0 CASH AT BEGINNING OF YEAR................................................................... 33,517 0 0 ------------ ------------- ----------- CASH AT END OF YEAR......................................................................... $ 107,166 $ 33,517 $ 0 ============ ============= =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year: Interest on debt................................................................... $ 1,390 $ 3,310 $ 5,611 Income taxes....................................................................... $ 27,395 $ 25,638 $ 56,192
The accompanying consolidated financial statements of Protective Life Insurance Company and subsidiaries (Protective) 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 B.)
On May 1, 2001, PLC transferred its ownership of another five companies (that market prepaid dental products) to Protective. This transfer was also accounted for in a manner similar to that in pooling-of-interests accounting, which resulted in the assets and liabilities of these companies being transferred at amounts equal to PLC’s bases. Protective’s share-owner’s equity was also adjusted by an amount equal to the companies’ share-owner’s equity at May 1, 2001.
On December 31, 2001, Protective sold substantially all of the companies transferred from PLC as part of the sale of the Dental Benefits Division. For more information see the discussion under the heading “Discontinued Operations” included in Note A herein.
In September 2000, the Financial Accounting Standards Board (FASB) issued SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of SFAS No. 125". SFAS No. 140 revises the standards for accounting for securitizations and other transfers of financial assets. This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. The adoption of this accounting standard did not have a material effect on Protective’s financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. SFAS No. 144 requires that the same accounting model be used for long-lived assets to be disposed of by sales, whether previously held and used or newly acquired, expands the use of discontinued operations accounting to include more types of transactions and changes the timing of when discontinued operations accounting is applied. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. Protective does not expect the adoption of SFAS No. 144 to have a material effect on Protective’s financial position or results of operations.
Fixed maturities (bonds, and redeemable preferred stocks) - at current market value. Where market values are unavailable, Protective obtains estimates from independent pricing services or estimates market value based upon a comparison to quoted issues of the same issuer or issues of other issuers with similar terms and risk characteristics.
Equity securities (common and nonredeemable preferred stocks)-- at current market value.
2001 2000 ---- ---- Total investments....................................... $13,157,623 $10,258,809 Deferred policy acquisition costs....................... 1,553,786 1,192,696 All other assets........................................ 4,789,297 3,654,604 ------------ ------------ $19,500,706 $15,106,109 ============ ============
Deferred income taxes................................... $ 43,774 $ 100,256 All other liabilities................................... 17,626,767 13,424,068 ------------ ------------ 17,670,541 13,524,324 Share-owner's equity.................................... 1,830,165 1,581,785 ------------ ------------ $19,500,706 $15,106,109 ============ ============
Realized gains and losses on sales of investments are recognized in net income using the specific identification basis.
Protective discontinues hedge accounting prospectively when (1) it is determined that the derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item (including firm commitments or forecasted transactions); (2) the derivative expires or is sold, terminated, or exercised; (3) the derivative is dedesignated as a hedge instrument, because it is unlikely that a forecasted transaction will occur; (4) because a hedged firm commitment no longer meets the definition of a firm commitment; or (5) management determines that designation of the derivative as a hedge instrument is no longer appropriate.
Fair-Value Hedges. Protective has designated, as a fair value hedge, callable interest rate swaps used to modify the interest characteristics of certain stable value contracts. In assessing hedge effectiveness, Protective excludes the embedded call option's time value component from each derivative's total gain or loss. In 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 $1.3 million. Both the measured ineffectiveness and the excluded time value component are reported in Realized Investment Gains (Losses) - Derivative Financial Instruments in Protective's consolidated statements of income.
Cash-Flow Hedges. Protective has not designated any hedging relationships as a cash flow hedge.
Other Derivatives. Protective 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. In 2001, Protective recognized total pre-tax losses of $1.2 million representing the change in fair value of these derivative instruments.
On its foreign currency swaps, Protective recognized a $8.2 million pre-tax loss in 2001 while recognizing a $11.2 million foreign exchange pre-tax gain on the related foreign-currency-denominated stable value contracts. The net gain primarily results from the difference in the forward and spot exchange rates used to revalue the currency swaps and the stable value contracts, respectively. This net gain is reflected in Realized Investment Gains (Losses) - Derivative Financial Instruments in Protective's consolidated statements of income.
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,” Protective makes certain assumptions regarding the mortality, persistency, expenses, and interest rates (equal to the rate used to compute liabilities for future policy benefits; currently 3.0% 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 Protective’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. Protective 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 $523.4 million and $343.6 million at December 31, 2001 and 2000, respectively. During 2001, $221.9 million of present value of future profits was capitalized (relating to acquisitions made during the year) and $42.1 million was amortized. During 2000, $47.3 million of present value of future profits was capitalized, and $44.3 million was amortized.
Goodwill is being amortized straight-line over periods ranging from 20 to 40 years. Goodwill at December 31, is as follows:
The assets and liabilities related to separate accounts in which Protective 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.
Protective markets guaranteed investment contracts 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. Protective also sells funding agreements to special purpose entities that in turn issue notes or certificates in smaller, transferable denominations. In a structured program, Protective issues funding agreements to a special purpose trust or entity formed solely to purchase the funding agreements and simultaneously issue certificates or notes having terms substantially identical to the underlying funding agreements. Stable value contract account balances include guaranteed investment contracts and funding agreements issued by Protective, and the obligations of consolidated special purpose trusts or entities formed to purchase funding agreements issued by Protective. At December 31, 2001 and 2000 Protective had $1.7 billion and $1.0 billion of stable value contract account balances marketed through structured programs.
On December 31, 2001, Protective completed the sale to Fortis, Inc. of substantially all of its Dental Benefits Division (Dental Division), and discontinued other remaining Dental Division related operations, primarily other health insurance lines.
Note B-- RECONCILIATION WITH STATUTORY REPORTING PRACTICES 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 provided for temporary differences between financial and taxable earnings; (d) the Asset Valuation Reserve and Interest Maintenance Reserve are restored to share-owner’s 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 Protective’s statutory capital.
Note B-- RECONCILIATION WITH STATUTORY REPORTING PRACTICES - (Continued) The reconciliations of net income and share-owner’s equity prepared in conformity with statutory reporting practices to that reported in the accompanying consolidated financial statements are as follows:
Realized investment gains (losses) for all other investments for the years ended December 31 are summarized as follows:
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUES 2001 ------------ ----------- ----------- ------------ ---- Fixed maturities: Bonds: Mortgage-backed securities........... $ 3,709,118 $ 84,965 $ 33,759 $ 3,760,324 United States Government and authorities........................ 98,967 4,088 0 103,055 States, municipalities, and political subdivision.............. 94,022 4,009 0 98,031 Public utilities..................... 807,773 19,763 4,860 822,676 Convertibles and bonds with warrants........................... 96,951 7,423 6,184 98,190 All other corporate bonds............ 4,910,614 117,092 99,500 4,928,206 Redeemable preferred stocks............... 1,612 0 3 1,609 ------------ ---------- --------- ------------- 9,719,057 237,340 144,306 9,812,091 Equity securities......................... 62,051 3,565 5,123 60,493 Short-term investments.................... 228,396 0 0 228,396 ------------ ---------- --------- ------------- $10,009,504 $240,905 $149,429 $10,100,980 ============ ========== ========= =============
2001 2000 1999 ---- ---- ---- Fixed maturities..... $108,307 $109,625 $(217,901) Equity securities.... 715 (820) 973
At December 31, 2001, all of Protective’s mortgage loans were commercial loans of which 75% were retail, 10% were apartments, 7% were office buildings, and 7% were warehouses, and 1% other. Protective specializes in making mortgage loans on either credit-oriented or credit-anchored commercial properties, most of which are strip shopping centers in smaller towns and cities. No single tenant’s leased space represents more than 3.5% of mortgage loans. Approximately 76% of the mortgage loans are on properties located in the following states listed in decreasing order of significance: Texas, Tennessee, Georgia, Alabama, North Carolina, South Carolina, Florida, Virginia, California, Mississippi, Washington, Kentucky, and Ohio.
At December 31, 2001, the average mortgage loan was approximately $2.1 million, and the weighted average interest rate was 7.6%. The largest single mortgage loan was $18.8 million.
For several years Protective has offered a type of commercial mortgage loan under which Protective 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, 2001 and 2000, approximately $548.4 million and $572.2 million respectively, of Protective’s mortgage loans have this participation feature.
At December 31, 2001 and 2000, Protective’s problem mortgage loans (over ninety days past due) and foreclosed properties totaled $29.6 million and $20.6 million, respectively. Since Protective’s mortgage loans are collateralized by real estate, any assessment of impairment is based upon the estimated fair value of the real estate. Based on Protective’s evaluation of its mortgage loan portfolio, Protective does not expect any material losses on its mortgage loans.
On December 31, 2001, Protective Life Insurance Company had $117.0 million of securities sold under repurchase agreements with an interest rate of 2.0%. The agreement to repurchase liability is recorded as securities sold under repurchase agreements.
Note D-- FEDERAL INCOME TAXES Protective’s effective income tax rate varied from the maximum federal income tax rate as follows:
2001 2000 1999 ---- ---- ---- Deferred policy acquisition costs..................................... $ 81,015 $41,533 $44,546 Benefits and other policy liability changes........................... (127,189) 10,969 (27,158) Temporary differences of investment income............................ 7,145 (3,333) 6,655 Other items........................................................... (8,935) 129 3 --------- -------- --------- $(47,964) $49,298 $24,046 ========= ======== =========
2001 2000 ---- ---- Deferred income tax assets: Policy and policyholder liability reserves............................ $334,876 $ 205,815 Other................................................................. 10,893 1,959 -------- -------- 345,769 207,774 Deferred income tax liabilities: -------- -------- Deferred policy acquisition costs..................................... 379,072 302,631 Unrealized gains (losses) on investments.............................. 39,100 (22,792) -------- -------- 418,172 279,839 -------- -------- Net deferred income tax liability $ 72,403 $ 72,065 ======== ========
Under pre-1984 life insurance company income tax laws, a portion of Protective'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, 2001 was approximately $70.5 million. Should the accumulation in the Policyholders' Surplus account exceed certain stated maximums, or should distributions including cash dividends be made to PLC in excess of approximately $972 million, 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, Protective does not anticipate paying income tax on amounts in the Policyholders' Surplus accounts.
Protective has a mortgage note on investment real estate amounting to approximately $2.3 million that matures in 2003.
Included in indebtedness to related parties is a surplus debenture issued by Protective to PLC. At December 31, 2001, the balance of the surplus debenture was $6.0 million. The debenture matures in 2003 and has an interest rate of 8.5%.
In October 2001, Protective completed the acquisition of the stock of Inter-State Assurance Company (Inter-State) and First Variable Life Insurance Company (First Variable) from ILona Financial Group, Inc., a subsidiary of Irish Life & Permanent plc of Dublin, Ireland. The purchase price was approximately $250 million. The assets acquired included $132.7 million of present value of future profits.
Summarized below are the consolidated results of operations for 2001 and 2000, on an unaudited pro forma basis, as if the Inter-State and First Variable acquisitions had occurred as of January 1, 2000. The pro forma information is based on Protective’s consolidated results of operations for 2001 and 2000, and on data provided by the acquired companies, after giving effect to certain pro forma adjustments. The pro forma financial information does not purport to be indicative of results of operations that would have occurred had the transaction occurred on the basis assumed above nor are they indicative of results of the future operations of the combined enterprises.
(unaudited) 2001 2000 ----------------------------------------------------------------------- Total revenues $1,557,827 $1,294,937 Net income 115,433 135,735
On October 1, 2001, Protective transferred its ownership interest in a small subsidiary to PLC. This transfer was recorded as a common dividend at an amount equal to Protective's basis in the subsidiary, which approximated fair value.
Note J-- RELATED PARTY MATTERS On August 6, 1990, PLC announced that its Board of Directors approved the formation of an Employee Stock Ownership Plan (ESOP). On December 1, 1990, Protective transferred to the ESOP 520,000 shares of PLC's common stock held by it in exchange for a note. The outstanding balance of the note, $4.5 million at December 31, 2001, is accounted for as a reduction to share-owner's equity. The stock will be used to match employee contributions to PLC's existing 401(k) Plan. The ESOP shares are dividend paying. Dividends on the shares are used to pay the ESOP's note to Protective.
Certain corporations with which PLC's directors were affiliated paid Protective premiums and policy fees or other amounts for various types of insurance and investment products. Such premiums, policy fees, and other amounts totaled $19.6 million, $50.9 million and $70.3 million in 2001, 2000, and 1999, respectively. Protective and/or PLC paid commissions, interest on debt and investment products, and fees to these same corporations totaling $5.9 million, $28.2 million and $16.7 million in 2001, 2000, and 1999, respectively.
Note K-- OPERATING SEGMENTS Protective operates business segments each having a strategic focus which can be grouped into three general categories: life insurance, retirement savings and investment products and specialty insurance products. An operating segment is generally distinguished by products and/or channels of distribution. A brief description of each division follows.
The Life Marketing segment markets level premium term and term-like insurance, universal life, and variable universal life products on a national basis primarily through networks of independent insurance agents and brokers, and in the "bank owned life insurance" market.
The Acquisitions segment focuses on acquiring, converting, and servicing policies acquired from other companies. The segment's primary focus is on life insurance policies sold to individuals.
Note K-- OPERATING SEGMENTS - (Continued) Retirement Savings and Investment Products
The Stable Value Contracts segment markets guaranteed investment contracts to 401(k) and other qualified retirement savings plans. The segment also markets fixed and floating rate funding agreements to the trustees of municipal bond proceeds, institutional investors, bank trust departments, and money market funds.
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.
The Credit Products segment markets credit life and disability insurance products through banks, consumer finance companies, and automobile dealers, and markets vehicle and recreational marine extended service contracts.
Protective has an additional business segment herein referred to as Corporate and Other. The Corporate and Other segment primarily consists of net investment income and expenses not attributable to the segments above (including net investment income on unallocated capital and interest on substantially all debt). This segment also includes earning from several lines of business which Protective is not actively marketing (mostly cancer insurance and group annuities).
LIFE INSURANCE ---------------------------------- LIFE OPERATING SEGMENT INCOME MARKETING ACQUISITIONS ---------------------------------------------------------------------------------------------------------- Gross premiums and policy fees $ 542,407 $ 243,914 Reinsurance ceded (421,411) (61,482) ---------------------------------------------------------------------------------------------------------- Net premium and policy fees 120,996 182,432 Net investment income 178,866 187,535 Realized investment gains (losses) - - Other income 1,134 345 ---------------------------------------------------------------------------------------------------------- Total revenues 300,996 370,312 ---------------------------------------------------------------------------------------------------------- Benefits and settlement expenses 190,538 238,877 Amortization of deferred policy acquisition costs and goodwill 41,399 20,500 Other operating expenses (22,957) 41,684 ---------------------------------------------------------------------------------------------------------- Total benefits and expenses 208,980 301,061 ---------------------------------------------------------------------------------------------------------- Income from continuing operations before income tax 92,016 69,251 Income tax expense Discontinued operations, net of income tax Change in accounting principle, net of income tax ---------------------------------------------------------------------------------------------------------- Net income ---------------------------------------------------------------------------------------------------------- Gross premiums and policy fees $ 487,720 $ 134,099 Reinsurance ceded (387,907) (31,102) ---------------------------------------------------------------------------------------------------------- Net premium and policy fees 99,813 102,997 Net investment income 152,317 116,940 Realized investment gains (losses) - - Other income (1,379) (4) ---------------------------------------------------------------------------------------------------------- Total revenues 250,751 219,933 ---------------------------------------------------------------------------------------------------------- Benefits and settlement expenses 149,430 125,151 Amortization of deferred policy acquisition costs and goodwill 48,770 17,081 Other operating expenses (23,255) 24,077 ---------------------------------------------------------------------------------------------------------- Total benefits and expenses 174,945 166,309 ---------------------------------------------------------------------------------------------------------- Income from continuing operations before income tax 75,806 53,624 Income tax expense Discontinued operations, net of income tax Change in accounting principle, net of income tax ---------------------------------------------------------------------------------------------------------- Net income ---------------------------------------------------------------------------------------------------------- Gross premiums and policy fees $ 361,824 $ 148,620 Reinsurance ceded (246,111) (33,754) ---------------------------------------------------------------------------------------------------------- Net premium and policy fees 115,713 114,866 Net investment income 138,044 129,806 Realized investment gains (losses) - - Other income (948) (9) ---------------------------------------------------------------------------------------------------------- Total revenues 252,809 244,663 ---------------------------------------------------------------------------------------------------------- Benefits and settlement expenses 147,631 129,581 Amortization of deferred policy acquisition costs and goodwill 29,481 19,444 Other operating expenses 18,201 31,178 ---------------------------------------------------------------------------------------------------------- Total benefits and expenses 195,313 180,203 ---------------------------------------------------------------------------------------------------------- Income from continuing operations before income tax 57,496 64,460 Income tax expense Discontinued operations, net of income tax Change in accounting principle, net of income tax ---------------------------------------------------------------------------------------------------------- Net income ---------------------------------------------------------------------------------------------------------- Operating Segment Assets Investments and other assets $3,431,441 $4,091,672 Deferred policy acquisition costs and goodwill 829,021 418,268 ---------------------------------------------------------------------------------------------------------- Total assets $4,260,462 $4,509,940 ---------------------------------------------------------------------------------------------------------- Investments and other assets $2,834,956 $1,602,352 Deferred policy acquisition costs and goodwill 710,468 222,620 ---------------------------------------------------------------------------------------------------------- Total assets $3,545,424 $1,824,972 ---------------------------------------------------------------------------------------------------------- (1)Adjustments to net income represent the inclusion of unallocated realized investment gains (losses) and 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.
- $ 24,248 $ 284,891 $ 41,438 - $ 861,021 - - (176,928) (5,504) - (462,297) ---------------------------------------------------------------------------------------------------------- - 24,248 107,963 35,934 - 398,724 $ 210,208 106,599 24,121 9,051 - 617,829 (549) 1,446 - - $ 3,863 4,760 - 2,146 15,831 5,579 - 22,599 ---------------------------------------------------------------------------------------------------------- 209,659 134,439 147,915 50,564 3,863 1,043,912 ---------------------------------------------------------------------------------------------------------- 175,290 88,642 55,899 32,613 - 629,656 744 19,820 24,718 2,482 - 96,689 4,709 14,617 44,728 17,521 - 130,954 ---------------------------------------------------------------------------------------------------------- 180,743 123,079 125,345 52,616 - 857,299 ---------------------------------------------------------------------------------------------------------- 28,916 11,360 22,570 (2,052) 3,863 186,613 67,991 67,991 9,636 9,636 - - ---------------------------------------------------------------------------------------------------------- $ 128,258 ----------------------------------------------------------------------------------------------------------
$3,340,099 $3,844,169 $1,220,733 $552,178 $200,850 $13,595,337 2,144 120,219 150,984 10,006 214,770 1,431,211 ---------------------------------------------------------------------------------------------------------- $3,342,243 $3,964,388 $1,371,717 $562,184 $415,620 $15,026,548 ----------------------------------------------------------------------------------------------------------
2001 2000 ---- ---- Projected benefit obligation, beginning of the year..................... $45,538 $36,530 Service cost - benefits earned during the year.......................... 3,739 3,338 Interest cost - on projected benefit obligation......................... 3,531 3,195 Actuarial gain (loss)................................................... (357) 1,968 Plan amendment.......................................................... 1,162 833 Divestiture............................................................. (2,165) Benefits paid........................................................... (579) (326) -------- -------- Projected benefit obligation, end of the year........................... 50,869 45,538 -------- -------- Fair value of plan assets beginning of the year......................... 40,822 34,420 Actual return on plan assets............................................ (1,440) (148) Employer contribution................................................... 5,221 6,876 Benefits paid........................................................... (579) (326) -------- -------- Fair value of plan assets end of the year............................... 44,024 40,822 -------- -------- Plan assets less than the projected benefit obligation.................. (6,845) (4,716) Unrecognized net actuarial loss from past experience different from that assumed................................................................ 10,213 7,766 Unrecognized prior service cost......................................... 2,026 1,226 -------- --------- Net pension asset recognized in balance sheet........................... $ 5,394 $ 4,276 ======== =========
PLC also sponsors an unfunded excess benefits plan, which is a nonqualified plan that provides defined pension benefits in excess of limits imposed by federal income tax law. At December 31, 2001 and 2000, the projected benefit obligation of this plan totaled $15.9 million and $14.4 million, respectively, of which $13.8 million and $10.5 million, respectively, have been recognized in PLC’s financial statements.
Net pension costs of the excess benefits plan includes the following components for the years ended December 31:
Since 1973, PLC has had stock-based incentive plans to motivate management to focus on PLC's long-range performance through the awarding of stock-based compensation. Under plans approved by share owners in 1997 and 1998, up to 5,000,000 shares may be issued in payment of awards.
A performance share is equivalent in value to one share of PLC Common Stock. With respect to SARs, PLC will pay an amount equal to the difference between the specified base price of PLC's Common Stock and the market value at the exercise date. Awards are paid in shares of PLC Common Stock. At December 31, 2002, outstanding awards measured at maximum payouts were 423,362 performance shares and 853,236 SARs.
During 1996, 2000, and 2001, SARs were granted to certain officers of PLC to provide long-term incentive compensation based solely on the performance of PLC's Common Stock. The SARs are exercisable after five years (earlier upon the death, disability, or retirement of the officer, or in certain circumstances, of a change in control of PLC) and expire after ten years or upon termination of employment. In 2000, 217,500 SARs were awarded, having an estimated fair value on the grant date of $1.5 million. In 2001, 62,500 SARs were awarded, having an estimated fair value on the grant date of $0.6 million. The number of SARs granted in 1996, 2000, and 2001, outstanding at December 31, 2001, was 660,000, 215,000, and 62,500, respectively.
The 1996 SARs have a base price of $17.4375. The 2000 SARs have a base price of $22.31. The 2001 SARs have a base price of $31.26 and $31.29. The fair value of the 2001 SARs was estimated using a Black-Scholes option pricing model. Assumptions used in the model were as follows: expected volatility of 26.4% (approximately equal to that of the S&P Life Insurance Index), a risk-free interest rate of 4.7%, a dividend rate of 1.9%, and an expected exercise date of 2007.
Note N-- REINSURANCE Protective 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, Protective 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 Protective's new life insurance sales are being reinsured. Protective reviews the financial condition of its reinsurers and monitors the amount of reinsurance it has with its reinsurers.
Protective has reinsured approximately $169.5 billion, $126.0 billion and $93.5 billion in face amount of life insurance risks with other insurers representing $565.1 million, $496.4 million, and $364.7 million of premium income for 2001, 2000, and 1999, respectively. Protective has also reinsured accident and health risks representing $122.7 million, $125.8 million, and $97.1 million of premium income for 2001, 2000, and 1999, respectively. In 2001 and 2000, policy and claim reserves relating to insurance ceded of $2,059.0 million and $988.4 million, respectively, are included in reinsurance receivables. Should any of the reinsurers be unable to meet its obligation at the time of the claim, obligation to pay such claim would remain with Protective. At December 31, 2001 and 2000, Protective had paid $46.4 million and $33.5 million, respectively, of ceded benefits which are recoverable from reinsurers. In addition, at December 31, 2001, Protective had receivables of $69.3 million related to insurance assumed. Included in these receivables are $51.2 million related to the sale of Protective's Dental Division, and $783.9 million related to fixed annuities that were ceded in conjunction with the October 2001 acquisition of two small insurers.
2001 2000 ----------------------------- ----------------------------- ESTIMATED ESTIMATED CARRYING FAIR CARRYING FAIR AMOUNT VALUES AMOUNT VALUES ---------- ----------- ---------- ------------ Assets (see Notes A and C): Investments: Fixed maturities......................... $9,812,091 $9,812,091 $7,390,110 $7,390,110 Equity securities........................ 60,493 60,493 41,792 41,792 Mortgage loans on real estate............ 2,512,844 2,671,074 2,268,224 2,385,174 Short-term investments................... 228,396 228,396 172,699 172,699
Protective estimates the fair value of its mortgage loans using discounted cash flows from the next call date.
SCHEDULE IV - REINSURANCE PROTECTIVE LIFE INSURANCE COMPANY AND SUBSIDIARIES (Dollars in thousands) ------------------------------------------------------------------------------------------------------------------------------------ COL. A COL. B COL. C COL. D COL. E COL. F ------------------------------------------------------------------------------------------------------------------------------------ PERCENTAGE CEDED TO ASSUMED OF AMOUNT GROSS OTHER FROM OTHER NET ASSUMED AMOUNT COMPANIES COMPANIES AMOUNT TO NET ------------ ------------ ----------- ------------ -------- Year Ended December 31, 2001: Life insurance in force........................... $191,105,511 $171,449,182 $23,152,614 $42,808,143 54.1% ============ ============ =========== =========== ===== Premiums and policy fees: Life insurance.................................... $ 774,294 $ 565,130 $ 198,832 $ 407,996 48.7% Accident and health insurance..................... 181,508 122,747 58,761 0.0% Property and liability insurance.................. 158,890 83,274 76,295 151,911 50.2% ------------ ------------ ----------- ----------- TOTAL........................................... $ 1,114,692 $ 771,151 $ 275,127 $ 618,668 ============ ============ =========== =========== Year Ended December 31, 2000: Life insurance in force........................... $153,371,754 $128,374,583 $17,050,342 $42,047,513 40.6% ============ ============ =========== =========== Premiums and policy fees: Life insurance.................................... $ 670,113 $ 493,793 $ 112,668 $ 288,988 39.0% Accident and health insurance..................... 203,475 128,520 17,164 92,119 18.6% Property and liability insurance.................. 159,354 63,795 13,169 108,728 12.1% ------------ ------------ ----------- ----------- TOTAL......................................... $ 1,032,942 $ 686,108 $ 143,001 $ 489,835 ============ ============ =========== ===========