Cumulative effect of change in accounting principle relating to SFAS No. 133, net of income tax. (3) Prior periods have been restated to reflect discontinued operations.
December 31 ------------------------------------------------------------------------------- 2003 2002 2001 2000 1999 -------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) BALANCE SHEET DATA Total assets............................ $23,971,212 $21,767,675 $19,582,503 $15,041,781 $12,862,097 Total debt(4)........................... $ 2,234 $ 4,264 $ 8,291 $ 12,315 $ 16,338 Total stable value product and annuity account balances(5).................. $ 4,847,518 $ 4,198,070 $ 3,907,892 $ 3,385,092 $ 2,915,417 Share-owner's equity.................... $ 2,629,798 $ 2,285,284 $ 1,883,333 $ 1,539,955 $ 1,236,495 --------------------------------------------------------------------------------------------------------------------------
Includes indebtedness to related parties. Such indebtedness totaled $0.0 million, $2.0 million, $6.0 million, $10.0 million, and $14.0 million at December 31, 2003, 2002, 2001, 2000, and 1999, respectively. See also Note E to the Consolidated Financial Statements.
Includes stable value product account balances and annuity account balances which do not pose significant mortality risk.
The Life Marketing segment’s pretax operating income was $160.0 million in 2003, an increase of 27.5% over the $125.4 million reported in 2002. The increase was primarily attributable to an increase in business-in-force.
The Annuities segment’s pretax operating income was $13.2 million in 2003, a decline of $1.5 million from the $14.7 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.
Corporate and Other had a pretax operating loss of $15.4 million in 2003 compared to a loss of $19.3 million in 2002. An increase in investment income contributed to the change.
Protective’s accounting policies inherently require the use of judgments relating to a variety of assumptions and estimates, in particular expectations of current and future mortality, morbidity, persistency, expenses, and interest rates. Because of the inherent uncertainty when using the assumptions and estimates, the effect of certain accounting policies under different conditions or assumptions could be materially different from those reported in the consolidated financial statements. A discussion of the various critical accounting policies is presented below.
Protective has a deferred policy acquisition costs asset of approximately $99.7 million related to its variable annuity product line with an account balance of $2.2 billion at December 31, 2003. Protective monitors the rate of amortization of the deferred policy acquisition costs associated with its variable annuity product line. The methodologies employ varying assumptions about how much and how quickly the stock markets will appreciate. The primary assumptions used to project future profits as part of the analysis include: a long-term equity market growth rate of 9%, reversion to the mean methodology with a reversion to the mean cap rate of 14%, reversion to the mean period of 5 years, and an amortization period of 20 years. A recovery in equity markets, or methodologies and assumptions that anticipate a recovery, results in lower amounts of amortization, and a worsening of equity markets results in higher amounts of amortization.
Establishing an adequate liability for Protective’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 Protective’s historical experience, modified as necessary to reflect anticipated trends and to include provisions for possible adverse deviation.
The assessment of potential obligations for tax, regulatory, and litigation matters inherently involve a variety of estimates of potential future outcomes. Protective makes such estimates after consultation with its advisors and a review of available facts.
The percentage earned on average cash and investments was 6.8% in 2002 and 6.1% in 2003, due to the overall decline in interest rates on new investments.
Protective generally purchases its investments with the intent to hold to maturity by purchasing investments that match future cash flow needs.
The following table sets forth realized investment gains (losses) relating to derivative financial instruments and all other investments for the periods shown:
Derivative Year Ended Financial All Other December 31 Instruments Investments --------------------------------------------------------------- (in thousands) 2001 $ 2,182 $(6,123) 2002 (4,708) 12,314 2003 8,249 66,764 ---------------------------------------------------------------
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 $73.0 million were largely offset by realized investment losses of $60.7 million. Realized investment gains related to all other investments in 2003 of $93.4 million were offset by realized investment losses of $26.6 million. During 2002 and 2003, Protective recorded other-than-temporary impairments in its investments of $17.8 million and $13.6 million, respectively.
Each quarter Protective 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, Protective 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, Protective 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.
Percentage Year Ended Increase December 31 Amount (Decrease) ------------------------------------------------------------------------------ (in thousands) 2001 $38,578 9.6% 2002 41,483 7.5 2003 46,825 12.9 ------------------------------------------------------------------------------
Other income consists primarily of revenues of Protective’s direct response businesses, service contract businesses, noninsurance subsidiaries, and rental of space in its administrative building to PLC. In 2002, revenues from Protective’s service contract business increased $4.7 million. Income from all other sources decreased $1.8 million. In 2003, revenues from Protective’s service contract business increased $4.5 million. Income from all other sources increased $0.8 million.
Consistent with Protective’s segment reporting in the Notes to Consolidated Financial Statements, management evaluates the results of Protective’s segments on a before-income-tax basis as adjusted for certain items which management believes are not indicative of Protective’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 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 Protective’s overall financial performance, management believes that operating segment income (loss) enhances an investor’s understanding of Protective’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, Protective’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 investments.
The table below sets forth operating income or loss and income or loss before income tax by business segment for the periods shown:
Certain investments included in realized investment gains and considered a part of operating income
The Life Marketing segment’s 2002 pretax operating income was $125.4 million, $33.4 million above 2001. In the third quarter of 2002, Protective 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, Protective had recorded cash and receivables totaling $69.7 million, which reflected the amounts received at that date, and Protective’s estimate of amounts to be recovered in the future, based upon the information then available.
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 $19.0 million can be attributed to growth through sales.
In the ordinary course of business, the Acquisitions segment regularly considers acquisitions of blocks of policies or smaller insurance companies. Policies acquired through the segment are usually administered as “closed” blocks; i.e., no new policies are being marketed. Therefore, earnings from the Acquisitions segment are normally expected to decline over time (due to the lapsing of policies resulting from deaths of insureds or terminations of coverage) unless new acquisitions are made.
The Annuities segment’s pretax operating income for 2002 was $14.7 million as compared to $15.1 million in 2001. Fixed annuity earnings increased $1.2 million due to higher account balances. This increase was more than offset by a decline in variable annuity earnings of $2.4 million due to the general decline in the equity markets. The segment’s 2003 pretax operating income was $13.2 million, a decrease of $1.5 million from 2002. The decrease is primarily attributable to spread compression and the inability to capitalize excess expenses due to lower sales of fixed annuities caused by lower interest rates in 2003. The segment had a $0.3 million realized investment gain (net of related amortization of deferred policy acquisition costs) in 2002 and a $3.8 million gain in 2003. As a result, total pretax income was $15.0 million in 2002 and $17.0 million in 2003.
The Corporate and Other segment consists primarily of net investment income on unallocated capital, interest expense on substantially all debt, several lines of business that Protective is not actively marketing (mostly health insurance), and earnings from various investment-related transactions. In 2002, the segment had a pretax operating loss of $19.3 million, $3.1 million less than 2001. The increase relates to a $9.6 million increase in investment income allocated to the segment, which was partially offset by $4.1 million less income from the cancer line. Other items decreased income by $2.4 million in 2002. Realized investment gains (net of derivative gains related to investments) in 2002 were $4.1 million. As a result, the total pretax loss in 2002 was $15.2 million.
The following table sets forth the effective income tax rates relating to continuing operations for the periods shown:
Year Ended Effective Income December 31 Tax Rates -------------------------------------------- 2001 32.9% 2002 34.9 2003 33.7 --------------------------------------------
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 2001, the loss from discontinued operations was $9.9 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.
Year Ended Percent December 31 Amount Increase/(Decrease) -------------------------------------------------------------------------- (in thousands) 2001 $143,501 26.8% 2002 157,394 9.7 2003 232,040 47.4 --------------------------------------------------------------------------
Net income from continuing operations before cumulative effect of change in accounting principle in 2002 of $157.4 million 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 in 2003 of $232.0 million 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.
Protective is exposed to the risks of natural disasters, malicious and terrorist acts that could adversely affect Protective’s operations.
Protective operates in a mature, highly competitive industry, which could limit its ability to gain or maintain its position in the industry.
Life and health insurance is a mature industry. In recent years, the industry has experienced little growth in life insurance sales, though the aging population has increased the demand for retirement savings products. Life and health insurance is a highly competitive industry. Protective encounters significant competition in all lines of business from other insurance companies, many of which have greater financial resources than Protective, as well as competition from other providers of financial services. Competition could result in, among other things, lower sales or higher lapses of existing products.
The insurance industry is consolidating, with larger, potentially more efficient organizations emerging from consolidation. Participants in certain of Protective’s independent distribution channels are also consolidating into larger organizations. Some mutual insurance companies are converting to stock ownership, which will give them greater access to capital markets. Additionally, commercial banks, insurance companies, and investment banks may now combine, provided certain requirements are satisfied. The ability of banks to increase their securities-related business or to affiliate with insurance companies may materially and adversely affect sales of all of Protective’s products by substantially increasing the number and financial strength of potential competitors.
Rating organizations assign ratings based upon several factors. While most of the factors relate to the rated company, some of the factors relate to the views of the rating organization, general economic conditions and circumstances outside the rated company’s control. In addition, rating organizations use various models and formulas to assess the strength of a rated company, and from time to time rating organizations have, in their discretion, altered the models. Changes to the models could impact the rating organizations’ judgment of the rating to be assigned to the rated company. Protective cannot predict what actions the rating organizations may take, or what actions Protective may be required to take in response to the actions of the rating organizations, which could adversely affect Protective.
Protective’s policy claims fluctuate from period to period, and actual results could differ from its expectations.
Protective’s results may fluctuate from period to period due to fluctuations in policy claims received by Protective. Certain of Protective’s businesses may experience higher claims if the economy is growing slowly or in recession, or equity markets decline.
The timing of premium payments to, and receipt of expense allowances from, reinsurers may differ from Protective’s receipt of customer premium payments and incurrence of expenses. These timing differences introduce variability in certain components of Protective’s statements of income, and may also introduce variability in Protective’s quarterly results.
Significant changes in interest rates expose insurance companies to the risk of not earning anticipated spreads between the interest rate earned on investments and the credited interest rates paid on outstanding policies and contracts. Both rising and declining interest rates can negatively affect Protective’s spread income. While Protective develops and maintains asset/liability management programs and procedures designed to preserve spread income in rising or falling interest rate environments, no assurance can be given that changes in interest rates will not affect such spreads.
From time to time, Protective has participated in securities repurchase transactions that have contributed to Protective’s investment income. Such transactions involve some degree of risk that the counterparty may fail to perform its obligations to pay amounts owed and the collateral has insufficient value to satisfy the obligation. No assurance can be given that such transactions will continue to be entered into and contribute to Protective’s investment income in the future.
Additionally, Protective’s asset/liability management programs and procedures incorporate assumptions about the relationship between short-term and long-term interest rates (i.e., the slope of the yield curve) and relationships between risk-adjusted and risk-free interest rates, market liquidity, and other factors. The effectiveness of Protective’s asset/liability management programs and procedures may be negatively affected whenever actual results differ from these assumptions.
A deficiency in Protective’s systems could result in over or underpayments of amounts owed to or by Protective and/or errors in Protective’s critical assumptions or reported financial results.
Changes to tax law or interpretations of existing tax law could adversely affect Protective and its ability to compete with non-insurance products or reduce the demand for certain insurance products.
Under the Internal Revenue Code of 1986, as amended (the “Code”), income tax payable by policyholders on investment earnings is deferred during the accumulation period of certain life insurance and annuity products. This favorable tax treatment may give certain of Protective’s products a competitive advantage over other non-insurance products. To the extent that the Code is revised to reduce the tax-deferred status of life insurance and annuity products, or to increase the tax-deferred status of competing products, all life insurance companies, including Protective and its subsidiaries, would be adversely affected with respect to their ability to sell such products, and, depending upon grandfathering provisions, would be affected by the surrenders of existing annuity contracts and life insurance policies. For example, changes in laws or regulations could restrict or eliminate the advantages of certain corporate or bank-owned life insurance products. Recent changes in tax law, which have reduced the federal income tax rates on corporate dividends in certain circumstances, could make the tax advantages of investing in certain life insurance or annuity products less attractive. Additionally, changes in tax law based on proposals to establish new tax advantaged retirement and life savings plans, if enacted, could reduce the tax advantage of investing in certain life insurance or annuity products. In addition, life insurance products are often used to fund estate tax obligations. Legislation has been enacted that would, over time, reduce and eventually eliminate the estate tax. If the estate tax is significantly reduced or eliminated, the demand for certain life insurance products could be adversely affected. Additionally, Protective is subject to the federal corporation income tax. Protective cannot predict what changes to tax law or interpretations of existing tax law could adversely affect Protective.
Protective’s ability to maintain low unit costs is dependent upon the level of new sales and persistency (continuation or renewal) of existing business. A decrease in sales or persistency without a corresponding reduction in expenses may result in higher unit costs.
Protective’s results may be affected by the performance of others because Protective has entered into various arrangements involving other parties. For example, most of Protective’s products are sold through independent distribution channels, and variable annuity deposits are invested in funds managed by third parties. Additionally, Protective’s operations are dependent on various technologies, some of which are provided and/or maintained by other parties.
As with all financial services companies, its ability to conduct business is dependent upon consumer confidence in the industry and its products. Actions of competitors and financial difficulties of other companies in the industry could undermine consumer confidence and adversely affect retention of existing business and future sales of Protective’s insurance and investment products.
Protective’s ability to compete is dependent on the availability of reinsurance. Premium rates charged by Protective 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 Protective for the reinsurance, though Protective 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, Protective could be adversely affected.
Computer viruses or network security breaches could affect the data processing systems of Protective or its business partners.
Like all publicly traded companies, PLC is required to comply with accounting principles generally accepted in the United States of America (GAAP). A number of organizations are instrumental in the development of GAAP such as the Securities and Exchange Commission (SEC), the Financial Accounting Standards Board (FASB), and the American Institute of Certified Public Accountants (AICPA). GAAP is subject to constant review by these organizations and others in an effort to address emerging issues and otherwise improve financial reporting. In this regard, these organizations adopt new accounting rules and issue interpretive accounting guidance on a continual basis. PLC and Protective can give no assurance that future changes to GAAP will not have a negative impact on Protective’s reported financial results.
On January 1, 2001, Protective adopted Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities”. SFAS No. 133, as amended by SFAS Nos. 137, 138, and 149, requires Protective to record all derivative financial instruments at fair value on the balance sheet. Changes in fair value of a derivative instrument are reported in net income or other comprehensive income, depending on the designated use of the derivative instrument. The adoption of SFAS No. 133 resulted in a cumulative charge to net income, net of income tax, of $8.3 million and a cumulative after-tax increase to other comprehensive income of $4.0 million on January 1, 2001. The charge to net income and increase to other comprehensive income primarily resulted from the recognition of derivative instruments embedded in Protective’s corporate bond portfolio. In addition, the charge to net income includes the recognition of the ineffectiveness on existing hedging relationships including the difference in spot and forward exchange rates related to foreign currency swaps used as an economic hedge of foreign-currency-denominated stable value contracts. The adoption of SFAS No. 133 has introduced volatility into Protective’s reported net income and other comprehensive income depending on market conditions and Protective’s hedging activities.
Year Ended December 31 ----------------------------------------- 2003 2002 2001 ---------------------------------------------------------------------------------------------------------------------- (in thousands) Adjusted net income: Income from continuing operations before cumulative effect of change in accounting principle $232,040 $157,394 $143,501 Add back amortization of goodwill, net of income tax 1,838 ---------------------------------------------------------------------------------------------------------------------- Adjusted income from continuing operations before cumulative effect of change in accounting principle 232,040 157,394 145,339 Loss from discontinued operations, net of income tax (9,856) Loss from sale of discontinued operations, net of income tax (17,754) ---------------------------------------------------------------------------------------------------------------------- Adjusted net income before cumulative effect of change in accounting principle 232,040 157,394 117,729 Cumulative effect of change in accounting principle, net of income tax (8,341) ---------------------------------------------------------------------------------------------------------------------- Adjusted net income $232,040 $157,394 $109,388 ----------------------------------------------------------------------------------------------------------------------
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, Protective 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. Protective anticipates that the Medicare Act will not have a material impact on the financial results of Protective; therefore the costs reported in Note L to the consolidated financial statements do not reflect these changes. The final accounting guidance could require changes to previously reported information.
Protective’s investment portfolio consists primarily of fixed maturity securities (bonds and redeemable preferred stocks) and commercial mortgage loans. Protective generally purchases its investments with the intent to hold to maturity by purchasing investments that match future cash flow needs. However, Protective may sell any of its investments to maintain proper matching of assets and liabilities. Accordingly, Protective has classified its fixed maturities and certain other securities as “available for sale.”
Protective’s investments in debt and equity securities are reported at market value, and investments in mortgage loans are reported at amortized cost. At December 31, 2003, Protective’s fixed maturity investments (bonds and redeemable preferred stocks) had a market value of $12.9 billion, which is 5.0% above amortized cost of $12.3 billion. Protective had $2.7 billion in mortgage loans at December 31, 2003. While Protective’s mortgage loans do not have quoted market values, at December 31, 2003, Protective estimates the market value of its mortgage loans to be $3.0 billion (using discounted cash flows from the next call date), which is 8.2% above amortized cost. Most of Protective’s mortgage loans have significant prepayment fees. These assets are invested for terms approximately corresponding to anticipated future benefit payments. Thus, market fluctuations are not expected to adversely affect liquidity.
December 31 ------------------------------------------------------------------------- 2003 2002 ---------------------------------------------------------------------------------------------------------------------- (in thousands) Publicly issued bonds $10,967,622 64.7% $9,694,132 62.8% Privately issued bonds 1,956,734 11.5 1,959,506 12.7 Redeemable preferred stock 3,164 0.0 1,827 0.0 ---------------------------------------------------------------------------------------------------------------------- Fixed maturities 12,927,520 76.2 11,655,465 75.5% Equity securities 30,521 0.2 48,799 0.3 Mortgage loans 2,733,722 16.1 2,518,151 16.3 Investment real estate 13,152 0.1 15,499 0.1 Policy loans 502,748 3.0 543,161 3.5 Other long-term investments 244,913 1.4 210,381 1.4 Short-term investments 510,635 3.0 447,155 2.9 ---------------------------------------------------------------------------------------------------------------------- Total investments $16,963,211 100.0% $15,438,611 100.0% ----------------------------------------------------------------------------------------------------------------------
The following table sets forth the estimated market values of Protective’s fixed maturity investments and mortgage loans resulting from a hypothetical immediate 1 percentage point increase in interest rates from levels prevailing at December 31, and the percent change in market value the following estimated market values would represent.
Protective monitors the overall credit quality of Protective’s portfolio within general guidelines. The following table shows Protective’s available for sale fixed maturities by credit rating at December 31, 2003.
Creditor Market Value --------------------------------------------------------------------------- Berkshire Hathaway $71.7 Citigroup 68.0 Kinder Morgan Partners 67.4 Progress Energy 64.5 Verizon 64.1 Cox Communications 63.5 Public Service Enterprise Group 61.7 Constellation Energy Group 60.4 Bank of America 59.0 American Electric Power 59.0 ---------------------------------------------------------------------------
During 2003, Protective recorded pretax other-than-temporary impairments in its investments of $13.6 million. In 2002, Protective recorded pretax other-than-temporary impairments in its investments of $17.8 million.
Protective’s management considers a number of factors when determining the impairment status of individual securities. These include the economic condition of various industry segments and geographic locations and other areas of identified risks. Although it is possible for the impairment of one investment to affect other investments, Protective engages in ongoing risk management to safeguard against and limit any further risk to its investment portfolio. Special attention is given to correlative risks within specific industries, related parties and business markets.
Protective generally considers a number of factors relating to the issuer in determining the financial strength, liquidity, and recoverability of an issuer. These include but are not limited to: available collateral, tangible and intangible assets that might be available to repay debt, operating cash flows, financial ratios, access to capital markets, quality of management, market position, exposure to litigation or product warranties, and the effect of general economic conditions on the issuer.
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, Protective had an overall net unrealized gain of $614.1 million.
For traded and private fixed maturity and equity securities held by Protective that are in an unrealized loss position at December 31, 2003, the estimated market value, amortized cost, unrealized loss and total time period that the security has been in an unrealized loss position are presented in the table below.
At December 31, 2003, $24.5 million of securities in an unrealized loss position were securities issued in Protective-sponsored commercial mortgage loan securitizations, including $19.2 million in an unrealized loss position greater than five years. Protective does not consider these unrealized loss positions to be other-than-temporary, because the underlying mortgage loans continue to perform consistently with Protective’s original expectations.
Estimated % Market Amortized % Amortized Unrealized % Unrealized Market Value Value Cost Cost Loss Loss ------------------------------------------------------------------------------------------------------------------------ (in thousands) = 90 days $ 25,138 10.1% $ 25,959 9.3% $ (821) 2.5% 90 days but = 180 days 34,423 13.9 35,497 12.7 (1,074) 3.3 180 days but = 270 days 40,369 16.3 41,363 14.8 (994) 3.1 270 days but = 1 year 14,111 5.7 14,567 5.2 (456) 1.4 1 year but = 2 years 34,399 13.9 38,085 13.6 (3,686) 11.4 2 years but = 3 years 29,901 12.1 32,746 11.7 (2,845) 8.8 3 years but = 4 years 1,919 0.8 2,044 0.7 (125) 0.4 4 years but = 5 years 26,182 10.6 30,335 10.8 (4,153) 12.9 5 years 41,319 16.6 59,458 21.2 (18,139) 56.2 ------------------------------------------------------------------------------------------------------------------------ Total $247,761 100.0% $280,054 100.0% $(32,293) 100.0% ------------------------------------------------------------------------------------------------------------------------
During the year ended December 31, 2003, Protective recorded pretax other-than-temporary impairments in its investments of $13.6 million as compared to $17.8 million in the year ended December 31, 2002.
Proceeds % Proceeds Realized Loss % Realized Loss ---------------------------------------------------------------------------------------------- (in thousands) = 90 days $454,692 86.6% $1,242 19.7% 90 days but = 180 days 7,747 1.5 15 0.2 180 days but = 270 days 3,000 0.6 1,952 31.0 270 days but = 1 year 35,503 6.8 457 7.2 1 year 23,808 4.5 2,648 41.9 ---------------------------------------------------------------------------------------------- Total $524,750 100.0% $6,314 100.0% ----------------------------------------------------------------------------------------------
Protective records mortgage loans net of an allowance for credit losses. This allowance is calculated through analysis of specific loans that are believed to be at a higher risk of becoming impaired in the near future. At December 31, 2003, Protective’s allowance for mortgage loan credit losses was $4.7 million.
At December 31, 2003, delinquent mortgage loans and foreclosed properties were 0.1% of invested assets. Protective does not expect these investments to adversely affect its liquidity or ability to maintain proper matching of assets and liabilities.
In the ordinary course of its commercial mortgage lending operations, Protective will commit to provide a mortgage loan before the property to be mortgaged has been built or acquired. The mortgage loan commitment is a contractual obligation to fund a mortgage loan when called upon by the borrower. The commitment is not recognized in Protective’s financial statements until the commitment is actually funded. The mortgage loan commitment contains terms, including the rate of interest, which may be less than prevailing interest rates.
Percent At December 31 Amount Change ----------------------------------------------------------------------------------- (in millions) Stable value product account balances $4,198.4 1.8% Annuity account balances 3,966.6 4.5
Stable value product account balances $4,817.2 1.7% Annuity account balances 3,642.0 4.8 -----------------------------------------------------------------------------------
Approximately 10% of Protective’s liabilities relate to products (primary whole life insurance), the profitability of which could be affected by changes in interest rates. The effect of such changes in any one year is not expected to be material.
Protective uses 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.
At December 31, 2003, contracts with a notional amount of $2.2 billion were in a $169.0 million net gain position. At December 31, 2002, contracts with a notional amount of $6.0 billion were in a $83.9 million net gain position. Protective recognized an $8.2 million realized investment gain, a $4.7 million realized investment loss, and a $2.2 million realized investment gain in 2003, 2002, and 2001, respectively, related to derivative financial instruments.
The following table sets forth the December 31 notional amount and fair value of Protective’s interest rate risk related derivative financial instruments, and the estimated fair value resulting from a hypothetical immediate plus and minus one percentage point change in interest rates from levels prevailing at December 31.
Protective is also subject to foreign exchange risk arising from stable value contracts denominated in foreign currencies and related foreign currency swaps. At December 31, 2003, stable value contracts of $416.1 million had a foreign exchange loss of approximately $151.8 million and the related foreign currency swaps had a net unrealized gain of approximately $154.4 million. At December 31, 2002, stable value contracts of $539.2 million had a foreign exchange loss of approximately $86.5 million and the related foreign currency swaps had a net unrealized gain of approximately $78.4 million.
Protective’s asset/liability management programs and procedures involve the monitoring of asset and liability durations for various product lines; cash flow testing under various interest rate scenarios; and the continuous rebalancing of assets and liabilities with respect to yield, risk, and cash flow characteristics. It is Protective’s policy to generally maintain asset and liability durations within one-half year of one another, although, from time to time, a broader interval may be allowed.
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. Protective’s asset/liability management programs and procedures take into account maturing contracts and expected withdrawals. Accordingly, Protective does not expect stable value contract related cash outflows to have an unusual effect on the future operations and liquidity of Protective.
Protective and its insurance subsidiaries were committed at December 31, 2003, to fund mortgage loans in the amount of $578.5 million. Protective held $621.7 million in cash and short-term investments at December 31, 2003. Protective Life Corporation had an additional $1.1 million in cash and short-term investments available for general corporate purposes.
While Protective generally anticipates that the cash flow of its subsidiaries will be sufficient to meet their investment commitments and operating cash needs, Protective recognizes that investment commitments scheduled to be funded may, from time to time, exceed the funds then available. Therefore, Protective has arranged sources of credit for its insurance subsidiaries to use when needed. Protective expects that the rate received on its investments will equal or exceed its borrowing rate. Additionally, Protective may, from time to time, sell short-duration stable value products to complement its cash management practices.
Protective has also used securitization transactions involving its commercial mortgage loans to increase its liquidity.
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 Protective’s insurance subsidiaries. The subsidiaries may secure additional statutory capital through various sources, such as retained statutory earnings or equity contributions by PLC.
The table below sets forth future maturities of stable value products, notes payable, operating lease obligation, and mortgage loan commitments.
2004 2005-2006 2007-2008 After 2008 --------------------------------------------------------------------------------------------------------------- (in thousands) 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 ---------------------------------------------------------------------------------------------------------------
The higher interest rates that have traditionally accompanied inflation could also affect Protective’s operations. Policy loans increase as policy loan interest rates become relatively more attractive. As interest rates increase, disintermediation of stable value and annuity account balances and individual life policy cash values may increase. The market value of Protective’s fixed-rate, long-term investments may decrease, Protective may be unable to implement fully the interest rate reset and call provisions of its mortgage loans, and Protective’s ability to make attractive mortgage loans, including participating mortgage loans, may decrease. In addition, participating mortgage loan income may decrease. The difference between the interest rate earned on investments and the interest rate credited to life insurance and investment products may also be adversely affected by rising interest rates.
Report of Independent Auditors................................................................................ Consolidated Statements of Income for the years ended December 31, 2003, 2002, and 2001....................... Consolidated Balance Sheets as of December 31, 2003 and 2002.................................................. Consolidated Statements of Share-Owner's Equity for the years ended December 31, 2003, 2002, and 2001.......................................................................... Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001.................... Notes to Consolidated Financial Statements.................................................................... Financial Statement Schedules: Schedule III-- Supplementary Insurance Information............................................................ Schedule IV-- Reinsurance ................................................................................... Schedule V-- Valuation Accounts...............................................................................
Year Ended December 31 -------------------------------------------- 2003 2002 2001 ---------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) Revenues Premiums and policy fees $1,653,609 $1,548,201 $1,389,819 Reinsurance ceded (917,935) (738,158) (771,151) ---------------------------------------------------------------------------------------------------------------------------- Net of reinsurance ceded 735,674 810,043 618,668 Net investment income 980,743 971,808 835,203 Realized investment gains (losses) Derivative financial instruments 8,249 (4,708) 2,182 All other investments 66,764 12,314 (6,123) Other income 46,825 41,483 38,578 ---------------------------------------------------------------------------------------------------------------------------- Total revenues 1,838,255 1,830,940 1,488,508 ---------------------------------------------------------------------------------------------------------------------------- Benefits and expenses Benefits and settlement expenses (net of reinsurance ceded: 2003 - $918,275; 2002 - $699,808; 2001 - $609,996) 1,124,077 1,167,085 972,624 Amortization of deferred policy acquisition costs 225,107 267,662 147,058 Amortization of goodwill 0 0 2,827 Other operating expenses (net of reinsurance ceded: 2003 - $142,181; 2002 - $177,509; 2001 - $167,243) 139,099 154,570 152,041 ---------------------------------------------------------------------------------------------------------------------------- Total benefits and expenses 1,488,283 1,589,317 1,274,550 ---------------------------------------------------------------------------------------------------------------------------- Income from continuing operations before income tax 349,972 241,623 213,958 ---------------------------------------------------------------------------------------------------------------------------- Income tax expense Current 42,491 75,335 118,421 Deferred 75,441 8,894 (47,964) ---------------------------------------------------------------------------------------------------------------------------- Total income tax expense 117,932 84,229 70,457 ---------------------------------------------------------------------------------------------------------------------------- Net income from continuing operations before cumulative effect of change in accounting principle 232,040 157,394 143,501 Loss from discontinued operations, net of income tax 0 0 (9,856) Loss from sale of discontinued operations, net of income tax 0 0 (17,754) ---------------------------------------------------------------------------------------------------------------------------- Net income before cumulative effect of change in accounting principle 232,040 157,394 115,891 Cumulative effect of change in accounting principle, net of income tax 0 0 (8,341) ---------------------------------------------------------------------------------------------------------------------------- Net income $232,040 $ 157,394 $ 107,550 ============================================================================================================================
December 31 ---------------------------------------- 2003 2002 --------------------------------------------------------------------------------------------------------------------- (dollars in thousands) Liabilities Policy liabilities and accruals Future policy benefits and claims $8,950,091 $8,247,296 Unearned premiums 743,727 843,166 --------------------------------------------------------------------------------------------------------------------- Total policy liabilities and accruals 9,693,818 9,090,462 Stable value product account balances 4,676,531 4,018,552 Annuity account balances 3,480,577 3,697,495 Other policyholders' funds 158,359 174,665 Other liabilities 764,097 620,731 Accrued income taxes 5,718 36,859 Deferred income taxes 339,273 206,845 Notes payable 2,234 2,264 Indebtedness to related parties 0 2,000 Liabilities related to separate accounts Variable annuity 2,045,038 1,513,824 Variable universal life 171,408 114,364 Other 4,361 4,330 --------------------------------------------------------------------------------------------------------------------- Total liabilities 21,341,414 19,482,391 --------------------------------------------------------------------------------------------------------------------- Commitments and contingent liabilities - Note G --------------------------------------------------------------------------------------------------------------------- Share-owner's equity Preferred Stock, $1 par value shares authorized and issued: 2,000, liquidation preference $2,000 2 2 Common Stock, $1 par value shares authorized and issued: 5,000,000 5,000 5,000 Additional paid-in capital 863,819 846,619 Note receivable from PLC Employee Stock Ownership Plan (3,426) (3,838) Retained earnings 1,431,818 1,201,587 Accumulated other comprehensive income Net unrealized gains on investments (net of income tax: 2003 - $177,642; 2002 - $128,145) 329,907 237,983 Accumulated gain (loss) - hedging (net of income tax: 2003 - $1,442; 2002 - $(1,114)) 2,678 (2,069) --------------------------------------------------------------------------------------------------------------------- Total share-owner's equity 2,629,798 2,285,284 --------------------------------------------------------------------------------------------------------------------- $23,971,212 $21,767,675 =====================================================================================================================
Net Note Unrealized Accumu- Receivable Gains lated Total Additional From (Losses) Gain Share- Preferred Common Paid-In PLC Retained on (Loss)- Owner's (dollars in thousands) Stock Stock Capital ESOP Earnings Investments Hedging Equity ------------------------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2000 $2 $5,000 $651,419 (4,841) $ 939,745 $(51,370) $ 0 $1,539,955 Net income for 2001 107,550 107,550 Change in net unrealized gains/losses on investments (net of income tax - $52,019) 96,607 96,607 Reclassification adjustment for amounts inluded included in net income (net of income tax - $2,143) 3,980 3,980 Transition adjustment on derivative financial instruments (net of income tax - $2,127) 3,951 3,951 ------- Comprehensive income for 2001 212,088 ------- Capital contribution 134,000 134,000 Common dividend - transfer of subsidiary to PLC (See Note A) (2,052) (2,052) Preferred dividend ($500.00 per share) (1,000) (1,000) Decrease in note receivable from PLC ESOP 342 342 ------------------------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2001 2 5,000 785,419 (4,499) 1,044,243 53,168 0 1,883,333 Net income for 2002 157,394 157,394 Change in net unrealized gains/losses on investments (net of income tax - $103,826) 192,819 192,819 Reclassification adjustment for amounts included in net income (net of income tax - $(4,310)) (8,004) (8,004) Change in accumulated gain (loss) - hedging (net of income tax - $(1,114)) (2,069) (2,069) ------- Comprehensive income for 2002 340,140 ------- Capital contribution 61,200 61,200 Preferred dividend ($25.00 per share) (50) (50) Decrease in note receivable from PLC ESOP 661 661 ------------------------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2002 2 5,000 846,619 (3,838) 1,201,587 237,983 (2,069) 2,285,284 Net income for 2003 232,040 232,040 Change in net unrealized gains/losses on investments (net of income tax - $72,865) 135,321 135,321 Reclassification adjustment for amounts included in net income (net of income tax - $(23,367)) (43,397) (43,397) Change in accumulated gain (loss) Hedging (net of income tax - $2,556) 4,747 4,747 ------- Comprehensive income for 2003 328,711 ------- Capital contribution 17,200 17,200 Common dividend (1,809) (1,809) Decrease in note receivable from PLC ESOP 412 412 ------------------------------------------------------------------------------------------------------------------------------------------------- Balance December 31, 2003 $2 $5,000 $863,819 $(3,426) $1,431,818 $329,907 $2,678 $2,629,798 -------------------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 --------------------------------------------- 2003 2002 2001 --------------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) Cash flows from operating activities Net income $ 232,040 $ 157,394 $ 107,550 Adjustments to reconcile net income to net cash provided by operating activities: Realized investment (gains) losses (66,764) (12,314) 6,123 Amortization of deferred policy acquisition costs 225,107 239,490 154,383 Capitalization of deferred policy acquisition costs (381,667) (437,325) (317,626) Depreciation expense 11,637 10,409 11,651 Deferred income taxes 75,441 8,894 (40,970) Accrued income taxes (31,141) (88,976) 139,016 Amortization of goodwill 0 0 8,328 Loss from sale of discontinued operations 0 0 17,754 Interest credited to universal life and investment products 647,695 900,930 944,098 Policy fees assessed on universal life and investment products (324,773) (268,191) (222,415) Change in accrued investment income and other receivables 29,607 (303,497) (238,097) Change in policy liabilities and other policyholder funds of traditional life and health products 500,871 493,714 444,119 Change in other liabilities (190,896) 93,368 132,497 Other (net) 55,437 89,556 11,024 --------------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 782,594 883,452 1,157,435 --------------------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities Investments available for sale, net of short-term investments: Maturities and principal reductions of investments 4,615,096 3,617,235 1,979,245 Sale of investments 7,539,673 15,267,722 7,696,212 Cost of investments acquired (13,185,410) (20,014,789) (10,881,064) Increase in mortgage loans, net (215,571) (5,308) (244,620) Decrease (increase) in investment real estate, net 2,347 8,674 (11,607) Decrease (increase) in policy loans, net 40,413 (21,320) (291,313) Increase in other long-term investments, net (34,532) (109,695) (34,040) Decrease (increase) in short-term investments, net 270,782 (218,759) (55,697) Acquisitions and bulk reinsurance assumptions 0 130,515 (118,557) Purchase of property and equipment (15,915) (8,934) (10,029) Sale of discontinued operations, net of cash transferred 0 0 216,031 --------------------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (983,117) (1,354,659) (1,755,439) --------------------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities Borrowings under line of credit arrangements and long-term debt 5,829,066 2,050,772 2,574,954 Capital contribution from PLC 17,200 60,785 134,000 Principal payments on line of credit arrangement and long-term debt (5,829,096) (2,167,799) (2,457,979) Principal payment on surplus note to PLC (2,000) (4,000) (4,000) Dividends to share owner 0 (50) (1,000) Investment product deposits and change in universal life deposits 2,721,579 1,687,213 1,735,653 Investment product withdrawals (2,511,017) (1,177,030) (1,315,179) --------------------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 225,732 449,891 666,449 --------------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash 25,209 (21,316) 68,445 --------------------------------------------------------------------------------------------------------------------------------------- Cash at beginning of year 85,850 107,166 38,721 --------------------------------------------------------------------------------------------------------------------------------------- Cash at end of year $ 111,059 $ 85,850 $ 107,166 ---------------------------------------------------------------------------------------------------------------------------------------
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make various estimates that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities, as well as the reported amounts of revenues and expenses. Actual results could differ from these estimates.
On January 1, 2002, Protective 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. Protective 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 $232,040 $157,394 $143,501 Add back amortization of goodwill, net of income tax 1,838 ---------------------------------------------------------------------------------------------------------------------- Adjusted income from continuing operations before cumulative effect of change in accounting principle 232,040 157,394 145,339 Loss from discontinued operations, net of income tax (9,856) Loss from sale of discontinued operations, net of income tax (17,754) ---------------------------------------------------------------------------------------------------------------------- Adjusted net income before cumulative effect of change in accounting principle 232,040 157,394 117,729 Cumulative effect of change in accounting principle, net of income tax (8,341) ---------------------------------------------------------------------------------------------------------------------- Adjusted net income $232,040 $157,394 $109,388 ----------------------------------------------------------------------------------------------------------------------
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 Protective. Protective is currently evaluating the impact of FIN 46 on entities to be consolidated as of March 31, 2004. Although Protective 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, Protective’s reported assets and liabilities would have increased by approximately $70 million.
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, Protective 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 Pensions” until authoritative guidance on accounting for the federal subsidy is issued. Protective anticipates that the Medicare Act will not have a material impact on the financial results of Protective; therefore the costs reported in Note L to the Consolidated Financial Statements do not reflect these changes. The final accounting guidance could require changes to previously reported information.
Short-term investments - at cost, which approximates current market value, except collateral from securities lending which is recorded at current market value.
Protective 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.
Derivative instruments expose Protective to credit and market risk. Protective minimizes its credit risk by entering into transactions with highly rated counterparties. Protective 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, Protective 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 Protective’s consolidated condensed statements of income.
Fair-Value Hedges. During 2003, there were no fair value hedges outstanding. In 2002 and 2001, Protective designated, as fair value hedges, 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 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 Protective’s consolidated statements of income.
Protective 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, Protective 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 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 $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 was amortized.
The goodwill balance at December 31, 2003 and 2002, was $35.1 million. At October 31, 2003 and 2002, Protective 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.
2003 2002 ------------------------------------------------------------------------------- Home office building $ 48,678 $ 45,297 Other, principally furniture and equipment 76,461 67,059 ------------------------------------------------------------------------------- 125,139 112,356 Accumulated depreciation 81,983 73,478 ------------------------------------------------------------------------------- $ 43,156 $ 38,878 -------------------------------------------------------------------------------
Protective 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, Protective is able to offer secured notes to both institutional and retail investors. During the fourth quarter of 2003, Protective 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 Protective as well as the obligations of consolidated special purpose trusts or entities formed to purchase funding agreements issued by Protective. At December 31, 2003 and 2002 Protective had $2.8 billion and $2.2 billion of stable value contract account balances marketed through structured programs. Most GICs and funding agreements written by Protective have maturities of three to seven years. At December 31, 2003, future maturities of stable value contracts were $1.2 billion in 2004, $2.0 billion in 2005-2006, $1.4 billion in 2007-2008, and $123.1 million after 2008.
2003 2002 2001 ------------------------------------------------------------------------------------- Balance beginning of year $116,214 $100,023 $109,973 Less reinsurance 54,765 33,723 25,830 ------------------------------------------------------------------------------------- Net balance beginning of year 61,449 66,300 84,143 ------------------------------------------------------------------------------------- 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 (6,166) ------------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------------
Universal life and investment products include universal life insurance, guaranteed investment contracts, deferred annuities, and annuities without life contingencies. Premiums and policy fees for universal life and investment products consist of fees that have been assessed against policy account balances for the costs of insurance, policy administration, and surrenders. Such fees are recognized when assessed and earned. Benefit reserves for universal life and investment products represent policy account balances before applicable surrender charges plus certain deferred policy initiation fees that are recognized in income over the term of the policies. Policy benefits and claims that are charged to expense include benefit claims incurred in the period in excess of related policy account balances and interest credited to policy account balances. Interest rates credited to universal life products ranged from 4.6% to 6.5% and investment products ranged from 2.6% to 9.4% in 2003.
Total revenues $12,293 $15,809 $350,988 -------------------------------------------------------------------------------------------------------------- Loss before income taxes from discontinued operations $ 0 $ 0 $(12,749) Income tax benefit 0 0 2,893 -------------------------------------------------------------------------------------------------------------- Loss from discontinued operations $ 0 $ 0 $ (9,856) -------------------------------------------------------------------------------------------------------------- Gain from sale of discontinued operations before income tax $ 27,221 Income tax expense related to sale (44,975) -------------------------------------------------------------------------------------------------------------- Loss from sale of discontinued operations $(17,754) --------------------------------------------------------------------------------------------------------------
Assets and liabilities related to the discontinued lines of business of approximately $57.1 million remain at December 31, 2003.
The amortized cost and estimated market values of fixed maturities at December 31, 2003 by expected maturity, are shown as follows. Expected maturities are derived from rates of prepayment that may differ from actual rates of prepayment.
Protective considers the impairment of securities that have been in an unrealized loss position for less than 12 months to be temporary. Protective believes that it will collect all amounts contractually due and has the intent and the ability to hold these securities until maturity.
For mortgage-backed securities in an unrealized loss position for greater than 12 months, $23.3 million of the unrealized loss relates to securities issued in Protective-sponsored commercial loan securitizations. Protective does not consider these unrealized loss positions to be other-than-temporary, because the underlying mortgage loans continue to perform consistently with Protective’s original expectations.
2003 2002 2001 --------------------------------------------------------------------------- Fixed maturities $110,499 $227,283 $108,307 Equity securities 2,371 (480) 715 ---------------------------------------------------------------------------
Many of the mortgage loans have call provisions between 3 to 10 years. Assuming the loans are called at their next call dates, approximately $125.0 million would become due in 2004, $537.3 million in 2005 to 2008, $461.5 million in 2009 to 2013, and $40.2 million thereafter.
At December 31, 2003 and 2002, Protective had investments related to retained beneficial interests of mortgage loan securitizations of $283.6 million and $295.7 million, respectively.
Certain investments with a carrying value of $64.4 million were non-income producing for the twelve months ended December 31, 2003.
Protective’s effective income tax rate related to continuing operations varied from the maximum federal income tax rate as follows:
Deferred policy acquisition costs $54,747 $ 51,998 Benefits and other policy liability changes 41,065 (22,359) Temporary differences of investment income (19,080) (28,637) Other items (1,291) 7,892 -------------------------------------------------------------------------------------- $75,441 $ 8,894 --------------------------------------------------------------------------------------
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, 2003 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 $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, Protective does not anticipate paying income tax on amounts in the Policyholders’ Surplus accounts.
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 $166.1 million of present value of future profits.
In June 2002, Protective coinsured a block of traditional life and interest-sensitive life insurance policies from Conseco Variable Insurance Company. These transactions have been accounted for as purchases, and the results of the transactions have been included in the accompanying financial statements since their respective effective dates.
Summarized below are the consolidated results of operations for 2002, on an unaudited pro forma basis, as if the Conseco transaction had occurred as of January 1, 2002. The pro forma information is based on Protective’s consolidated results of operations for 2002, and on data provided by the acquired block, 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.
Protective leases furnished office space and computers to affiliates. Lease revenues were $4.7 million in 2003, $3.5 million in 2002, and $4.0 million in 2001. Protective purchases data processing, legal, investment and management services from affiliates. The costs of such services were $93.1 million, $88.0 million, and $82.6 million in 2003, 2002, and 2001, respectively. Commissions paid to affiliated marketing organizations of $8.6 million, $8.2 million, and $10.0 million, in 2003, 2002, and 2001, respectively, were included in deferred policy acquisition costs.
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 $12.2 million, $16.0 million and $19.6 million in 2003, 2002, and 2001, respectively. Protective and/or PLC paid commissions, interest on debt and investment products, and fees to these same corporations totaling $2.1 million, $1.6 million and $5.9 million in 2003, 2002, and 2001, respectively.
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 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 to the trustees of municipal bond proceeds, institutional investors, bank trust departments, and money market funds. During the fourth quarter of 2003, Protective registered a funding agreement-backed notes program with the SEC.
The Asset Protection segment markets extended service contracts and credit life and disability insurance to protect consumers’ investments in automobiles and watercraft.
Operating Segment Income for the Year Ended December 31, 2003 ----------------------------------------------------------------------------------------------------------------------------------- Life Stable Value Marketing Acquisitions Annuities Products ----------------------------------------------------------------------------------------------------------------------------------- Premiums and policy fees $ 856,431 $289,906 $ 26,265 Reinsurance ceded (657,778) (75,994) ----------------------------------------------------------------------------------------------------------------------------------- Net of reinsurance ceded 198,653 213,912 26,265 Net investment income 229,913 246,143 224,330 $233,104 Realized investment gains (losses) 22,733 9,756 Other income 875 2,640 3,768 ----------------------------------------------------------------------------------------------------------------------------------- Total revenues 429,441 462,695 277,096 242,860 ----------------------------------------------------------------------------------------------------------------------------------- Benefits and settlement expenses 253,785 291,768 197,955 186,565 Amortization of deferred policy acquisition costs 66,078 32,690 38,196 2,279 Other operating expenses (50,379) 41,537 23,969 5,349 ----------------------------------------------------------------------------------------------------------------------------------- Total benefits and expenses 269,484 365,995 260,120 194,193 ----------------------------------------------------------------------------------------------------------------------------------- Income from continuing operations before income tax 159,957 96,700 16,976 48,667 Less: realized investment gains (losses) 22,733 9,756 Add back: related amortization of deferred policy acquisition cost 18,947 ----------------------------------------------------------------------------------------------------------------------------------- Operating income 159,957 96,700 13,190 38,911
----------------------------------------------------------------------------------------------------------------------------------- Corporate Asset and Total Protection Other Adjustments Consolidated ----------------------------------------------------------------------------------------------------------------------------------- Premiums and policy fees $ 442,876 $38,131 $1,653,609 Reinsurance ceded (180,358) (3,805) (917,935) ----------------------------------------------------------------------------------------------------------------------------------- Net of reinsurance ceded 262,518 34,326 735,674 Net investment income 38,972 8,281 980,743 Realized investment gains (losses) 42,524 75,013 Other income 38,063 1,479 46,825 ----------------------------------------------------------------------------------------------------------------------------------- Total revenues 339,553 86,610 1,838,255 ----------------------------------------------------------------------------------------------------------------------------------- Benefits and settlement expenses 162,484 31,520 1,124,077 Amortization of deferred policy acquisition costs 84,653 1,211 225,107 Other operating expenses 81,850 36,773 139,099 ----------------------------------------------------------------------------------------------------------------------------------- Total benefits and expenses 328,987 69,504 1,488,283 ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before income tax 10,566 17,106 349,972 Less: realized investment gains (losses) 42,524 Add back: derivative gains related to investments 10,036 ----------------------------------------------------------------------------------------------------------------------------------- Operating income (loss) 10,566 (15,382) Income tax expense $117,932 117,932 ----------------------------------------------------------------------------------------------------------------------------------- Net income $ 232,040 ===================================================================================================================================
Operating Segment Income for the Year Ended December 31, 2002 ----------------------------------------------------------------------------------------------------------------------------------- Life Stable Value Marketing Acquisitions Annuities Products ----------------------------------------------------------------------------------------------------------------------------------- Premiums and policy fees $ 673,412 $300,818 $ 25,826 Reinsurance ceded (453,228) (76,333) ----------------------------------------------------------------------------------------------------------------------------------- Net of reinsurance ceded 220,184 224,485 25,826 Net investment income 208,451 252,147 220,433 $246,098 Realized investment gains (losses) 2,277 (7,061) Other income 1,344 1,826 3,229 ----------------------------------------------------------------------------------------------------------------------------------- Total revenues 429,979 478,458 251,765 239,037 ----------------------------------------------------------------------------------------------------------------------------------- Benefits and settlement expenses 228,225 301,400 186,107 196,576 Amortization of deferred policy acquisition costs 117,836 35,245 24,669 2,304 Other operating expenses (41,501) 45,395 26,037 4,946 ----------------------------------------------------------------------------------------------------------------------------------- Total benefits and expenses 304,560 382,040 236,813 203,826 ----------------------------------------------------------------------------------------------------------------------------------- Income from continuing operations before income tax 125,419 96,418 14,952 35,211 Less: realized investment gains (losses) 2,277 (7,061) Add back: related amortization of deferred policy acquisition cost 1,981 ----------------------------------------------------------------------------------------------------------------------------------- Operating income 125,419 96,418 14,656 42,272
----------------------------------------------------------------------------------------------------------------------------------- Corporate Asset and Total Protection Other Adjustments Consolidated ----------------------------------------------------------------------------------------------------------------------------------- Premiums and policy fees $ 492,788 $ 55,357 $1,548,201 Reinsurance ceded (189,337) (19,260) (738,158) ----------------------------------------------------------------------------------------------------------------------------------- Net of reinsurance ceded 303,451 36,097 810,043 Net investment income 43,789 890 971,808 Realized investment gains (losses) 12,390 7,606 Other income 33,670 1,414 41,483 ----------------------------------------------------------------------------------------------------------------------------------- Total revenues 380,910 50,791 1,830,940 ----------------------------------------------------------------------------------------------------------------------------------- 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 89,632 30,061 154,570 ----------------------------------------------------------------------------------------------------------------------------------- Total benefits and expenses 396,102 65,976 1,589,317 ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before income tax (15,192) (15,185) 241,623 Less: realized investment gains (losses) 12,390 Add back: derivative gains related to investments 8,251 ----------------------------------------------------------------------------------------------------------------------------------- Operating income (loss) (15,192) (19,324) Income tax expense $84,229 84,229 ----------------------------------------------------------------------------------------------------------------------------------- Net income $ 157,394 ===================================================================================================================================
----------------------------------------------------------------------------------------------------------------------------------- Corporate Asset and Total Protection Other Adjustments Consolidated ----------------------------------------------------------------------------------------------------------------------------------- Investments and other assets $ 967,818 $2,440,866 $ 57,094 $22,072,501 Deferred policy acquisition costs 177,793 7,349 1,863,568 Goodwill 35,143 35,143 ----------------------------------------------------------------------------------------------------------------------------------- Total assets $1,180,754 $2,448,215 $ 57,094 $23,971,212 -----------------------------------------------------------------------------------------------------------------------------------
PLC has a defined benefit pension plan covering substantially all of its employees, including Protective employees. The plan is not separable by affiliates participating in the plan. The benefits are based on years of service and the employee’s highest thirty-six consecutive months of compensation. PLC’s funding policy is to contribute amounts to the plan sufficient to meet the minimum funding requirements of ERISA plus such additional amounts as PLC may determine to be appropriate from time to time. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future.
The actuarial present value of benefit obligations and the funded status of the plan at December 31 are as follows:
Assumptions used to determine the net pension cost for the years ended December 31 were as follows:
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 ------------------------------------------------------------------------------------
PLC 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 PLC’s financial statements.
In addition to pension benefits, PLC provides limited healthcare benefits to eligible retired employees until age 65. This postretirement benefit is provided by an unfunded plan. This benefit has no material effect on PLC’s consolidated financial statements. For a closed group of retirees over age 65, PLC provides a prescription drug benefit. At December 31, 2003, PLC’s liability related to this benefit was $0.3 million. PLC’s obligation is not materially affected by a 1% change in the healthcare cost trend assumptions used in the calculation of the obligation.
PLC sponsors a defined contribution retirement plan which covers substantially all employees. Employee contributions are made on a before-tax basis as provided by Section 401(k) of the Internal Revenue Code. PLC established an Employee Stock Ownership Plan (ESOP) to match voluntary employee contributions to PLC’s 401(k) Plan. In 1994, a stock bonus was added to the 401(k) Plan for employees who are not otherwise under a bonus or sales incentive plan. Expense related to the ESOP consists of the cost of the shares allocated to participating employees plus the interest expense on the ESOP’s note payable to Protective less dividends on shares held by the ESOP. At December 31, 2003, PLC had committed approximately 124,682 shares to be released to fund the 401(k) Plan match. The expense recorded by PLC for these employee benefits was $0.6 million, $0.1 million and less than $0.1 million in 2003, 2002, and 2001, respectively.
Protective’s share of net costs related to employee benefit plans was approximately $6.9 million, $3.8 million, and $5.4 million, in 2003, 2002, and 2001, respectively.
Certain Protective employees participate in PLC’s stock-based incentive plans and receive stock appreciation rights (SARs) from PLC.
Since 1973, Protective 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 2003, up to 6,500,000 shares may be issued in payment of awards.
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 for each SAR.
Protective continues to monitor the consolidation of reinsurers and the concentration of credit risk Protective has with any reinsurer. At December 31, 2003, Protective had reinsured approximately 89.6% of the face value of its life insurance in force. Protective had reinsured approximately 59.1% of the face value of its life insurance in force with three reinsurers. These reinsurers had a minimum Standard & Poor’s rating of AA- and a minimum A. M. Best rating of A+. Protective has not experienced any credit losses for the years ended December 31, 2003, 2002, or 2001 related to these reinsurers.
Protective has reinsured approximately $292.7 billion, $219.0 billion and $171.4 billion in face amount of life insurance risks with other insurers representing $781.8 million, $546.0 million and $565.1 million of premium income for 2003, 2002, and 2001, respectively. Protective has also reinsured accident and health risks representing $61.6 million, $61.5 million and $122.7 million of premium income for 2003, 2002, and 2001, respectively. In addition, Protective reinsured property and casualty risks representing $91.0 million, $143.9 million, and $83.3 million of premium income for 2003, 2002, and 2001, respectively. In 2003 and 2002, policy and claim reserves relating to insurance ceded of $2,230.7 million and $2,304.9 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, 2003 and 2002, Protective had paid $53.3 million and $45.5 million, respectively, of ceded benefits which are recoverable from reinsurers. In addition, at December 31, 2003, Protective had receivables of $66.6 million related to insurance assumed.
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION PROTECTIVE LIFE INSURANCE COMPANY AND SUBSIDIARIES (in thousands)
COL. A COL. B COL. C COL. D COL. E COL. F COL. G COL. H COL. I COL. J Stable Value Products, Annuity Amortization Deferred Contracts and of Deferred Policy Future Policy Other Net Premiums Net Benefits and Policy Other Acquisition Benefits and Unearned Policyholders' and Policy Investment Settlement Acquisition Operating Segment Costs Claims Premiums Funds Fees Income(1) Expenses Costs Expenses(1) ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 2003: Life Marketing $1,185,102 $4,846,032 $ 1,854 $ 62,641 $198,653 $229,913 $ 253,785 $ 66,078 $(50,379) Acquisitions 385,042 3,185,708 354 917,402 213,912 246,143 291,768 32,690 41,537 Annuities 101,096 593,119 5,329 2,618,571 26,265 224,330 197,955 38,196 23,969 Stable Value Products 7,186 4,520,956 233,104 186,565 2,279 5,349 Asset Protection 177,793 201,252 733,942 5,739 262,518 38,972 162,484 84,653 81,850 Corporate and Other 7,349 76,819 2,172 189,969 34,326 8,281 31,520 1,211 36,773 Adjustments(2) 47,161 76 189 ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- TOTAL $1,863,568 $8,950,091 $ 743,727 $8,315,467 $735,674 $980,743 $1,124,077 $225,107 $139,099 ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 2002: Life Marketing $ 973,631 $4,031,021 $ 318 $ 48,558 $220,184 $208,451 $ 228,225 $117,836 $(41,501) Acquisitions 435,592 3,240,407 395 1,040,855 224,485 252,147 301,400 35,245 45,395 Annuities 93,140 571,109 2,742,642 25,826 220,433 186,107 24,669 26,037 Stable Value Products 4,908 3,930,668 246,098 196,576 2,304 4,946 Asset Protection 194,281 259,974 839,955 8,714 303,451 43,789 220,341 86,129 89,632 Corporate and Other 7,702 81,010 2,212 115,708 36,097 890 34,436 1,479 30,061 Adjustments(2) 63,775 286 3,567 ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- TOTAL $1,709,254 $8,247,296 $ 843,166 $7,890,712 $810,043 $971,808 $1,167,085 $267,662 $154,570 ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 2001: Life Marketing $120,996 $178,866 $ 190,538 $ 41,399 $(22,957) Acquisitions 182,432 187,535 238,877 20,500 41,684 Annuities 28,145 167,809 137,204 24,021 24,073 Stable Value Products 261,079 222,306 1,662 3,961 Asset Protection 250,061 48,617 154,893 57,681 79,453 Corporate and Other 37,034 (8,703) 28,806 1,795 25,827 ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- TOTAL $618,668 $835,203 $972,624 $147,058 $152,041 -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Allocations of Net Investment Income and Other Operating Expenses are based on a number of assumptions and estimates and results would change if different methods were applied.
Balance Sheet adjustments represent the inclusion of assets related to discontinued operations.
SCHEDULE V - VALUATION ACCOUNTS PROTECTIVE LIFE INSURANCE COMPANY AND SUBSIDIARIES (dollars in thousands)