Year Ended Percentage December 31 Increase -------------------------------- (Decrease) 2000 1999 ----------- ------------ -----------
Premiums and policy fees, net of reinsurance (“premiums and policy fees”) decreased $4.9 million or 13.6% in 2000 as compared to 1999. Premiums and policy fees in the Acquisition Division are expected to decline with time unless new acquisitions are made. There were no new acquisitions made in 2000, therefore resulting in a decrease of $4.8 million. Premiums and policy fees from the Financial Institutions Division were $0.9 million higher in 2000 as compared to 1999 due to increased marketing efforts and sales momentum. Premiums and policy fees related to the Dental Benefits Division decreased $1.1 million in 2000 as compared to 1999, primarily due to the termination of a group life customer effective December 31, 1999. The Investment Products Division experienced a small increase in premiums in 2000 as compared to1999.
Pretax earnings from the Acquisitions Division decreased $0.6 million in 2000 as compared to 1999. Earnings from the Acquisitions Division are normally expected to decline over time (due to the lapsing of policies resulting from deaths of insureds or terminations of coverage) unless new acquisitions are made. There were no new acquisitions made in 2000.
The Financial Institutions Division’s 2000 pretax earnings decreased $0.3 million as compared to 1999 primarily due to an unfavorable increase in mortality rates within the Division.
The Investment Products Division’s 2000 pretax earnings increased $1.6 million primarily due to continued sales momentum and marketing efforts in the state of New York.
The Corporate and Other segment consists of net investment income and expenses not identified with the preceding business segments. Pretax earnings in 2000 increased $0.2 million over 1999, primarily due to increased net investment income on capital.
Year Ended Effective Income December 31 Tax Rates ----------- ---------------- 2000.................................. 34.5% 1999.................................. 28.0
Management’s current estimate of the effective income tax rate for 2001 is 34.5%.
Net income in 2000 decreased 7.0%, compared to 1999, reflecting improved operating earnings in the Investment Products Division and the Corporate and Other segment, offset by lower operating earnings in the Acquisitions, Financial Institutions and Dental Benefits Divisions and lower realized investment gains.
Report of Independent Accountants............................................................................. 9 Statements of Income for the years ended December 31, 2000, 1999, and 1998.................................... 10 Balance Sheets as of December 31, 2000 and 1999............................................................... 11 Statements of Share-Owners' Equity for the years ended December 31, 2000, 1999, and 1998.......................................................................... 12 Statements of Cash Flows for the years ended December 31, 2000, 1999, and 1998................................ 13 Notes to Financial Statements................................................................................. 14 Financial Statement Schedules: Schedule III-- Supplementary Insurance Information........................................................... 28 Schedule IV-- Reinsurance ................................................................................... 29
INCOME AVAILABLE TO COMMON SHARE OWNER.................................... $ 8,743,668 $ 9,401,173 $ 2,314,538 ============ ============ =========
CASH FLOWS FROM INVESTING ACTIVITIES Maturities and principal reduction of investments: Investments available for sale.................................................. 401,392,138 256,525,416 1,164,896,631 Other........................................................................... 845,893 2,701,003 3,018,788 Sale of investments: Investments available for sale.................................................. 11,251,538 17,961,720 210,129,485 Other........................................................................... 1,197,324 435,000 Cost of investments acquired: Investments available for sale.................................................. (453,746,936) (301,844,318)(1,371,845,622) ------------ ----------- ------------- Net cash (used in) provided by investing activities.................................... (39,060,043) (24,656,179) 6,634,282 ------------ ----------- -------------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Acquisitions and bulk reinsurance assumptions: Assets acquired................................................................. $ 247,894,180 Liabilities assumed............................................................. (380,405,180) --------------- Net............................................................................. $ (132,511,000) ===============
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of SFAS No. 125". SFAS No. 140 revises the standards of accounting for securitizations and other transfers of financial assets. The statement is effective for recognition and reclassification of collateral relating to securitization transactions and collateral for fiscal years ended after December 15, 2000. This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001.
• Short-term investments - at cost, which approximates current market value.
The Company's balance sheets at December 31, prepared on the basis of reporting investments at amortized cost rather than at market values, are as follows:
Total investments..................................... $490,073,836 $451,389,804 Deferred policy acquisition costs..................... 123,620,437 127,792,025 All other assets...................................... 44,233,429 47,769,637 -------------- ------------- $657,927,702 $626,951,466 ============== =============
Deferred income taxes................................. $ 10,823,740 $ 6,218,296 All other liabilities................................. 524,467,305 494,090,181 -------------- ------------- 535,291,045 500,308,477 Share-owners' equity.................................. 122,636,657 126,642,989 -------------- ------------- $657,927,702 $626,951,466 ============== =============
SEPARATE ACCOUNTS The assets and liabilities related to separate accounts in which the Company does not bear the investment risk are valued at market and reported separately as assets and liabilities related to separate accounts in the accompanying financial statements.
Balance beginning of year................................ $ 9,557,627 $4,089,659 $3,724,904 Less reinsurance..................................... 4,924,705 494,064 203,199 ----------- ----------- ----------
Net balance beginning of year............................ 4,632,922 3,595,595 3,521,705 ----------- ----------- ----------
Incurred related to: Current year............................................. 11,780,396 10,485,712 7,178,869 Prior year............................................... (213,798) (501,227) (173,472) ------------ ----------- ---------- Total incurred....................................... 11,566,598 9,984,485 7,005,397 ------------ ----------- ----------
The reconciliations of net income and share-owners’ equity prepared in conformity with statutory reporting practices to that reported in the accompanying financial statements are as follows:
In conformity with statutory reporting practices: $13,006,859 $12,659,788 $ 5,365,091 $ 31,878,162 $ 32,146,507 $ 26,256,416 Additions (deductions) by adjustment: Deferred policy acquisition costs, net of amortization............... (4,700,240) (6,133,391) (1,711,138) 128,228,360 127,792,025 133,275,451 Deferred income tax................. (4,605,444) (3,656,012) (938,986) (9,063,941) (109,523) (7,305,381) Asset Valuation Reserve............. 2,797,912 2,051,489 1,334,584 Interest Maintenance Reserve........ 118,604 93,585 (82,982) 247,870 366,474 460,059 Nonadmitted items................... 25,902 26,068 15,671 Other timing and valuation adjustments...................... 4,923,889 6,437,203 (217,447) (34,745,806) (46,974,915) (22,798,183) --------------- ----------- ----------- ------------- ------------ ------------ In conformity with generally accepted accounting principles $ 8,743,668 $ 9,401,173 $ 2,414,538 $119,368,459 $115,298,125 $131,238,617 =============== ========== ============ ============= ============ ============
As of December 31, 2000, the Company had on deposit with regulatory authorities, fixed maturity and short-term investments with a market value of approximately $7.5 million.
Fixed maturities................................... $28,814,204 $25,258,034 $ 7,525,336 Mortgage loans..................................... 314,376 89,178 952,437 Investment real estate............................ 211,521 15,713 72,318 Policy loans...................................... 3,625,750 4,362,037 656,623 Other, principally short-term investments.......... 556,879 458,761 2,083,693 ------------ ------------ ------------- 33,522,730 30,183,723 11,290,407 Investment expenses............................... (1,830,233) (1,468,772) (612,241) ------------- ------------ ------------- $31,692,497 $28,714,951 $ 10,678,166 ============= ============ =============
Fixed maturities.................................... $ (70,176) $ 194,374 $ 87,677 Mortgage loans and other investments................ 112,324 (104,824) 40,092 ---------- ------------ ----------- $ 42,148 $ 89,550 $ 127,769 =========== ============ ===========
Gross Gross Estimated Amortized Unrealized Unrealized Market 2000 Cost Gains Losses Values ---------- ------------- ------------ ------------ -----------
Gross Gross Estimated Amortized Unrealized Unrealized Market 1999 Cost Gains Losses Values ---------- --------------- ------------ ------------ -----------
Estimated Amortized Market Cost Values --------------- -------------- ------------ Due in one year or less.......................... $ 22,378,168 $ 22,297,943 Due after one year through five years............ 242,691,368 241,833,504 Due after five years through ten years........... 96,301,480 93,244,384 Due after ten years.............................. 67,021,583 61,380,848 --------------- -------------- $ 428,392,599 $ 418,756,679 =============== ==============
Estimated Amortized Market Cost Values --------------- -------------- ------------ Due in one year or less.......................... $ 11,793,662 $ 11,745,441 Due after one year through five years............ 188,297,459 184,541,652 Due after five years through ten years........... 117,246,221 110,568,151 Due after ten years.............................. 66,954,595 59,983,056 ---------------- -------------- $ 384,291,937 $ 366,838,300 ================ ==============
At December 31, 2000, all of the Company’s mortgage loans were commercial loans of which 61% were retail, 38% were office buildings, and 1% other. The Company specializes in making mortgage loans on either credit-oriented or credit-anchored commercial properties, most of which are strip shopping centers in smaller towns and cities. All of the mortgage loans are on properties located in the following states listed in decreasing order of significance: Tennessee, Alabama, Florida, Colorado, Texas and Arkansas.
At December 31, 2000, the average mortgage loan was $0.3 million, and the weighted average interest rate was 8.4%. The largest single mortgage loan was $1.3 million.
At December 31, 2000, the Company’s problem mortgage loans (over ninety days past due) and foreclosed properties totaled less than $0.1 million. At December 31, 1999, the Company’s problem mortgage loans and foreclosed properties totaled $1.1 million. Since the Company’s mortgage loans are collateralized by real estate, any assessment of impairment is based upon the estimated fair value of the real estate. Based on the Company’s evaluation of its mortgage loan portfolio, the Company does not expect any material losses on its mortgage loans.
2000 1999 1998 ------- -------- ------- Statutory federal income tax rate applied to pretax income............ 35.0% 35.0% 35.0% Tax-exempt interest................................................... (0.2) (4.0) Other adjustments..................................................... (0.5) (6.8) (3.0) ------- -------- ------- Effective income tax rate............................................. 34.5% 28.0% 28.0% ======= ======== =======
2000 1999 1998 ------------- ------------ ------------- Deferred policy acquisition costs..................................... $ 6,202,088 $ 5,095,750 $ 14,616,912 Benefit and other policy liability changes............................ (3,129,276) 395,046 (11,991,104) Temporary differences of investment income............................ 1,532,632 (1,834,784) 398,620 Other items........................................................... - - (2,085,442) ------------- ------------ -------------- $ 4,605,444 $ 3,656,012 $ 938,986 ============= ============ ==============
Deferred income tax assets: Policy and policyholder liability reserves.......... $15,126,970 $11,997,694 Unrealized loss on investments...................... 1,528,259 7,409,865 -------------- ------------ 16,655,229 19,407,559 ============== ============ Deferred income tax liabilities: Deferred policy acquisition costs................... 25,719,170 19,517,082 -------------- ------------ 25,719,170 19,517,082 -------------- ------------ Net deferred income tax liability................... $ 9,063,941 $ 109,523 ============== ============
In October 1998, the Company coinsured a block of life insurance policies from Lincoln National Corporation. In September 1999, the Company recaptured a block of credit life and disability policies which it had previously ceded.
A number of civil jury verdicts have been returned against insurers and other providers of financial services involving sales practices, alleged agent misconduct, failure to properly supervise representatives, and other matters. Increasingly these lawsuits have resulted in the award of substantial judgments that are disproportionate to the actual damages, including material amounts of punitive damages. In some states, including Alabama (where the Company maintains its headquarters), juries have substantial discretion in awarding punitive and non-economic compensatory damages which creates the potential for unpredictable material adverse judgments in any given lawsuit. In addition, in some class action and other lawsuits, companies have made material settlement payments. The Company, like other financial service companies, in the ordinary course of business, is involved in such litigation, or alternatively, in arbitration. Although the outcome of any such litigation or arbitration cannot be predicted, the Company believes that at the present time there are no pending or threatened lawsuits that are reasonably likely to have a material adverse effect on the financial position, results of operations, or liquidity of the Company.
Protective and the Company also entered into a guaranty agreement on December 31, 1995, whereby Protective guaranteed that the Company will perform all of the obligations of Protective pursuant to the terms and conditions of an indemnity coinsurance agreement between Protective and an unaffiliated life insurance company. Total liabilities related to this coinsurance agreement were $10.4 million and $10.3 million at December 31, 2000 and 1999, respectively.
PLC, through its subsidiaries, operates divisions each having a strategic focus which can be grouped into three general categories: life insurance, specialty insurance products, and retirement savings and investment products. Each division has a senior officer of Protective responsible for its operations. A division is generally distinguished by products and/or channels of distribution. A brief description of each division the Company operates in follows.
The Acquisitions Division focuses on acquiring, converting, and servicing policies acquired from other companies. The Division’s primary focus is on life insurance policies sold to individuals.
The Financial Institutions Division specializes in marketing credit life and disability insurance products through banks, consumer finance companies and automobile dealers. The Division also offers automobile and recreational marine extended service contracts.
There are no significant intersegment transactions. Note J-- OPERATING SEGMENTS (Continued)
---- Premiums and policy fees, net....... $27,443,897 $ 647,946 $2,997,130 $ 116,106 $31,205,079 Net investment income............... 29,275,899 6,049 628,572 1,416,117 $ 365,860 31,692,497 Realized investment gains........... $ 42,148 42,148 Other income (loss)................. (4,486) (2,065) (6,551) ------------- ----------- ------------ ----------- ----------- ------------- ----------- Total revenues.............. 56,715,310 653,995 3,625,702 1,530,158 365,860 42,148 62,933,173 ------------- ----------- ------------ ----------- ----------- ------------- ----------- Benefits and settlement expenses.... 29,247,353 737,005 2,250,237 1,267,445 33,502,040 Amortization of deferred policy acquisition costs........... 5,871,420 714,278 179,748 6,765,446 Other operating expenses............ 9,991,067 (5,138) 57,601 (787,364) 60,409 9,316,575 ------------- ----------- ------------ ----------- ----------- ------------- ----------- Total benefits and expenses. 45,109,840 731,867 3,022,116 659,829 60,409 49,584,061 ------------- ----------- ------------ ----------- ----------- ------------- ----------- Income before income tax............ 11,605,470 (77,872) 603,586 870,329 305,451 42,148 13,349,112 Income tax expense.................. 4,605,444 4,605,444 ------------- ----------- Net income ....................... $ 8,743,668 ===========
(1) Adjustments represent the inclusion of unallocated realized investment gains (losses) and the recognition of income tax expense. There are no asset adjustments.
Operating Segment Assets ----- Investments and other assets........ $453,999,198 $4,034,632 $11,462,251 $ 25,799,102 $29,376,162 $524,671,345 Deferred policy acquisition costs... 124,984,368 1,596,654 1,647,338 128,228,360 ------------- ----------- ------------ ------------ ----------- ------------ Total assets ....................... $578,983,566 $4,034,632 $13,058,905 $ 27,446,440 $29,376,162 $652,899,705 ============= =========== ============ ============ =========== ============
----- Investments and other assets........ $424,265,907 $3,871,844 $11,815,617 $ 9,812,824 $31,939,612 $481,705,804 Deferred policy acquisition costs... 126,247,865 1,544,160 127,792,025 ------------- ---------- ----------- ------------ ----------- ------------ Total assets ....................... $550,513,772 $3,871,844 $13,359,777 $ 9,812,824 $31,939,612 $609,497,829 ============= ========== =========== ============ =========== ============
The Company has reinsured approximately $5.3 billion, $5.8 billion, and $7.6 billion in face amount of life insurance risks with other insurers representing $17.4 million, $20.1 million, and $12.6 million of premium income for 2000, 1999, and 1998, respectively. The Company has also reinsured accident and health risks representing $0.7 million, $0.8 million, and $0.9 million of premium income for 2000, 1999, and 1998, respectively. In 2000 and 1999, policy and claim reserves relating to insurance ceded of $21.2 million and $21.9 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 the Company. At December 31, 2000 and 1999, the Company had paid $2.0 million and $4.9 million, respectively, of ceded benefits which are recoverable from reinsurers.
Year Ended December 31, 2000: Life insurance in force(1)........................ $ 324,167 $ 5,287,046 $ 6,600,096 $ 1,637,217 403.1% ============= ============= =========== ============ ========
Premiums and policy fees: Life insurance.................................... $ 4,472,372 $17,343,933 $41,747,694 $ 28,876,133 144.6% Accident and health insurance..................... 3,042,534 717,954 4,366 2,328,946 0.2% ------------ ------------ ----------- ------------ TOTAL......................................... $ 7,514,906 $18,061,887 $41,752,060 $ 31,205,079 ============ ============ =========== ============
Premiums and policy fees: Life insurance.................................... $ 4,195,074 $12,616,610 $17,462,742 $ 9,041,206 193.1% Accident and health insurance...................... 1,542,679 858,678 41,937 725,938 5.8% ----------- ----------- ----------- ------------ TOTAL......................................... $ 5,737,753 $13,475,288 $17,504,679 $ 9,767,144 =========== =========== =========== ============