The Company has no properties. The Company has contracts with PLC and Protective under which it receives investment, legal, and data processing on a fee basis and other managerial and administrative services on a shared cost basis.
Year Ended Percentage December 31 Increase ----------------------- (Decrease) 1999 1998 ---- ------ ----------
Operating Income (Loss)(1) Life Insurance Acquisitions $12,159,598 $3,408,955 Specialty Insurance Products Dental 489,179 736,761 Financial Institutions 910,419 387,194 Retirement Savings and Investment Products Investment Products (714,839) (58,991) Corporate and Other 123,278 (1,248,164) -------------------------------------------------------------------------------- Total operating income 12,967,635 3,225,755 -------------------------------------------------------------------------------- Realized Investment Gains (Losses) Unallocated Realized Investment Gains 89,550 127,769 -------------------------------------------------------------------------------- Total net 89,550 127,769 -------------------------------------------------------------------------------- Income (Loss) Before Income Tax Life Insurance Acquisitions 12,159,598 3,408,955 Specialty Insurance Products Dental 489,179 736,761 Financial Institutions 910,419 387,194 Retirement Savings and Investment Products Investment Products (714,839) (58,991) Corporate and Other 123,278 (1,248,164) Unallocated Realized Investment Gains 89,550 127,769 -------------------------------------------------------------------------------- Total income before income tax $13,057,185 $3,353,524 --------------------------------------------------------------------------------
Pretax earnings from the Acquisitions Division increased $8.8 million in 1999 as compared to 1998. Earnings from the Acquisitions Division are normally expected to decline over time (due to the lapsing of policies resulting from deaths of insureds or terminations of coverage) unless new acquisitions are made. In October 1998, the Division acquired approximately 260,000 policies from Lincoln National Corporation. The policies represent the payroll deduction business originally marketed and underwritten by Aetna. This acquisition resulted in a $7.7 million increase in pretax earnings in 1999. The Division’s mortality experience was approximately $2.2 million more favorable in 1999 than in 1998.
The Financial Institutions Division’s 1999 pretax earnings increased $0.5 million as compared to 1998 primarily due to the recapture of a block of credit life and disability policies which had been previously ceded.
The Corporate and Other segment consists of net investment income and expenses not identified with the preceding business segments. Pretax gains for this segment were $0.1 million in 1999 as compared to pretax losses of $1.2 million in 1998 primarily due to increased net investment income on capital.
Year Ended Effective Income December 31 Tax Rates ----------- --------------- 1999........................................... 28% 1998........................................... 28%
For information regarding recently issued accounting standards see Note A to the financial statements included herein.
As of February 29, 2000, PLC and the Company have had no Year 2000 issues which have impaired their operations. Although PLC and the Company believe they have made all of the modifications necessary for their systems to process transactions dated beyond 1999, it is possible that Year 2000 issues may emerge during 2000. Therefore there can be no assurances that the Year 2000 issue will not otherwise adversely affect PLC and the Company.
Statements of Cash Flows for the years ended December 31, 1999, 1998, and 1997
December 31 --------------------------- 1999 1998 --------------- --------- ASSETS Investments: Fixed maturities, at market (amortized cost: 1999-$384,291,937; 1998-$346,561,571)............................................................ $366,838,300 $360,113,277 Mortgage loans on real estate.................................................... 3,683,311 7,900,221 Investment real estate, net of accumulated depreciation (1999-$3,750)............ 1,096,250 Policy loans..................................................................... 54,824,429 54,103,044 Short-term investments........................................................... 7,493,877 18,267,431 -------------- ----------- Total investments 433,936,167 440,383,973 Cash................................................................................. 4,021,839 Accrued investment income............................................................ 7,718,388 7,597,305 Accounts and premiums receivable, net of allowance for uncollectible amounts (1999-$7,000; 1998-$7,000)............................................... 4,256,931 673,967 Reinsurance receivables.............................................................. 26,779,589 22,405,337 Deferred policy acquisition costs.................................................... 127,792,025 133,275,451 Other assets......................................................................... 41,731 55,968 Assets related to separate accounts Variable annuity................................................................. 4,951,159 237,565 -------------- --------------- $609,497,829 $604,629,566 ============ ============
Balance, December 31, 1996 $ 2,000 $2,000,000 $6,200,000 $14,793,500 $ (448,387) 22,547,113 ----------- Net income for 1997 1,845,454 1,845,454 Increase in net unrealized gains on investments (net of income tax: $602,348) 1,118,646 1,118,646 Reclassification adjustment for amounts included in net income (net of income tax: $20,961) 38,928 38,928 ----------- Comprehensive income for 1997 3,003,028 ----------- Preferred dividends ($50 per share) (100,000) (100,000) ---------------------------------------------------------------------------
Balance, December 31, 1997 2,000 2,000,000 6,200,000 16,538,954 709,187 25,450,141 ----------- Net income for 1998 2,414,538 2,414,538 Increase in net unrealized gains on investments (net of income tax-$4,405,946) 8,182,472 8,182,472 Reclassification adjustment for amounts included in net income (net of income tax: ($44,719)) (83,050) (83,050) ------------ Comprehensive income for 1998 10,513,960 ------------ Common stock dividend (50,000 shares) 500,000 (500,000) Preferred dividends ($50 per share) (100,000) (100,000) Capital contribution from Protective 95,374,516 95,374,516 --------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES Dividends to share owners.......................................................... (5,000,000) (100,000) (100,000) Investment product deposits and change in universal life deposits.................. 50,693,411 7,980,628 (368,379) Investment product withdrawals..................................................... (24,899,286) (13,812,984) -------------- ---------------- ------------- Net cash provided by (used in) financing activities.................................... 20,794,125 (5,932,356) (468,379) -------------- ---------------- -------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year: Income taxes....................................................................$ 0 $ 350,000 $ 548,581
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) =============
NATURE OF OPERATIONS The Company, since it is licensed in the State of New York, is the entity through which PLC markets, distributes, and services insurance and annuity products in New York. The operating results of companies in the insurance industry have historically been subject to significant fluctuations due to competition, economic conditions, interest rates, investment performance, maintenance of insurance ratings, and other factors.
In 1999, the Company adopted SFAS No. 134, “Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise,” and Statement of Position 98-1, ‘Accounting for the Costs of Computer software Developed or Obtained for Internal Use,” and Statement of Positions 97-3, “Accounting by Insurance and Other Enterprises for Insurance Related Assessments” issued by the American Institute of Certified Public Accountants.
The adoption of these accounting standards did not have a material effect on the Company’s financial statements.
The Financial Accounting Standards Board has issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” Effective January 1, 2001, SFAS No. 133 will require the Company to report derivative financial instruments on the balance sheet and to carry such derivatives at fair value. The fair values of derivatives increase or decrease as interest rates change. Under SFAS No. 133, changes in fair value are reported as a component of net income or as a change to share-owners’ equity, depending upon the nature of the derivative. Although the adoption of SFAS No. 133 will not affect the Company’s operations, adoption will introduce volatility into the Company’s reported net income and share-owners’ equity as interest rates change. The Company has not estimated the potential effect SFAS No. 133 will have on its net income and share-owners’ equity.
· Fixed maturities (bonds and redeemable preferred stocks) - at current market value.
· Short-term investments - at cost, which approximates current market value.
As prescribed by SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” certain investments are recorded at their market values with the resulting unrealized gains and losses, net of income tax, reported as a component of share-owners’ equity. The market values of fixed maturities increase or decrease as interest rates fall or rise. Therefore, although the application of SFAS No. 115 does not affect the Company’s operations, its reported share-owners’ equity will fluctuate significantly as interest rates change.
Deferred income taxes.................. $ 6,218,296 $ 2,562,284 All other liabilities.................... 494,090,181 466,085,568 ----------- ----------- 500,308,477 468,647,852 Share-owners' equity.................... 126,642,989 122,430,008 ----------- ----------- $626,951,466 $591,077,860 =========== ===========
Balance beginning of year...........$4,089,659 $3,724,904 $5,008,998 Less reinsurance................ 494,064 203,199 801,709 --------- --------- --------- Net balance beginning of year........3,595,595 3,521,705 4,207,289 --------- --------- --------- Incurred related to: Current year........................10,485,712 7,178,869 5,947,439 Prior year.......................... (501,227) (173,472) (331,984) ---------- --------- --------- Total incurred.................. 9,984,485 7,005,397 5,615,455 ---------- --------- --------- Acquisitions and reserve transfers.. 338,940
Paid related to: Current year........................ 8,999,287 5,904,526 4,913,958 Prior year.......................... 286,811 1,026,981 1,387,081 --------- --------- --------- Total paid...................... 9,286,098 6,931,507 6,301,039 --------- --------- --------- Net balance end of year............. 4,632,922 3,595,595 3,521,705 Plus reinsurance................ 4,924,705 494,064 203,199 --------- --------- --------- Balance end of year.................$9,557,627 $4,089,659 $3,724,904 ========= ========= =========
The cost to acquire blocks of insurance representing the present value of future profits from such blocks of insurance is also included in deferred policy acquisition costs. The Company amortizes the present value of future profits over the premium payment period, including accrued interest of up to approximately 8.0%. The unamortized present value of future profits was approximately $125.6 million at December 31, 1999. During 1999, $0.8 million of present value of future profits on acquisitions made during the year was capitalized and $6.4 million was amortized.
RECLASSIFICATIONS Certain reclassifications have been made in the previously reported financial statements and accompanying notes to make the prior year amounts comparable to those of the current year. Such reclassifications had no effect on net income, total assets, or share-owners’ equity.
Financial statements prepared in conformity with generally accepted accounting principles (“GAAP”) differ in some respects from the statutory accounting practices prescribed or permitted by insurance regulatory authorities. The most significant differences are: (a) acquisition costs of obtaining new business are deferred and amortized over the approximate life of the policies rather than charged to operations as incurred, (b) benefit liabilities are computed using a net level method and are based on realistic estimates of expected mortality, interest, and withdrawals as adjusted to provide for possible unfavorable deviation from such assumptions, (c) deferred income taxes are provided for temporary differences between financial and taxable earnings, (d) the Asset Valuation Reserve and Interest Maintenance Reserve are restored to share-owners’ equity, (e) agents’ debit balances and prepaid expenses are reported as assets rather than being charged directly to surplus (referred to as nonadmitted items), (f) certain items of interest income, principally accrual of mortgage and bond discounts are amortized differently, and (g) bonds are stated at market instead of amortized cost.
Net Income Share-Owners' Equity --------------------------------- ---------------------------------- 1999 1998 1997 1999 1998 1997 ---- ---- ---- ---- ---- ---- In conformity with statutory reporting practices:....................................$12,659,788 $5,365,091 $2,794,015 $32,146,507 $26,256,416 $20,467,722 Additions (deductions) by adjustment: Deferred policy acquisition costs, net of amortization............................ (6,133,391) (1,711,138) (320,288) 127,792,025 133,275,451 1,692,285 Deferred income tax....................... (3,656,012) (938,986) (402,108) (109,523) (7,305,381) (2,005,168) Asset Valuation Reserve................... 2,051,489 1,334,584 730,240 Interest Maintenance Reserve.............. 93,585 (82,982) (85,826) 366,474 460,059 161,051 Nonadmitted items......................... 26,068 15,671 10,431 Other timing and valuation adjustments.... 6,437,203 (217,447) (140,339) (46,974,915) (22,798,183) 4,393,580 --------- --------- -------- ----------- ----------- ---------- In conformity with generally accepted accounting principles......................... $9,401,173 $2,414,538 $1,845,454 $115,298,125 $131,238,617 $25,450,141 ========= ========= ========= =========== =========== ==========
As of December 31, 1999, the Company had on deposit with regulatory authorities, fixed maturity and short-term investments with a market value of approximately $7.3 million.
1999 1998 1997 ---- ---- ---- Fixed maturities..... ....................... $194,374 $ 87,677 $(59,889) Mortgage loans and other investments......... (104,824) 40,092 0 ------- ------- ------- $ 89,550 $127,769 $(59,889) ======= ======= =======
In 1999, gross gains on the sale of investments available for sale (fixed maturities and short-term investments) were approximately $298,685 and gross losses were approximately $104,311. In 1998, gross gains were approximately $600,000 and gross losses were approximately $500,000. In 1997, gross gains were approximately $10,000 and gross losses were approximately $70,000.
The amortized cost and estimated market values of the Company's investments classified as available for sale at December 31 are as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Market 1999 Cost Gains Losses Values ---- --------- ---------- --------- ---------- Fixed maturities: Bonds: Mortgage-backed............. $ 6,008,883 $ 74,844 $ 34,384 $ 6,049,343 United States Government and authorities................. 10,206,255 52,292 238,867 10,019,680 States, municipalities, and political subdivisions...... 3,056,009 0 26,039 3,029,970 Public utilities............ 54,683,099 120,250 2,193,490 52,609,859 Convertibles and bonds with warrants.................... 694,978 0 155,978 539,000 All other corporate bonds... 309,642,713 71,357 15,123,622 294,590,448 ----------- ------- ---------- ----------- 384,291,937 318,743 17,772,380 366,838,300 Short-term investments.......... 7,493,877 0 0 7,493,877 ----------- ------- ---------- ----------- $391,785,814 $ 318,743 $17,772,380 $374,332,177 =========== ======= ========== ===========
The amortized cost and estimated market values of fixed maturities at December 31, by expected maturity, are shown below. Expected maturities are derived from rates of prepayment that may differ from actual rates of prepayment.
Estimated Amortized Market Cost Values ----------- ------------ ---- Due in one year or less...................... $ 28,436,528 $ 28,618,945 Due after one year through five years........ 178,463,434 185,885,380 Due after five years through ten years....... 78,858,516 83,976,562 Due after ten years.......................... 60,803,093 61,632,390 ----------- ----------- $346,561,571 $360,113,277 =========== ===========
Rating 1999 1998 ------ ---- ---- AAA 6.0% 4.4% AA 4.1 6.7 A 46.8 43.7 BBB 39.9 43.1 BB or Less 3.2 2.1 ----- ----- 100.0% 100.0%
At December 31, 1999 and 1998, the Company had bonds which were rated less than investment grade of $11.9 million and $7.7 million, respectively, having an amortized cost of $12.7 million and $7.8 million, respectively.
1999 1998 1997 ---- ---- ---- Fixed maturities............... $(20,153,473) $8,099,422 $1,157,574
At December 31, 1999, approximately 99% of the Company’s mortgage loans were commercial loans of which 56% were retail, and 43% were office buildings. 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.
Many of the mortgage loans have call provisions after three to ten years. Assuming the loans are called at their next call dates, approximately $0.3 million would become due in 2001.
At December 31, 1999, the Company's problem mortgage loans and foreclosed properties totaled $1.1 million. At December 31, 1998, the Company had no problem mortgage loans or foreclosed properties. 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.
Deferred income tax liabilities: Unrealized gain on investments.............. 5,276,789 Deferred policy acquisition costs........... 19,517,082 14,421,332 ---------- ---------- 19,517,082 19,698,121 ---------- ---------- Net deferred income tax liability... $ 109,523 $ 7,305,381 ========== ==========
A number of civil jury verdicts have been returned against insurers in the jurisdictions in which the Company does business involving the insurers’ sales practices, alleged agent misconduct, failure to properly supervise agents, and other matters. Increasingly these lawsuits have resulted in the award of substantial judgments against the insurer that are disproportionate to the actual damages, including material amounts of punitive damages. In addition, in some class action and other lawsuits involving insurers’ sales practices, insurers have made material settlement payments. In some states (including Alabama), juries have substantial discretion in awarding punitive damages which creates the potential for unpredictable material adverse judgments in any given punitive damage suit. The Company, like other insurers, in the ordinary course of business, are involved in such litigation or alternatively in arbitration. Although the outcome of any litigation or arbitration cannot be predicted with certainty, 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.
The Company has no employees; therefore, the Company purchases data processing, legal, investment, and other management services from PLC and other affiliates. The cost of such services was $6.3 million in 1999, $1.2 million in 1998, and $1.2 million in 1997.
Acquisitions Division. The Acquisitions Division focuses solely on acquiring, converting, and servicing policies acquired from other companies. The Division’s primary focus is on life insurance policies sold to individuals.
Financial Institutions Division. The Financial Institutions Division specializes in marketing credit life and disability insurance products through banks, consumer finance companies and automobile dealers. The Division also includes a small property casualty insurer that sells automobile service contracts.
Investment Products Division. The Investment Products Division manufactures, sells, and supports fixed and variable annuity products. These products are primarily sold through stockbrokers, but are also sold through financial institutions and the Individual Life Division’s sales force.
Assets are allocated based on policy liabilities and deferred policy acquisition costs directly attributable to each segment.
The Company has reinsured approximately $5.8 billion, $7.6 billion, and $133 million in face amount of life insurance risks with other insurers representing $20.1 million, $12.6 million, and $0.7 million of premium income for 1999, 1998, and 1997, respectively. The Company has also reinsured accident and health risks representing $0.8 million, $0.9 million, and $2.3 million of premium income for 1999, 1998, and 1997, respectively. In 1999 and 1998, policy and claim reserves relating to insurance ceded of $21.9 million and $20.9 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, 1999 and 1998, the Company had paid $4.9 million and $1.5 million, respectively, of ceded benefits which are recoverable from reinsurers.
Approximately 60% and 68% of the reinsurance receivable balances at Decmeber 31, 1999 and 1998, respectively, relate to one insurance company rated "A+" (Superior) by the A.M. Best Company, an independent rating organization.
The carrying amount and estimated market values of the Company’s financial instruments at December 31 are as follows:
COL. A COL. B COL. C COL. D COL. E COL. F COL. G COL. H COL. I COL. J
-------------------------------------------------------------------------------------------------------------- COL. A COL. B COL. C COL. D COL. E COL. F -------------------------------------------------------------------------------------------------------------- Percentage Ceded to Assumed of Amount Gross Other from Other Net Assumed Amount Companies Companies Amount to Net ------ --------- --------- --------- ---------- Year Ended December 31,1999: Life insurance in force(1).....$ 308,419 $ 5,833,675 $ 7,260,439 $ 1,735,183 418.4% ======== ========== ========== ========= ===== Premiums and policy fees: Life insurance.................$ 7,207,635 $ 20,061,073 $47,053,071 $34,199,633 137.6% Accident and health insurance.. 2,698,776 797,021 29,578 1,931,333 1.5% --------- ---------- ---------- ---------- TOTAL......................$ 9,906,411 $20,858,094 $47,082,649 $36,130,966 ========= ========== ========== ========== Year Ended December 31,1998: Life insurance in force(1).....$ 282,231 $ 7,575,418 $ 7,914,524 $ 621,337 1,273.8% ======= ========= ========= ======= ======= 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 ========= ========== ========== =========