Properties Protective’s administrative office building is located at 2801 Highway 280 South, Birmingham, Alabama 35223. This campus includes the original 142,000 square-foot building which was completed in 1976 and a second contiguous 220,000 square-foot building which was completed in 1985. In addition, parking is provided for approximately 1,200 vehicles. During 2000, Protective will begin construction of a third contiguous building which will have approximately 315,000 square feet and parking for approximately 1,560 vehicles.
Protective leases administrative and marketing office space in 45 cities, including approximately 137,355 square feet in Birmingham, with most leases being for periods of three to five years. The aggregate annualized rent is approximately $5.7 million.
Premiums and policy fees.......................... $ 599,223 $ 568,125 5.5% Net investment income............................. 623,231 603,795 3.2% Realized investment gains......................... 4,760 2,136 122.8% Other income...................................... 27,102 20,201 34.2% ---------- ----------- $1,254,316 $1,194,257
Protective maintains an allowance for uncollectible amounts on investments. The allowance totaled $20.4 million at December 31, 1999 and $24.1 million at December 31, 1998. Realized investment gains in 1999 of $55.2 million were largely offset by realized investment losses of $50.4 million. Realized investment losses do not include $3.7 million of credit losses charged against the allowance for uncollectible amounts on investments.
Operating Income (Loss) and Income (Loss) Before Income Tax Year Ended December 31 (in thousands) 1999 1998 ----------- ------------
(1)Income before income tax excluding realized investment gains and losses and related amortization of deferred policy acquisition costs.
The Individual Life Division’s 1999 pretax income was $31.4 million, $1.2 million above 1998. The Division’s mortality experience was $1.3 million more favorable in 1999 than 1998. The Division’s 1999 results also include expenses to develop new distribution channels.
The Acquisitions Division’s 1999 pretax operating income was $64.5 million, $11.5 million above 1998. The full year effect of the October 1998 coinsurance of a block of policies from Lincoln National increased earnings $7.7 million in 1999. The Division’s mortality experience was approximately $8.9 million more favorable in 1999 than in 1998.
The Dental Division’s 1999 pretax income was $18.0 million compared to $10.2 million in 1998. This increase reflects the Division’s growth through sales.
The Financial Institutions Division’s 1999 pretax income increased $4.9 million to $22.6 million. In September 1999, Protective recaptured a block of credit life and disability policies that it had previously ceded resulting in $2.7 million of earnings in 1999. The Division’s other lines of business improved $2.2 million in 1999.
Management’s current estimate of the effective income tax rate for 2000 is between 36.0% and 36.5%.
Compared to 1998, net income in 1999 increased 9.5%, reflecting improved operating earnings in the Individual Life, West Coast, Acquisitions, Dental, Financial Institutions, and Investment Products Divisions, and higher realized investment gains, offset by lower operating earnings in the Stable Value Products Division and the Corporate and Other segment.
Year 2000 Disclosure Protective shares computer hardware and software with its parent, PLC, and other affiliates of PLC. PLC began work on the Year 2000 problem in 1995. PLC cannot specifically identify all of the costs to develop and implement its Year 2000 plan. The costs of new systems to replace non-compliant systems have been capitalized in the ordinary course of business. Other costs have been expensed as incurred. Those costs that have been specifically identified as relating to the Year 2000 problem total $5.2 million. PLC’s Year 2000 efforts have not adversely affected its normal procurement and development of information technology.
As of February 29, 2000, PLC and Protective have had no Year 2000 issues which have impaired their operations. Although PLC believes it has made all of the modifications necessary for its systems to process transactions dated beyond 1999, it is possible that Year 2000 issues involving PLC or Protective or their service providers may emerge during 2000. Therefore, there can be no assurances that the Year 2000 issue will not otherwise adversely affect PLC or Protective.
Should some of PLC's or Protective's systems become unavailable due to Year 2000 problems, in a reasonably likely worst case scenerio, PLC and Protective could experience delays in their ability to perform certain functions, but do not expect to be unable to perform critical functions or otherwise conduct business.
REVENUES Premiums and policy fees............................................... $1,137,256 $1,027,340 $ 814,420 Reinsurance ceded ..................................................... (538,033) (459,215) (334,214) ------------------------------------ Net of reinsurance ceded............................................. 599,223 568,125 480,206 Net investment income.................................................. 623,231 603,795 557,488 Realized investment gains.............................................. 4,760 2,136 1,824 Other income........................................................... 27,102 20,201 6,149 ------------------------------------ 1,254,316 1,194,257 1,045,667 ------------------------------------ BENEFITS AND EXPENSES Benefits and settlement expenses (net of reinsurance ceded: 1999-$344,474; 1998-$330,494; 1997-$180,605)........................................ 771,527 730,496 658,872 Amortization of deferred policy acquisition costs ..................... 104,913 111,188 107,175 Other operating expenses (net of reinsurance ceded: 1999-$150,570; 1998-$166,375; 1997-$90,045)......................................... 176,439 172,228 129,870 ----------------------------------- 1,052,879 1,013,912 895,917 -----------------------------------
INCOME TAX EXPENSE (BENEFIT) Current.............................................................. 47,504 48,237 66,283 Deferred............................................................. 25,675 14,925 (13,981) ------------------------------------ 73,179 63,162 52,302 ------------------------------------ NET INCOME................................................................ $ 128,258 $ 117,183 $ 97,448 ====================================
Accrued investment income............................................................ 101,120 100,395 Accounts and premiums receivable, net of allowance for uncollectible amounts (1999-$2,540; 1998-$4,304)............................................... 45,852 31,265 Reinsurance receivables.............................................................. 859,684 756,370 Deferred policy acquisition costs.................................................... 1,011,524 841,425 Property and equipment, net.......................................................... 49,002 42,374 Other assets......................................................................... 27,712 34,632 Receivable from related parties...................................................... 13,059 Assets related to separate accounts.................................................. Variable Annuity................................................................. 1,778,618 1,285,952 Variable Universal Life.......................................................... 40,293 13,606 Other............................................................................ 3,517 3,482 ------------------------------- $12,581,143 $11,622,895 ===============================
CONSOLIDATED STATEMENTS OF SHARE-OWNER'S EQUITY (Dollars in thousands, except per share amounts)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) December 31 --------------------------------------- 1999 1998 1997 --------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income..............................................................................$ 128,258 $ 117,183 $ 97,448 Adjustments to reconcile net income to net cash provided by operating activities: Realized investment gains........................................................... (4,760) (2,136) (1,824) Amortization of deferred policy acquisition costs................................... 104,913 111,188 107,175 Capitalization of deferred policy acquisition costs................................. (239,483) (192,838) (135,211) Depreciation expense................................................................ 10,513 7,110 5,124 Deferred income taxes............................................................... 24,234 14,925 (17,918) Accrued income taxes................................................................ (14,841) (11,933) (5,558) Interest credited to universal life and investment products......................... 331,746 352,721 299,004 Policy fees assessed on universal life and investment products...................... (165,818) (139,689) (131,582) Change in accrued investment income and other receivables........................... (119,183) (159,362) (158,798) Change in policy liabilities and other policyholder funds of traditional life and health products 215,201 322,464 279,522 Change in other liabilities......................................................... 67,552 (19,771) 65,393 Other (net)......................................................................... (5,526) (22,634) (1,133) ------------------------------------- Net cash provided by operating activities.................................................... 332,806 377,228 401,642 -------------------------------------
The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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.
The consolidated financial statements include the accounts, after intercompany eliminations, of Protective Life Insurance Company and its wholly-owned subsidiaries. Protective is a wholly-owned subsidiary of Protective Life Corporation ("PLC"), an insurance holding company.
Protective provides financial services through the production, distribution, and administration of insurance and investment products. Protective markets individual life insurance, dental insurance and managed care services, credit life and disability insurance, guaranteed investment contracts, guaranteed funding agreements, and fixed and variable annuities throughout the United States. Protective also maintains a separate division devoted exclusively to the acquisition of insurance policies from other companies.
The adoption of these accounting standards did not have a material effect on PLC's or Protective'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 Protective 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-owner’s equity, depending upon the nature of the derivative. Although the adoption of SFAS No. 133 will not affect Protective’s operations, adoption will introduce volatility into Protective’s reported net income and share-owners’ equity as interest rates change. Protective has not estimated the potential effect SFAS No. 133 will have on its net income and share-owner’s equity.
·Mortgage loans-- at unpaid balances, adjusted for loan origination costs, net of fees, and amortization of premium or discount.
·Investment real estate-- at cost, less allowances for depreciation computed on the straight-line method. With respect to real estate acquired through foreclosure, cost is the lesser of the loan balance plus foreclosure costs or appraised value.
Substantially all short-term investments have maturities of three months or less at the time of acquisition and include approximately $0.8 million in bank deposits voluntarily restricted as to withdrawal.
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 reduced by a related adjustment to deferred policy acquisition costs, net of income tax reported as a component of share-owner’s equity. The market values of fixed maturities increase or decrease as interest rates fall or rise. Therefore, although the adoption of SFAS No. 115 does not affect Protective’s operations, its reported share-owner’s equity will fluctuate significantly as interest rates change.
Protective uses interest rate swap contracts to convert certain investments from a variable to a fixed rate of interest and from a fixed rate to a variable rate of interest. Swap contracts are also used to alter the effective durations of assets and liabilities. Amounts paid or received related to the initiation of certain interest rate swap contracts are deferred and amortized over the life of the related financial instrument, and subsequent periodic settlements are recorded in investment income or interest expense. Gains or losses on contracts terminated upon the early termination of the related financial instrument are recorded as realized investment gains or losses. Amounts paid related to the initiation of interest rate swap contracts were $1.4 million and $1.0 million in 1999 and 1998 respectively. No amounts were received in 1999 and 1998.
Home office building.................................. $40,524 $37,959 Other, principally furniture and equipment............ 54,412 58,958 ------------------------- 94,936 96,917 Accumulated depreciation.............................. 45,934 54,543 ------------------------- $49,002 $42,374 =========================
SEPARATE ACCOUNTS The assets and liabilities related to separate accounts in which Protective does not bear the investment risk are valued at market and reported separately as assets and liabilities related to separate accounts in the accompanying consolidated financial statements.
Paid related to: Current year............................................. 264,298 236,001 203,381 Prior year............................................... 40,197 58,951 58,104 ----------------------------------------- Total paid........................................... 304,495 294,952 261,485 -----------------------------------------
DEFERRED POLICY ACQUISITION COSTS Commissions and other costs of acquiring traditional life and health insurance, credit insurance, universal life insurance, and investment products that vary with and are primarily related to the production of new business have been deferred. Traditional life and health insurance acquisition costs are amortized over the premium-payment period of the related policies in proportion to the ratio of annual premium income to total anticipated premium income. Credit insurance acquisition costs are being amortized in proportion to earned premium. Acquisition costs for universal life and investment products are amortized over the lives of the policies in relation to the present value of estimated gross profits before amortization. Under SFAS No. 97, “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments,” Protective makes certain assumptions regarding the mortality, persistency, expenses, and interest rates it expects to experience in future periods. These assumptions are to be best estimates and are to be periodically updated whenever actual experience and/or expectations for the future change from that assumed. Additionally, relating to SFAS No. 115, these costs have been adjusted by an amount equal to the amortization that would have been recorded if unrealized gains or losses on investments associated with Protective’s universal life and investment products had been realized.
Note B-- RECONCILIATION WITH STATUTORY REPORTING PRACTICES Financial statements prepared in conformity with accounting principals generally accepted in the United States (“GAAP”) differ in some respects from the statutory accounting practices prescribed or permitted by insurance regulatory authorities. The most significant differences are as follows: (a) acquisition costs of obtaining new business are deferred and amortized over the approximate life of the policies rather than charged to operations as incurred, (b) benefit liabilities are computed using a net level method and are based on realistic estimates of expected mortality, interest, and withdrawals as adjusted to provide for possible unfavorable deviation from such assumptions, (c) deferred income taxes are provided for temporary differences between financial and taxable earnings, (d) the Asset Valuation Reserve and Interest Maintenance Reserve are restored to stock-owner’s equity, (e) furniture and equipment, agents’ debit balances, and prepaid expenses are reported as assets rather than being charged directly to surplus (referred to as nonadmitted 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-Owner's Equity -------------------------------------------------------------------------- 1999 1998 1997 1999 1998 1997 --------------------------------------------------------------------------
Fixed maturities............................. $466,957 $463,416 $396,255 Equity securities............................ 775 905 1,186 Mortgage loans on real estate................ 172,027 158,461 161,604 Investment real estate....................... 1,949 1,224 2,004 Policy loans................................. 15,994 12,346 11,370 Other, principally short-term investments.... 20,244 16,536 21,876 ------------------------------------------ 677,946 652,888 594,295 Investment expenses.......................... 54,715 49,093 36,807 ------------------------------------------ $623,231 $603,795 $557,488 ==========================================
Fixed maturities............................. $13,049 $4,374 $ (8,355) Equity securities............................ (3,371) (4,465) 5,975 Mortgage loans and other investments......... (4,918) 2,227 4,204 ------------------------------------------ $4,760 $2,136 $ 1,824 ==========================================
The amortized cost and estimated market values of Protective's investments classified as available for sale
Gross Gross Estimated Amortized Unrealized Unrealized Market 1999 Cost Gains Losses Values --------------------------------------------------------------------------------------------------------------------
The change in unrealized gains (losses), net of income tax on fixed maturity and equity securities for the years ended December 31 is summarized as follows:
Note C-- INVESTMENT OPERATIONS (Continued) Many of the mortgage loans have call provisions after 3 to 10 years. Assuming the loans are called at their next call dates, approximately $109.6 million would become due in 2001, $408.8 million in 2002 to 2005, and $333.6 million in 2006 to 2010.
At December 31, 1999, the average mortgage loan was approximately $2.0 million, and the weighted average interest rate was 7.8%. The largest single mortgage loan was $17.0 million.
At December 31, 1999 and 1998, Protective's problem mortgage loans (over ninety days past due) and foreclosed properties totaled $22.9 million and $11.7 million, respectively. Since Protective's mortgage loans are collateralized by real estate, any assessment of impairment is based upon the estimated fair value of the real estate. Based on Protective's evaluation of its mortgage loan portfolio, Protective does not expect any material losses on its mortgage loans.
1999 1998 1997 ------------------------------- Statutory federal income tax rate applied to pretax income................. 35.0% 35.0% 35.0% Dividends received deduction and tax-exempt interest....................... (0.1) (0.1) (0.2) Low-income housing credit.................................................. (0.5) (0.5) (0.6) Tax benefits arising from prior acquisitions and other adjustments............................................................... 0.3 0.1 0.7 State income taxes......................................................... 1.6 0.5 ------------------------------- Effective income tax rate.................................................. 36.3% 35.0% 34.9% ===============================
1999 1998 1997 ------------------------------------ Deferred policy acquisition costs.................................... $46,175 $60,746 $ 7,054 Benefit and other policy liability changes........................... (27,158) (41,268) (23,564) Temporary differences of investment income........................... 6,655 (3,491) 2,516 Other items.......................................................... 3 (1,062) 13 ----------------------------------- $25,675 $14,925 $(13,981) ===================================
Note D-- FEDERAL INCOME TAXES (Continued) The components of Protective's net deferred income tax liability as of December 31 were as follows:
1999 1998 -------------------------- Deferred income tax assets: Policy and policyholder liability reserves.................. $217,642 $190,328 Unrealized loss on investments.............................. 70,421 Other....................................................... 2,088 2,091 -------------------------- 290,151 192,419 -------------------------- Deferred income tax liabilities: Deferred policy acquisition costs........................... 257,816 211,641 Unrealized gain on investments.............................. 32,513 -------------------------- 257,816 244,154 -------------------------- Net deferred income tax liability............................ $(32,335) $ 51,735 ==========================
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, 1999 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 $840.3 million, such excess would be subject to federal income taxes at rates then effective. Deferred income taxes have not been provided on amounts designated as Policyholders' Surplus. Under current income tax laws, Protective does not anticipate paying income tax on amounts in the Policyholders' Surplus accounts.
Note E - DEBT At December 31, 1999, PLC had borrowed $55.0 million at a rate of 6.7%. PLC had also borrowed $59.0 million at a rate of 6.6% under a term note that contains, among other provisions, requirements for maintaining certain financial ratios, and restrictions on indebtedness incurred by PLC's subsidiaries including Protective. Additionally, PLC, on a consolidated basis, cannot incur debt in excess of 50% of its total capital.
Protective has arranged sources of credit to temporarily fund scheduled investment commitments. Protective expects that the rate received on its investments will equal or exceed its borrowing rate. Protective had no such temporary borrowings outstanding at December 31, 1999 and 1998. Also, Protective has a mortgage note on investment real estate amounting to approximately $2.3 million that matures in 2003.
Included in indebtedness to related parties is a surplus debenture issued by Protective to PLC. At December 31, 1999, the balance of the surplus debenture was $14.0 million. The debenture matures in 2003.
Protective routinely receives from or pays to affiliates under the control of PLC reimbursements for expenses incurred on one another's behalf. Receivables and payables among affiliates are generally settled monthly.
In September 1999, Protective recaptured a block of credit life and disability policies which it had previously ceded.
Note G-- COMMITMENTS AND CONTINGENT LIABILITIES Under insurance guaranty fund laws, in most states, insurance companies doing business therein can be assessed up to prescribed limits for policyholder losses incurred by insolvent companies. Protective does not believe such assessments will be materially different from amounts already provided for in the financial statements. Most of these laws do provide, however, that an assessment may be excused or deferred if it would threaten an insurer's own financial strength.
A number of civil jury verdicts have been returned against insurers in the jurisdictions in which Protective 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 some states including Alabama, (where Protective 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 involving insurers' sales practices, insurers have made material settlement payments. Protective and its subsidiaries, like other financial service companies, 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, Protective 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 Protective.
Note H-- SHARE-OWNER'S EQUITY AND RESTRICTIONS At December 31, 1999, approximately $736.0 million of consolidated share-owner's equity excluding net unrealized gains on investments, represented net assets of Protective and its subsidiaries that cannot be transferred to PLC. In general, dividends up to specified levels are considered ordinary and may be paid thirty days after written notice to the insurance commissioner of the state of domicile unless such commissioner objects to the dividend prior to the expiration of such period. Dividends in larger amounts are considered extraordinary and are subject to affirmative prior approval by such commissioner. The maximum amount that would qualify as ordinary dividends to PLC by Protective in 2000 is estimated to be $175.5 million.
Note J-- RELATED PARTY MATTERS On August 6, 1990, PLC announced that its Board of Directors approved the formation of an Employee Stock Ownership Plan ("ESOP"). On December 1, 1990, Protective transferred to the ESOP 520,000 shares of PLC's common stock held by it in exchange for a note. The outstanding balance of the note, $5.1 million at December 31, 1999, is accounted for as a reduction to share-owner's equity. The stock will be used to match employee contributions to PLC's existing 401(k) Plan. The ESOP shares are dividend paying. Dividends on the shares are used to pay the ESOP's note to Protective.
Certain corporations with which PLC's directors were affiliated paid Protective premiums, policy fees, or deposits for various types of insurance and investment products. Such premiums, policy fees, and deposits amounted to $56.4 million, $28.6 million and $21.4 million in 1999, 1998, and 1997, respectively. Protective and/or PLC paid commissions, interest on debt and investment products, and fees to these same corporations totaling $16.9 million, $7.3 million and $5.4 million in 1999, 1998, and 1997, respectively.
Note K-- OPERATING SEGMENTS Protective operates seven divisions whose principal strategic focuses 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 follows.
Life Insurance Individual Life Division. The Individual Life Division markets level premium term and term-like insurance products, universal life, and variable universal life on a national basis primarily through networks of independent insurance agents.
Specialty Insurance Products Dental and Consumer Benefits Division. The Division’s primary focus is on indemnity and prepaid dental products. In 1997, the Division exited from the traditional group major medical business, fulfilling the Division’s strategy to focus primarily on dental and related products.
Note K-- OPERATING SEGMENTS (continued) Retirement Savings and Investment Products Stable Value Products Division. The Stable Value Products Division markets guaranteed investment contracts to 401(k) and other qualified retirement savings plans. The Division also offers related products, including fixed and floating rate funding agreements offered to the trustees of municipal bond proceeds, bank trust departments, and money market funds, and long-term annuity contracts offered to fund certain state obligations.
Operating segment income and assets for the years ended December 31 are as follows:
Individual Operating Segment Income Life West Coast Acquisitions ------------------------------------------------------------------------- ----------------- --------------- --------------- Premiums and policy fees $ 274,598 $87,226 $ 148,620 Reinsurance ceded (182,092) (64,019) (33,754) ------------------------------------------------------------------------- ----------------- --------------- --------------- Net of reinsurance ceded 92,506 23,207 114,866 Net investment income 59,916 78,128 129,806 Realized investment gains (losses) Other income (2,250) 1,302 (9) ------------------------------------------------------------------------- ----------------- --------------- --------------- Total revenues 150,172 102,637 244,663 ------------------------------------------------------------------------- ----------------- --------------- --------------- Benefits and settlement expenses 74,455 73,176 129,581 Amortization of deferred policy acquisition costs 23,434 6,047 19,444 Other operating expenses 20,850 (2,649) 31,178 ------------------------------------------------------------------------- ----------------- --------------- --------------- Total benefits and expenses 118,739 76,574 180,203 ------------------------------------------------------------------------- ----------------- --------------- --------------- Income before income tax 31,433 26,063 64,460 Income tax expense ------------------------------------------------------------------------- ----------------- --------------- --------------- Net income ------------------------------------------------------------------------- ----------------- --------------- --------------- Premiums and policy fees $ 228,701 $ 75,757 $ 125,329 Reinsurance ceded (102,533) (53,377) (28,594) ------------------------------------------------------------------------- ----------------- --------------- --------------- Net of reinsurance ceded 126,168 22,380 96,735 Net investment income 55,779 63,492 112,154 Realized investment gains (losses) Other income 70 6 1,713 ------------------------------------------------------------------------- ----------------- --------------- --------------- Total revenues 182,017 85,878 210,602 ------------------------------------------------------------------------- ----------------- --------------- --------------- Benefits and settlement expenses 106,308 54,617 112,051 Amortization of deferred policy acquisition costs 30,543 4,924 18,894 Other operating expenses 14,983 5,354 26,717 ------------------------------------------------------------------------- ----------------- --------------- --------------- Total benefits and expenses 151,834 64,895 157,662 ------------------------------------------------------------------------- ----------------- --------------- --------------- Income before income tax 30,183 20,983 52,940 Income tax expense ------------------------------------------------------------------------- ----------------- --------------- --------------- Net income ------------------------------------------------------------------------- ----------------- --------------- --------------- Premiums and policy fees $ 182,746 $ 41,290 $ 120,504 Reinsurance ceded (55,266) (27,168) (17,869) ------------------------------------------------------------------------- ----------------- --------------- --------------- Net of reinsurance ceded 127,480 14,122 102,635 Net investment income 54,593 30,194 110,155 Realized investment gains (losses) Other income 617 10 ------------------------------------------------------------------------- ----------------- --------------- --------------- Total revenues 182,690 44,316 212,800 ------------------------------------------------------------------------- ----------------- --------------- --------------- Benefits and settlement expenses 114,678 28,304 116,506 Amortization of deferred policy acquisition costs 27,354 961 16,606 Other operating expenses 18,178 6,849 23,016 ------------------------------------------------------------------------- ----------------- --------------- --------------- Total benefits and expenses 160,210 36,114 156,128 ------------------------------------------------------------------------- ----------------- --------------- --------------- Income before income tax 22,480 8,202 56,672 Income tax expense ------------------------------------------------------------------------- ----------------- --------------- --------------- Net income ------------------------------------------------------------------------- ----------------- --------------- --------------- Operating Segment Assets Investments and other assets $1,205,968 $1,343,517 $1,553,954 Deferred policy acquisition costs 379,117 200,605 235,903 ------------------------------------------------------------------------- ----------------- --------------- --------------- Total assets $1,585,085 $1,544,122 $1,789,857 ------------------------------------------------------------------------- ----------------- --------------- --------------- Operating Segment Assets Investments and other assets $1,076,202 $1,149,642 $1,600,123 Deferred policy acquisition costs 301,941 144,455 255,347 ------------------------------------------------------------------------- ----------------- --------------- --------------- Total assets $1,378,143 $1,294,097 $1,855,470 ------------------------------------------------------------------------- ----------------- --------------- --------------- Investments and other assets $ 960,316 $ 910,030 $1,401,294 Deferred policy acquisition costs 252,321 108,126 138,052 ------------------------------------------------------------------------- ----------------- --------------- --------------- Total assets $1,212,637 $1,018,156 $1,539,346 ------------------------------------------------------------------------- ----------------- --------------- --------------- (1) Adjustments represent the inclusion of unallocated realized investment gains (losses) and the recognition of income tax expense. There are no asset adjustments.
$197,337 $645,909 $2,869,304 $2,542,536 $700,417 $10,781,470 23,836 39,212 1,448 75,177 9 841,425 ------------------------------------------------------------------------------------------------------------------------- $221,173 $685,121 $2,870,752 $2,617,713 $700,426 $11,622,895 -------------------------------------------------------------------------------------------------------------------------
Note L-- EMPLOYEE BENEFIT PLANS PLC has a defined benefit pension plan covering substantially all of its employees. The plan is not separable by affiliates participating in the plan. However, approximately 81% of the participants in the plan are employees of Protective. 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 finding 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.
Service cost.............................................................. $3,270 $ 2,585 $ 2,112 Interest cost............................................................. 2,779 2,203 2,036 Expected return on plan assets............................................ (2,348) (1,950) (1,793) Amortization of prior service cost........................................ 115 112 100 Amortization of transition asset.......................................... (17) (17) (17) Recognized net actuarial loss............................................. 494 305 152 -------------------------------------- Net pension cost.......................................................... $4,293 $ 3,238 $ 2,590 ======================================
Protective's share of the net pension cost was $3.6 million, $2.6 million, and $1.8 million, in 1999, 1998, and 1997, respectively.
1999 1998 1997 ----------------------------------- Weighted average discount rate................................. 8.00% 6.75% 7.25% Rates of increase in compensation level........................ 5.75% 4.75% 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 by federal income tax law. At December 31, 1999 and 1998, the projected benefit obligation of this plan totaled $13.1 million and $11.7 million, respectively, of which $8.3 million and $7.8 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. The postretirement benefit is provided by an unfunded plan. At December 31, 1999 and 1998, the liability for such benefits totaled $1.2 million. The expense recorded by PLC was $0.1 million in 1999, 1998 and 1997. PLC’s obligation is not materially affected by a 1% change in the healthcare cost trend assumptions used in the calculation of the obligation.
Note M-- STOCK BASED COMPENSATION Certain Protective employees participate in PLC’s Long-Term Incentive Plan (previously known as the Performance Share Plan) and receive stock appreciation rights (SARs) from PLC.
During 1996, stock appreciation rights (SARs) were granted to certain executives of PLC to provide long-term incentive compensation based on the performance of PLC’s Common Stock. Under this arrangement PLC will pay (in shares of PLC Common Stock) an amount equal to the difference between the specified base price of PLC’s Common Stock and the market value at the exercise date. The SARs are exercisable after five years (earlier upon the death, disability or retirement of the executive, or in certain circumstances, of a change in control of PLC) and expire in 2006 or upon termination of employment. The number of SARs granted during 1996 and outstanding at December 31, 1999 was 675,000. The SARs have a base price of $17.4375 per share of PLC Common Stock (the market price on the grant date was $17.50 per share). The estimated fair value of the SARs on the grant date was $3.0 million. This estimate was derived using the Roll-Geske variation of the Black-Sholes option pricing model. Assumptions used in the pricing model are as follows: expected volatility rate of 15% (approximately equal to that of the S & P Life Insurance Index), a risk free interest rate of 6.35%, a dividend yield rate of 1.97%, and an expected exercise date of August 15, 2002. The expense recorded by PLC for the SARs was $0.6 million in 1999, 1998 and 1997.
Protective has reinsured approximately $93.5 billion, $64.8 billion, and $34.1 billion in face amount of life insurance risks with other insurers representing $364.7 million, $294.4 million, and $147.2 million of premium income for 1999, 1998, and 1997, respectively. Protective has also reinsured accident and health risks representing $172.8 million, $164.8 million, and $187.7 million of premium income for 1999, 1998, and 1997, respectively. In 1999 and 1998, policy and claim reserves relating to insurance ceded of $739.3 million and $658.7 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, 1999 and 1998, Protective had paid $46.8 million and $22.8 million, respectively, of ceded benefits which are recoverable from reinsurers. In addition, at December 31, 1999, Protective had receivables of $74.0 million related to insurance assumed.
Liabilities (see Notes A and E): Guaranteed investment contract deposits 2,680,009 2,649,616 2,691,697 2,751,007 Annuity deposits...................... 1,639,231 1,598,993 1,519,820 1,513,148 Notes payable......................... 2,338 2,338 2,363 2,363 Other (see Note A): Derivative Financial Instruments...... 5,273 3,564 986 6,426
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 and Future Annuity Amortization Deferred Policy Deposits Premiums Benefits of Deferred Policy Benefits and Other and Net and Policy Other Acquisition and Unearned Policyholders' Policy Investment Settlement Acquisition Operating Segment Costs Claims Premiums Funds Fees Income(1) Expenses Costs Expenses (1) -------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,1998: Life Insurance Individual Life... $301,941 $1,054,253 $ 355 $ 10,802 $ 126,168 $ 55,779 $ 106,308 $ 30,543 $14,983 West Coast........ 144,455 1,006,280 0 77,254 22,380 63,492 54,617 4,924 5,354 Acquisitions...... 255,347 1,383,759 553 233,846 96,735 112,154 112,051 18,894 26,717 Specialty Insurance Products Dental and Consumer Benefits....... 23,836 111,916 3,341 78,224 191,563 15,245 140,632 10,352 49,913 Financial Institution 39,212 215,451 385,006 105,434 112,272 25,068 52,629 28,526 48,837 Retirement Savings and Investment Products Stable Value Contracts 1,448 172,674 0 2,691,697 0 213,136 178,745 735 2,876 Investment Products 75,177 194,726 0 1,233,528 18,809 105,827 85,045 17,213 14,428 Corporate and Other.. 9 944 39 88 198 13,094 469 1 9,120 ------------------------------------------------------------------------------------------------------------------------------- TOTAL........ $841,425 $4,140,003 $ 389,294 $4,430,873 $ 568,125 $ 603,795 $ 730,496 $ 111,188 $172,228 ===============================================================================================================================
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........................... $ 120,577,512 $ 92,566,755 $ 9,239,074 $ 37,249,831 24.8% ===========================================================================
Premiums and policy fees: Life insurance.................................... $ 540,430 $ 364,680 $ 131,855 $ 307,605 42.9% Accident and health insurance..................... 403,491 172,852 27,266 257,905 10.6% Property and liability insurance.................. 34,104 501 110 33,713 0.3% --------------------------------------------------------------- TOTAL......................................... $ 978,025 $ 538,033 $ 159,231 $ 599,223 ===============================================================
Premiums and policy fees: Life insurance.................................... $ 387,108 $ 147,184 $ 74,738 $ 314,662 23.8% Accident and health insurance..................... 336,575 187,539 10,510 159,546 6.7% Property and liability insurance.................. 6,139 176 35 5,998 0.6% --------------------------------------------------------------- TOTAL......................................... $ 729,822 $ 334,899 $ 85,283 $ 480,206 ===============================================================