Protective leases administrative and marketing office space in approximately 25 cities, including approximately 88,151 square feet in Birmingham, with most leases being for periods of three to ten years. The aggregate annualized rent is approximately $8.5 million.
YEAR ENDED PERCENTAGE DECEMBER 31 INCREASE (DECREASE) ----------------------------- -------------------- 2001 2000 ---- ---- (in thousands) Premiums and policy fees...................... $ 618,668 $ 489,835 26.3% Net investment income......................... 839,103 692,081 21.2% Realized investment gains (losses) ........... (7,841) (14,599) 46.3% Other income.................................. 38,578 35,194 9.6% --------- --------- $1,488,508 $1,202,511 ========= =========
In 2001, premiums and policy fees, net of reinsurance (premiums and policy fees) increased $128.8 million or 26.3% over 2000. The Life Marketing segment’s premiums and policy fees increased $21.2 million due to increased sales. Premiums and policy fees in the Acquisition segment, are expected to decline with time (due to the lapsing of policies resulting from deaths of insureds or terminations of coverage) unless new acquisitions are made. In January 2001, Protective coinsured a block of individual life policies from Standard Insurance Company resulting in an increase of $68.9 million in premiums and policy fees. In October 2001, Protective purchased two companies from a subsidiary of Irish Life & Permanent plc: Inter-State Assurance Company and First Variable Life Insurance Company. These transactions increased premiums and policy fees by $17.9 million over 2000. Premiums and policy fees from older acquired blocks declined $7.2 million in 2001 as compared to 2000. Premiums and policy fees related to the Credit Products segment increased $29.6 million. The decrease in premiums and policy fees from the Annuities segment was $2.0 million. Premium and policy fees relating to various health insurance lines in the Corporate and Other segment increased $0.6 million.
Other income consists primarily of revenues from Protective’s direct response business, service contract business, non-insurance subsidiaries and rental of space in its administrative building to PLC. In 2001, revenues from Protective’s direct response business and service contract business increased $2.0 million and $0.5 million, respectively. Income from other sources increased $0.9 million.
(1) Income from continuing operations before income tax excluding realized investment gains and losses and related amortization of deferred policy acquisition costs.
The Life Marketing segment’s 2001 pretax income was $92.0 million, $16.2 million above 2000. The segment has grown through sales. The segment’s results include expenses to develop new distribution channels.
The Stable Value Contracts segment’s 2001 pretax operating income increased $2.0 million to $33.2 million. The increase was due to higher account balances which was partially offset by lower interest rate spreads. Operating spreads in 2001 were compressed due to lower investment income. Realized investment gains associated with this segment in 2001 were $7.2 million as compared to realized investment losses of $6.5 million in 2000. As a result, total pretax income was $40.4 million in 2001 and $24.7 million in 2000.
The Annuities segment’s 2001 pretax operating income was $15.1 million, an increase of $1.5 million. The increase reflects the segment’s growth through sales. The 2001 results include a tax benefit of approximately $3.0 million related to the segment’s variable annuities which was partially offset by an increase in reserves related to minimum death benefit guarantees. The segment’s future results may also be negatively affected by the slowing economy. Volatile equity markets could negatively affect sales of variable annuities and the fees the segment assesses on variable annuity contracts. Lower interest rates could negatively affect sales of fixed annuities. The segment had no realized investment gains or losses (net of related amortization of deferred policy acquisition costs) in 2000 and $0.1 million of gains in 2001. As a result, total pretax income was $15.2 million in 2001 and $13.6 million in 2000.
The Credit Products segment’s 2001 pretax income increased $1.0 million to $35.7 million. Incurred credit insurance claims were higher, but were offset by a change in estimate with respect to reserves. The segment’s 2001 results include income of approximately $2.0 million from the sale of a small insurance subsidiary’s charter. The segment’s future results may be negatively affected by the slowing economy. Lower consumer lending and fewer automobile purchases could negatively affect the segment’s sales. Also, the level of claims typically increases in a slowing economy.
The Corporate and Other segment consists of net investment income on unallocated capital, several lines of business which Protective is not actively marketing (mostly health insurance), and other operating expenses not identified with the preceding business segments (including interest on substantially all debt). Pretax operating losses for this segment were $22.4 million in 2001 as compared to pretax operating losses of $19.4 million in 2000.
Management’s current estimate of the effective income tax rate for 2002 is between 33% and 34%.
Change In Accounting Principle On January 1, 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities". The adoption of SFAS No. 133 resulted in a cumulative after-tax charge to net income of approximately $8.3 million. The adoption of SFAS No. 133 also resulted in a cumulative after-tax increase to other comprehensive income of approximately $4.0 million.
Net Income The following table sets forth net income from continuing operations before the cumulative effect of change in accounting principle for the periods shown:
Consolidated Statements of Income for the years ended December 31, 2001, 2000, and 1999
DECEMBER 31 --------------------------------- 2001 2000 ---- ---- ASSETS Investments: Fixed maturities, at market (amortized cost: 2001 - $9,719,057; 2000 - $7,463,700).. $ 9,812,091 $7,390,110 Equity securities, at market (cost: 2001 - $62,051; 2000 - $44,450)................. 60,493 41,792 Mortgage loans on real estate....................................................... 2,512,844 2,268,224 Investment real estate, net of accumulated depreciation (2001 - $1,452; 2000 - $1,226) 24,173 12,566 Policy loans........................................................................ 521,840 230,527 Other long-term investments......................................................... 100,686 66,646 Short-term investments.............................................................. 228,396 172,699 ------------ ------------ Total investments............................................................... 13,260,523 10,182,564 Cash.................................................................................... 107,166 33,517 Accrued investment income............................................................... 158,841 121,996 Accounts and premiums receivable, net of allowance for uncollectible amounts (2001 - $3,025; 2000 - $2,195).............................................. 55,809 72,189 Reinsurance receivables................................................................. 2,173,987 1,099,574 Deferred policy acquisition costs....................................................... 1,532,683 1,189,380 Goodwill, net........................................................................... 35,992 241,831 Property and equipment, net............................................................. 46,337 51,166 Other assets............................................................................ 219,355 120,874 Receivable from related parties......................................................... 4,768 Assets related to separate accounts: Variable Annuity.................................................................... 1,910,651 1,841,439 Variable Universal Life............................................................. 77,162 63,504 Other............................................................................... 3,997 3,746 ------------ ------------ $19,582,503 $15,026,548 ============ ============ LIABILITIES Policy liabilities and accruals: Future policy benefits and claims.................................................. $ 6,974,685 $ 5,033,397 Unearned premiums.................................................................. 901,653 935,605 ------------ ------------ Total policy liabilities and accruals.............................................. 7,876,338 5,969,002 Stable value contract deposits.......................................................... 3,716,530 3,177,863 Annuity deposits........................................................................ 3,248,218 1,916,894 Other policyholders' funds.............................................................. 132,124 125,336 Other liabilities....................................................................... 410,621 324,901 Accrued income taxes.................................................................... 125,835 (10,932) Deferred income taxes................................................................... 72,403 72,065 Note payable............................................................................ 2,291 2,315 Indebtedness to related parties......................................................... 6,000 10,000 Securities sold under repurchase agreements............................................. 117,000 Liabilities related to separate accounts: Variable Annuity................................................................... 1,910,651 1,841,439 Variable Universal Life............................................................ 77,162 63,504 Other.............................................................................. 3,997 3,746 ------------ ------------ Total liabilities................................................................ 17,699,170 13,496,133 ============ ============ COMMITMENTS AND CONTINGENT LIABILITIES - NOTE G
SHARE-OWNER'S EQUITY Preferred Stock, $1.00 par value, shares authorized and issued: 2,000, liquidation preference $2,000.......................... 2 2 Common Stock, $1.00 par value, shares authorized and issued: 5,000,000..................................................... 5,000 5,000 Additional paid-in capital.............................................................. 785,419 632,805 Note receivable from PLC Employee Stock Ownership Plan.................................. (4,499) (4,841) Retained earnings....................................................................... 1,044,243 948,819 Accumulated other comprehensive income Net unrealized gains (losses) on investments (net of income tax: 2001 - $28,629; 2000-$(27,661))................................... 53,168 (51,370) ------------ ------------ Total share-owner's equity....................................................... 1,883,333 1,530,415 ------------ ------------ $19,582,503 $15,026,548 ============ ============ See notes to consolidated financial statements
NET NOTE UNREALIZED RECEIVABLE GAINS ADDITIONAL FROM (LOSSES) TOTAL PREFERRED COMMON PAID-IN PLC RETAINED ON SHARE-OWNER'S STOCK STOCK CAPITAL ESOP EARNINGS INVESTMENTS EQUITY --------- ------ ---------- ---------- -------- ----------- ------------ Balance, December 31, 1998 $2 $5,000 $327,992 $(5,199) $686,519 $ 55,057 $1,069,371 ----------- Net income for 1999 128,258 128,258 Change in net unrealized gains/losses on investments (net of income tax - $(106,638)) (198,043) (198,043) Reclassification adjustment for amounts included in net income (net of income tax - $(1,666)) (3,094) (3,094) ----------- Comprehensive loss for 1999 (72,879) ----------- Decrease in note receivable from PLC ESOP 51 51 -------- ------- --------- -------- --------- ---------- ----------- Balance, December 31, 1999 2 5,000 327,992 (5,148) 814,777 (146,080) 996,543 ----------- Net income for 2000 124,035 124,035 Change in net unrealized gains/losses on investments (net of income tax - $45,887) 85,221 85,221 Reclassification adjustment for amounts included in net income (net of income tax - $5,110) 9,489 9,489 ----------- Comprehensive income for 2000 218,745 ----------- Capital contribution 81,000 81,000 Transfer of subsidiaries from PLC (see Note A) 223,813 10,007 233,820 Decrease in note receivable from PLC ESOP 307 307 --------- -------- --------- -------- --------- --------- ----------- Balance, December 31, 2000 2 5,000 632,805 (4,841) 948,819 (51,370) 1,530,415 ----------- Net income for 2001 106,658 106,658 Change in net unrealized gains/losses on investments (net of income tax - $52,019) 96,607 96,607 Reclassification adjustment for amounts 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 211,196 ----------- Capital contribution 134,000 134,000 Common dividend - transfer of subsidiary to PLC (see note H) (2,052) (2,052) Preferred dividend (1,000) (1,000) Transfer of subsidiaries from PLC (see Note A) 18,614 (8,182) 10,432 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 $1,883,333 ========= ======== ========= ======== ========== ======== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Reduction of principal on note from ESOP............................................... $ 342 $ 307 $ 51 Acquisitions, related reinsurance transactions and subsidiary transfer Assets acquired.................................................................... $ 2,549,484 $ 759,067 $ 12,502 Liabilities assumed................................................................ (2,430,927) (384,207) (12,502) Equity from subsidiary transfers (see Note A)...................................... (10,432) (233,820) 0 ------------ ------------- ----------- Net................................................................................ $ 108,125 $ 141,040 $0 ============ ============= ===========
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 and 138, 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. Prospectively, the adoption of SFAS No. 133 may introduce volatility into Protective’s reported net income and other comprehensive income depending on future market conditions and Protective’s hedging activities.
In June 2001, the FASB issued SFAS Nos. 141, “Business Combinations”, and 142, “Goodwill and Other Intangible Assets”. SFAS No. 141 requires that business combinations initiated after June 30, 2001, be accounted for using the purchase method. 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. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001, and effective for any goodwill or intangible asset acquired after June 30, 2001. Protective expects the adoption of SFAS No. 142 to result in the elimination of up to $2.8 million of goodwill amortization in 2002.
In August 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations”. SFAS No. 143 requires that companies record the fair value of a liability for an asset retirement obligation in the period in which the liability is incurred. The Statement is effective for fiscal years beginning after June 15, 2002. Protective does not expect the adoption of SFAS No. 143 to have a material effect on Protective’s financial position or results of operations.
Protective has classified all of its investments in fixed maturities, equity securities, and short-term investments as “available for sale.”
Substantially all short-term investments have maturities of three months or less at the time of acquisition and include approximately $0.6 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 application of SFAS No. 115 does not affect Protective’s operations, its reported share-owner’s equity will fluctuate significantly as interest rates change.
Protective utilizes a risk management strategy that incorporates the use of derivative instruments, primarily to reduce its exposure to interest rate risk as well as currency exchange risk.
Combinations of interest rate swap contracts, options and futures contracts are sometimes used as hedges against changes in interest rates for certain investments, primarily outstanding mortgage loan commitments and mortgage-backed securities. Interest rate swap contracts generally involve the exchange of fixed and variable rate interest payments between two parties, based on a common notional principal amount and maturity date. Interest rate futures generally involved exchange traded contracts to buy or sell treasury bonds and notes in the future at specified prices. Interest rate options represent contracts that allow the holder of the option to receive cash or purchase, sell or enter into a financial instrument at a specified price within a specified period of time. Protective uses foreign currency swaps to reduce its exposure to currency exchange risk on certain stable value contracts denominated in foreign currencies, primarily the European euro and the British pound.
Protective monitors its use of derivatives in connection with its overall asset/liability management programs and procedures. Protective's asset/liability committee is responsible for implementing various hedging strategies that are developed through its analysis of data from financial simulation models and other internal and industry sources. The resulting hedging strategies are then incorporated into Protective's overall interest rate and currency exchange risk management strategies.
All derivatives are recognized on the balance sheet (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 a natural hedging instrument designed to act as an economic hedge against the changes in value or cash flows of a hedged item ("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 statements of income.
Protective formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as fair-value or cash-flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. Protective also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, Protective discontinues hedge accounting prospectively, as discussed below.
At December 31, 2001, contracts with a notional amount of $4,485.1 million were in a $1.6 million net loss position. At December 31, 2000, contracts with a notional amount of $2,424.3 million were in a $13.0 million net loss position. Protective recognized $2.2 million in realized investment gains related to derivative financial instruments in 2000.
2001 2000 ---- ---- Goodwill................... $41,363 $260,773 Accumulated amortization... 5,371 18,942 ------- -------- $35,992 $241,831 ======= ========
Protective periodically evaluates the recoverability of its goodwill by comparing expected future cash flows to the amount of unamortized goodwill. If this evaluation were to indicate the unamortized goodwill is impaired, the goodwill would be reduced to an amount representing the present value of applicable estimated future cash flows. A substantial portion of goodwill was disposed of in connection with the 2001 sale of Protective’s Dental Benefits Division.
2001 2000 ---- ---- Home office building.................................... $ 42,980 $ 41,184 Other, principally furniture and equipment.............. 67,128 66,484 ---------- ---------- 110,108 107,668 Accumulated depreciation................................ 63,771 56,502 ---------- ---------- $ 46,337 $ 51,166 ========== ==========
2001 2000 1999 ---- ---- ---- Balance beginning of year...................................... $109,973 $120,575 $ 90,332 Less reinsurance....................................... 25,830 47,661 20,019 --------- --------- --------- Net balance beginning of year.............................. 84,143 72,914 70,313 --------- --------- --------- Incurred related to: Current year............................................... 383,371 311,633 311,002 Prior year................................................. (1,080) (4,489) (5,574) --------- --------- --------- Total incurred......................................... 382,291 307,144 305,428 --------- --------- --------- Paid related to: Current year............................................... 312,748 241,566 264,298 Prior year................................................. 81,220 60,972 40,197 --------- --------- --------- Total paid............................................. 393,968 302,538 304,495 --------- --------- --------- Other changes: Acquisitions and reserve transfers................................... (6,166) 6,623 1,668 --------- --------- --------- Net balance end of year.................................... 66,300 84,143 72,914 Plus reinsurance....................................... 33,723 25,830 47,661 --------- --------- --------- Balance end of year............................................ $100,023 $109,973 $120,575 ========= ========= =========
Protective uses the asset and liability method of accounting for income taxes. Income tax provisions are generally based on income reported for financial statement purposes. Deferred federal income taxes arise from the recognition of temporary differences between the basis of assets and liabilities determined for financial reporting purposes and the basis determined for income tax purposes. Such temporary differences are principally related to the deferral of policy acquisition costs and the provision for future policy benefits and expenses.
Note A-- SIGNIFICANT ACCOUNTING POLICIES (Continued) The operating results and charges related to the sale of the Dental Division at December 31 are as follows:
2001 2000 1999 ----------------------------------------------------------------------------------------------- Total revenues $346,315 $254,547 $210,405 ----------------------------------------------------------------------------------------------- Income (loss) before income taxes from discontinued operations $ (13,983) $ 17,484 $ 14,824 Income tax (expense) Benefit 3,235 (6,593) (5,188) ---------------------------------------------------------------------------------------------- Income (loss) from discontinued operations $ (10,748) $ 10,891 $ 9,636 ---------------------------------------------------------------------------------------------- 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) ----------------------------------------------------------------------------------------------
Remaining assets and liabilities at December 31, 2001 related to the business sold to Fortis, Inc. consist of reinsurance receivables and policy liabilities and accruals of approximately $51.2 million. Assets and liabilities related to the other discontinued lines of business of approximately $11.1 million and $14.3 million, respectively, remain at December 31, 2001.
NET INCOME SHARE OWNER'S EQUITY ----------------------------------------- --------------------------------------- 2001 2000 1999 2001 2000 1999 ---- ---- ---- ---- ---- ---- In conformity with statutory reporting practices:(1).............................. $163,181 $ 66,694 $ 75,114 $775,138 $ 628,274 $ 567,634 Additions (deductions) by adjustment: Deferred policy acquisition costs, net of amortization......................... 163,243 157,617 120,644 1,532,683 1,189,380 1,011,524 Deferred income tax.................... 47,964 (52,580) (25,675) (74,083) (72,065) 32,335 Asset Valuation Reserve................ 108,062 103,853 41,104 Interest Maintenance Reserve........... (10,444) (3,540) (226) 16,959 9,715 19,328 Nonadmitted items...................... 139,500 97,447 51,350 Other timing and valuation adjustments. (33,456) (43,757) 72,527 (334,198) (204,985) (467,130) Discontinued operations................ (193,688) Noninsurance affiliates................ 19,022 21,276 20,698 Consolidation elimination.............. (49,164) (21,675) (134,824) (280,728) (221,204) (259,602) In conformity with generally accepted --------- --------- ---------- ----------- ----------- ---------- accounting principles...................... $106,658 $124,035 $ 128,258 $1,883,333 $1,530,415 $ 996,543 ========= ========= ========== =========== =========== ========== (1) Consolidated
As of December 31, 2001, Protective and its insurance subsidiaries had on deposit with regulatory authorities, fixed maturity and short-term investments with a market value of approximately $81.9 million.
2001 2000 1999 ---- ---- ---- Fixed maturities.................................... $609,578 $529,990 $462,295 Equity securities................................... 2,247 2,532 775 Mortgage loans...................................... 208,830 177,917 172,027 Investment real estate.............................. 2,094 2,027 1,949 Policy loans........................................ 31,763 14,977 15,994 Other, principally short-term investments........... 36,695 12,532 19,504 --------- ---------- ---------- 891,207 739,975 672,544 Investment expenses................................. 52,104 47,894 54,715 --------- ---------- ---------- $839,103 $692,081 $617,829 ========= ========== ==========
2001 2000 1999 ---- ---- ---- Fixed maturities.................................... $ (4,693) $ (14,787) $ 8,327 Equity securities................................... 2,462 1,685 (3,371) Mortgage loans and other investments................ (3,892) (3,654) (3,621) --------- ---------- --------- $ (6,123) $ (16,756) $ 1,335 ========= ========== =========
In 2001, gross gains on the sale of investments available for sale (fixed maturities, equity securities and short-term investments) were $62.5 million and gross losses were $68.1 million. In 2000, gross gains were $8.7 million and gross losses were $28.4 million. In 1999, gross gains were $44.1 million and gross losses were $32.3 million. During 2001, Protective recorded other than temporary impairments in its investments of $12.6 million.
Realized investment gains (losses) for derivative financial instruments for the years ended December 31 are summarized as follows:
Note C - INVESTMENT OPERATIONS (Continued) The amortized cost and estimated market values of Protective's investments classified as available for sale at December 31 are as follows:
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUES 2000 ----------- ------------ ----------- --------- ---- Fixed maturities: Bonds: Mortgage-backed securities........... $2,915,813 $ 49,372 $33,173 $2,932,012 United States Government and authorities........................ 95,567 2,662 0 98,229 States, municipalities, and political subdivision.............. 88,222 3,408 0 91,630 Public utilities..................... 631,698 7,803 5,591 633,910 Convertibles and bonds with warrants........................... 69,013 11,277 12,145 68,145 All other corporate bonds............ 3,662,586 49,536 146,732 3,565,390 Redeemable preferred stocks............... 801 0 7 794 ----------- ---------- --------- ----------- 7,463,700 124,058 197,648 7,390,110 Equity securities......................... 44,450 2,761 5,419 41,792 Short-term investments.................... 172,699 0 0 172,699 ----------- ---------- --------- ----------- $7,680,849 $126,819 $203,067 $7,604,601 =========== ========== ========= ===========
The amortized cost and estimated market values of fixed maturities at December 31, by expected maturity, are shown as follows. Expected maturities are derived from rates of prepayment that may differ from actual rates of prepayment.
ESTIMATED AMORTIZED MARKET COST VALUES 2001 ------------ ------------ ---- Due in one year or less.......................... $ 896,159 $ 899,666 Due after one year through five years............ 3,253,264 3,318,537 Due after five years through ten years........... 2,199,562 2,228,012 Due after ten years 3,370,072 3,365,876 ----------- ----------- $9,719,057 $9,812,091 =========== ===========
Note C - INVESTMENT OPERATIONS (Continued) At December 31, 2001 and 2000, Protective had bonds which were rated less than investment grade of $421.3 million and $226.5 million, respectively, having an amortized cost of $499.9 million and $306.0 million, respectively. At December 31, 2001, approximately $63.3 million of the bonds rated less than investment grade were securities issued in company-sponsored commercial mortgage loan securitizations. Approximately $1,762.2 million of bonds are not publicly traded.
Many of the mortgage loans have call provisions after 3 to 10 years. Assuming the loans are called at their next call dates, approximately $153.4 million would become due in 2002, $560.4 million in 2003 to 2006, and $392.5 million in 2007 to 2011, and $46.7 million thereafter.
Certain investments with a carrying value of $62.5 million were non-income producing for the twelve months ended December 31, 2001.
2001 2000 1999 ---- ---- ---- Statutory federal income tax rate applied to pretax income.................. 35.0% 35.0% 35.0% Dividends received deduction and tax-exempt interest........................ (1.7) (0.6) (0.1) Low-income housing credit................................................... (0.5) (0.4) (0.5) Other....................................................................... (0.1) 0.0 0.4 State income taxes.......................................................... 0.2 1.2 1.6 ----- ----- ----- Effective income tax rate................................................... 32.9% 35.2% 36.4% ===== ===== =====
Note D - FEDERAL INCOME TAXES - (Continued) The provision for federal income tax differs from amounts currently payable due to certain items reported for financial statement purposes in periods which differ from those in which they are reported for income tax purposes.
Protective’s income tax returns are included in the consolidated income tax returns of PLC. The allocation of income tax liabilities among affiliates is based upon separate income tax return calculations.
Note E-- DEBT Under revolving line of credit arrangements with several banks, PLC can borrow up to $200 million on an unsecured basis. No compensating balances are required to maintain the line of credit. These lines of credit arrangements contain, 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 40% of its total capital. At December 31, 2001, PLC had no borrowings outstanding under these credit arrangements.
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.
Interest expense on debt totaled $1.8 million, $3.8 million, and $5.1 million in 2001, 2000 and 1999, respectively.
Note F-- RECENT ACQUISITIONS In September 1999, Protective recaptured a block of credit life and disability policies which it had previously ceded.
Note G - COMMITMENTS AND CONTINGENT LIABILITIES Protective leases administrative and marketing office space in approximately 25 cities including Birmingham, with most leases being for periods of three to five years. The aggregate annual rent is approximately $8.5 million.
Protective has financed the construction of a third building contiguous to its existing home office complex under an operating lease arrangement. Approximately $38 million of construction costs had been incurred at December 31, 2001. Protective has an option to purchase the building from the lessor at the end of the lease term.
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, relationships with agents or persons with whom the insurer does business, 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 and non-economic compensatory damages. In some states, juries, judges and arbitrators have substantial discretion in awarding punitive and non-economic compensatory damages which creates the potential for unpredictable material adverse judgments or awards in any given lawsuit or arbitration. Arbitration awards are subject to very little appellate review. In addition, in some class action and other lawsuits, companies have made material settlement payments. Protective, 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 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, 2001, approximately $1,053.6 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 the form of dividends, loans, or advances. In addition, Protective and its subsidiaries are subject to various state statutory and regulatory restrictions on their ability to pay dividends 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 2002 is estimated to be $99.0 million.
Note I-- PREFERRED STOCK PLC owns all of the 2,000 shares of preferred stock issued by Protective's subsidiary, Protective Life and Annuity Insurance Company (PL&A). The stock pays, when and if declared, noncumulative participating dividends to the extent PL&A's statutory earnings for the immediately preceding fiscal year exceeded $1.0 million. In 2001, PL&A paid a $1.0 million preferred dividend to PLC. PL&A paid no preferred dividends during 2000 or 1999.
Protective leases furnished office space and computers to affiliates. Lease revenues were $4.0 million in 2001, $4.0 million in 2000, and $3.7 million in 1999. Protective purchases data processing, legal, investment and management services from affiliates. The costs of such services were $82.6 million, $76.7 million, and $69.2 million in 2001, 2000, and 1999, respectively. Commissions paid to affiliated marketing organizations of $10.0 million, $12.0 million, and $11.4 million in 2001, 2000, and 1999, respectively, were included in deferred policy acquisition costs.
In December 2001, Protective sold substantially all of its Dental Division and discontinued other Dental related operations. Additionally, other adjustments were made to combine its life insurance marketing operations into a single segment, and to reclassify certain smaller businesses. Prior period segment results have been restated to reflect these changes.
SPECIALTY RETIREMENT SAVINGS AND INSURANCE PRODUCTS INVESTMENT PRODUCTS ---------------------------------------------------------------------------------------------------------- STABLE VALUE CREDIT CORPORATE TOTAL CONTRACTS ANNUITIES PRODUCTS AND OTHER ADJUSTMENTS (1) CONSOLIDATED ----------------------------------------------------------------------------------------------------------
- $ 28,145 $ 524,281 $ 51,072 - $ 1,389,819 - (274,220) (14,038) - (771,151) - ---------------------------------------------------------------------------------------------------------- - 28,145 250,061 37,034 - 618,668 $ 261,079 167,809 48,617 (4,803) - 839,103 7,218 1,139 - - $ (16,198) (7,841) - 3,441 31,907 1,751 - 38,578 ---------------------------------------------------------------------------------------------------------- 268,297 200,534 330,585 33,982 (16,198) 1,488,508 ---------------------------------------------------------------------------------------------------------- 222,306 137,204 154,893 28,806 - 972,624 1,662 24,021 60,508 1,795 - 149,885 3,961 24,073 79,453 25,827 - 152,041 ---------------------------------------------------------------------------------------------------------- 227,929 185,298 294,854 56,428 - 1,274,550 ---------------------------------------------------------------------------------------------------------- 40,368 15,236 35,731 (22,446) (16,198) 213,958 70,457 70,457 (28,502) (28,502) (8,341) (8,341) ---------------------------------------------------------------------------------------------------------- $ 106,658 ----------------------------------------------------------------------------------------------------------
$3,872,637 $4,501,667 $1,050,546 $955,984 $109,881 $18,013,828 6,374 128,488 177,874 8,650 1,568,675 ---------------------------------------------------------------------------------------------------------- $3,879,011 $4,630,155 $1,228,420 $964,634 $109,881 $19,582,503 ----------------------------------------------------------------------------------------------------------
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 86% 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 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.
2001 2000 1999 ---- ---- ---- Service cost............................... $ 3,739 $ 3,338 $ 3,270 Interest cost.............................. 3,531 3,195 2,779 Expected return on plan assets............. (3,669) (3,049) (2,348) Amortization of prior service cost......... 176 176 115 Amortization of transition asset........... (17) (17) Amortization of losses..................... 141 Recognized net actuarial loss.............. 494 Cost of divestiture........................ 186 ------- ------- ------- Net pension cost........................... $ 4,104 $ 3,643 $ 4,293 ======= ======= =======
Protective's share of the net pension cost was approximately $5.4 million, $4.1 million, and $3.6 million, in 2001, 2000, and 1999, respectively.
2001 2000 1999 ---- ---- ---- Weighted average discount rate................... 7.25% 7.50% 8.00% Rates of increase in compensation level.......... 5.00 5.25 5.75 Expected long-term rate of return on assets...... 8.50 8.50 8.50
At December 31, 2001 approximately $7.2 million of the assets of the pension plan were in a group annuity contract with Protective and therefore are included in the general assets of Protective. Approximately $36.8 million of the assets of the pension plan are invested in a collective trust managed by Northern Trust Corporation.
Note L-- EMPLOYEE BENEFIT PLANS (Continued) Prior to July 1999, upon retirement, the amount of pension plan assets vested in the retiree were used to purchase a single premium annuity from Protective in the retiree’s name. Therefore, amounts presented above as plan assets exclude assets relating to such retirees. Beginning July 1999, retiree obligations are being fulfilled from pension plan assets.
2001 2000 1999 ---- ---- ---- Service cost............................................. $ 686 $ 736 $ 695 Interest cost............................................ 1,121 1,067 887 Amortization of prior service cost....................... 19 19 113 Amortization of transition asset......................... 37 37 37 Recognized net actuarial loss............................ 233 194 265 Cost of divestiture and special termination benefits..... 1,807 ------ ------ ------ Net pension cost....................................... $3,903 $2,053 $1,997 ====== ====== ======
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, 2001 and 2000, the liability for such benefits was approximately $1.2 million. The expense recorded by PLC was $0.1 million in 2001, 2000 and 1999. PLC's obligation is not materially affected by a 1% change in the healthcare cost trend assumptions used in the calculation of the obligation.
Life insurance benefits for retirees are provided through the purchase of life insurance policies upon retirement from $10,000 up to a maximum of $75,000. This plan is partially funded at a maximum of $50,000 face amount of insurance.
PLC sponsors a deferred compensation plan for certain directors, officers, agents, and others. Compensation deferred is credited to the participants in cash, PLC Common Stock, or as a combination thereof.
The criteria for payment of performance awards is based upon a comparison of PLC's average return on average equity and total rate of return over a four year award period (earlier upon the death, disability, or retirement of the executive, or in certain circumstances, of a change in control of PLC) to that of a comparison group of publicly held life and multiline insurance companies. If PLC's results are below the median of the comparison group, no portion of the award is earned. If PLC's results are at or above the 90th percentile, the award maximum is earned.
The expense recorded by PLC for its stock-based compensation plans was $5.6 million, $4.1 million, and $4.0 million in 2001, 2000, and 1999, respectively.
Protective believes the fair value of its short-term investments and notes payable to banks approximates book value due to either being short-term or having a variable rate of interest.
COL. A COL. B COL. C COL. D COL. E COL. F COL. G COL. H COL. I COL. J ------ ------ ------ ------ ------ ------ ------- ------ ------ ------ GIC, ANNUITY AMORTIZATION DEFERRED DEPOSITS AND OF DEFERRED POLICY FUTURE POLICY OTHER NET PREMIUMS NET BENEFITS AND POLICY OTHER ACQUISITION BENEFITS AND UNEARNED POLICYHOLDERS' AND POLICY INVESTMENT SETTLEMENT ACQUISITIONS OPERATING SEGMENT COSTS CLAIMS PREMIUMS FUNDS FEES INCOME(1) EXPENSES COSTS EXPENSES(1) ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ Year Ended December 31, 2001: Life Marketing $ 829,021 $3,326,841 $ 303 $ 86,937 $120,996 $178,866 $190,538 $ 41,399 $ (22,957) Acquisitions 418,268 3,046,401 434 876,221 182,432 187,535 238,877 20,500 41,684 Stable Value Contracts 6,374 - - 3,872,637 0 261,079 222,306 1,662 3,961 Annuities 128,488 281,074 - 2,232,779 28,145 167,809 137,204 24,021 24,073 Credit Products 141,882 211,713 898,340 3,856 250,061 48,617 154,893 57,681 82,280 Corporate and Other 8,650 16,572 2,242 247 37,034 (4,803) 28,806 1,795 25,827 Adjustments(2) 0 92,084 334 24,195 0 0 0 0 0 ---------- ---------- -------- ---------- -------- -------- -------- -------- -------- TOTAL $1,532,683 $6,974,685 $901,653 $7,096,872 $618,668 $839,103 $972,624 $147,058 $154,868 ========== ========== ======== ========== ======== ======== ======== ======== ======== Year Ended December 31, 2000: Life Marketing $ 710,468 $2,753,191 $ 334 $ 102,305 $ 99,813 $152,317 $149,430 $ 48,771 $ (23,255) Acquisitions 222,620 1,364,830 484 238,465 102,997 116,940 125,151 17,081 24,077 Stable Value Contracts 2,144 162,236 - 3,177,863 - 243,133 207,143 900 3,882 Annuities 120,219 306,021 - 1,633,203 30,127 132,204 109,607 24,156 18,203 Credit Products 112,135 293,253 929,943 3,901 220,466 46,464 135,494 50,132 74,830 Corporate and Other 10,006 40,588 2,242 129 36,432 1,024 33,953 2,140 26,196 Adjustments(2) 11,788 113,278 2,602 64,227 0 0 0 0 0 ---------- ---------- -------- ---------- -------- -------- -------- -------- -------- TOTAL $1,189,380 $5,033,397 $935,605 $5,220,093 $489,835 $692,082 $760,778 $143,180 $123,933 ========== ========== ======== ========== ======== ======== ======== ======== ======== Year Ended December 31, 1999: Life Marketing $115,713 $138,044 $147,631 $ 29,481 $ 18,201 Acquisitions 114,866 129,806 129,581 19,444 31,178 Stable Value Contracts - 210,208 175,290 744 4,709 Annuities 24,248 106,599 88,642 19,820 14,617 Credit Products 107,963 24,121 55,899 24,718 44,728 Corporate and Other 35,934 9,051 32,613 2,482 17,521 Adjustments 0 0 0 0 0 -------- -------- -------- --------- -------- TOTAL $398,724 $617,829 $629,656 $ 96,689 $130,954 ======== ======== ======== ========= ======== (1) 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. (2) Asset adjustments represent the inclusion of assets related to discontinued operations.
Year Ended December 31, 1999: Life insurance in force........................... $112,726,959 $ 92,566,755 $17,089,627 $37,249,831 45.9% ============ ============ =========== =========== Premiums and policy fees: Life insurance.................................... $ 530,728 $ 368,139 $ 130,368 $ 292,957 44.5% Accident and health insurance..................... 153,812 93,657 11,893 72,048 16.5% Property and liability insurance.................. 34,109 501 111 33,719 0.3% ------------ ------------ ----------- ----------- TOTAL......................................... $ 718,649 $ 462,297 $ 142,372 $ 398,724 ============ ============ =========== ===========