The Company’s Home Office is located at 2801 Highway 280 South, Birmingham, Alabama. This campus includes the original 142,000 square-foot building which was completed in 1976, a second contiguous 220,000 square-foot building which was completed in 1985, and a third contiguous 315,000 square-foot building that was completed in January 2003. In addition, parking is provided for approximately 2,760 vehicles. The Company owns each of the properties except for the third building which is currently leased.
Year Ended December 31 _________________________________________________________________________ 2004 2003 2002 2001 2000 _________________________________________________________________________________________________________________________ (dollars in thousands, except per share amounts) INCOME STATEMENT DATA(3) Premiums and policy fees $ 1,841,296 $1,670,312 $ 1,561,717 $1,389,820 $1,175,898 Reinsurance ceded (1,142,644) (934,435) (751,396) (771,151) (686,108) _________________________________________________________________________________________________________________________ Net of reinsurance ceded 698,652 735,877 810,321 618,669 489,790 Net investment income 1,084,217 1,030,752 1,022,953 880,141 730,149 Realized investment gains (losses) Derivative financial instruments 19,591 12,550 28,308 (1,114) 9,013 All other investments 28,305 58,064 910 (8,740) (16,056) Other income 157,810 120,282 100,196 120,647 151,833 _________________________________________________________________________________________________________________________ Total revenues 1,988,575 1,957,525 1,962,688 1,609,603 1,364,729 Benefits and expenses 1,603,374 1,632,113 1,697,645 1,400,007 1,153,054 Income tax expense 134,820 108,362 87,688 68,538 74,321 Income (loss) from discontinued operations(1) (30,522) 16,122 Change in accounting principle(2) (15,801) (7,593) _________________________________________________________________________________________________________________________ Net income $ 234,580 $ 217,050 $ 177,355 $ 102,943 $ 153,476 _________________________________________________________________________________________________________________________
The Life Marketing segment achieved solid growth in earnings, despite the expected decline in overall sales for the year and the negative impact from adopting Statement of Position (SOP) 03-1 “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts”. SOP 03-1 affects the timing of the recognition of mortality benefits for universal life products and not the overall profits from these products. The segment continued to focus on strengthening its relationships with high quality distributors of life insurance products. Sales made through the stockbroker and independent agent channels increased 27% and 11%, respectively. Sales from the brokerage distribution channel declined by 13.7%, as expected. Results for 2004 benefited from improved mortality, which was approximately $4 million better than 2003 levels.
Earnings in the Annuities segment increased over 23% in 2004, as a result of significantly higher sales of fixed annuities and improvement in the equity markets. Growth in equity markets translated into improved earnings as fee income based on variable account values increased and claims expense for variable annuity guaranteed minimum death benefits declined. The segment actively managed the rates offered on its fixed annuity products to minimize the effects of lower interest rates on earnings.
The Company also establishes liabilities for guaranteed minimum death benefits (GMDB) on its variable annuity products. The methods used to estimate the liabilities employ assumptions about mortality and the performance of equity markets. The Company assumes mortality of 60% of the National Association of Insurance Commissioners 1994 Variable Annuity GMDB Mortality Table plus a margin for reinsurance costs to reflect improvements in mortality since the table was derived and other factors. Future declines in the equity market would increase the Company’s GMDB liability. Differences between the actual experience and the assumptions used result in variances in profit and could result in losses. The Company’s GMDB at December 31, 2004 are subject to a dollar-for-dollar reduction upon withdrawal of related annuity deposits on contracts issued prior to January 1, 2003. At December 31, 2004, the total GMDB liability held by the Company was $5.0 million.
Determining whether a decline in the current fair value of invested assets is an other-than-temporary decline in value can involve a variety of assumptions and estimates, particularly for investments that are not actively traded in established markets. For example, assessing the value of certain investments requires the Company to perform an analysis of expected future cash flows or rates of prepayments. Other investments, such as collateralized mortgage or bond obligations, represent selected tranches of a structured transaction, supported overall by underlying investments in a wide variety of issuers. The Company’s specific accounting policies related to its invested assets are discussed in Notes 1 and 2 to the Consolidated Financial Statements. At December 31, 2004, the Company held $15.1 billion of available-for-sale investments, including $2.2 billion in investments with a gross unrealized loss of $51.8 million.
The Company utilizes derivative transactions primarily in order to reduce its exposure to interest rate risk, inflation risk, and currency exchange risk. Assessing the effectiveness of these hedging programs and evaluating the carrying values of the related derivatives often involve a variety of assumptions and estimates. The Company employs a variety of methods for determining the fair value of its derivative instruments. The fair values of swaps, interest rate swaptions, and options are based upon industry standard models which calculate the present-value of the projected cash flows of the derivatives using current and implied future market conditions. At December 31, 2004, the fair value of derivatives reported on the Company’s balance sheet in “other long-term investments” and “other liabilities” was $219.7 million and $27.4 million, respectively.
The following table sets forth a summary of results and reconciles segment operating income (loss) to consolidated net income:
Life Marketing $ 165,897 $159,157 $125,550 4.2% 26.8% Acquisitions 87,300 95,150 95,097 (8.3) 0.1 Annuities 16,467 13,373 15,694 23.1 (14.8) Stable Value Products 53,159 38,911 42,272 36.6 (8.0) Asset Protection 19,079 20,193 (14,847) (5.5) n/a Corporate and Other 21,560 (31,952) (2,888) n/a n/a ________________________________ 363,462 294,832 260,878 23.3 13.0
Realized investment gains (losses) - investments(1) 21,370 39,117 (1,071) Realized investment gains (losses) - derivatives(2) 369 (8,537) 5,236 Income tax expense (134,820) (108,362) (87,688) ________________________________
Net income before cumulative effect of change in accounting principle 250,381 217,050 177,355 15.4 22.4 Cumulative effect of change in accounting principle,net of income tax (15,801) ________________________________
(2)Realized investment gains (losses) - derivatives 19,591 12,550 28,308 Settlements on certain interest rate swaps (19,222) (21,087) (23,072) ________________________________ 369 (8,537) 5,236
Net income for 2003 reflects growth in overall segment operating income as well as significantly higher realized investment gains. Excluding the $12.3 million of reinsurance recoveries during 2003 and $7.2 million of recoveries in 2002 (see Note 12 to the Consolidated Financial Statements), Life Marketing’s operating income increased 24.1% in 2003, reflecting continued growth in life insurance in-force through new sales as well as favorable expense capitalization levels driven by the strong sales in 2003. Interest spread compression drove results in both the Stable Value Products and Annuities segments, as the impact of prepayments in the mortgage-backed security portfolio more than offset crediting rate reductions. Operating income in the Asset Protection segment increased in 2003 primarily due to the $25.6 million reserve strengthening taken during 2002 as well as a $6.9 million gain recognized during 2003 for the sale of an inactive charter. Corporate and Other earnings reflect a $28.4 million reserve strengthening for the residual value line in 2003.
BENEFITS AND EXPENSES Benefits and settlement expenses 274,584 253,785 228,224 8.2 11.2 Amortization of deferred policy acquisition costs 58,970 66,078 117,836 (10.8) (43.9) Other operating expenses 42,119 10,832 13,948 288.8 (22.3) ______________________________________ Total benefits and expenses 375,673 330,695 360,008 13.6 (8.1)
INCOME BEFORE INCOME TAX $ 165,897 $159,157 $125,550 4.2 26.8 ______________________________________
CHANGE _______________________ 2004 2003 2002 2004 2003 _____________________________________________ _______________________ Sales By Product Traditional $171,883 $205,335 $146,280 (16.3)% 40.4% Universal life 84,569 79,752 71,157 6.0 12.1 Variable universal life 5,236 4,558 6,700 14.9 (32.0) _____________________________________________ $261,688 $289,645 $224,137 (9.7) 29.2 _____________________________________________
Sales By Distribution Channel Brokerage general agents $161,174 $186,711 $131,804 (13.7) 41.7 Independent agents 55,926 50,207 39,866 11.4 25.9 Stockbrokers/banks 31,711 24,933 18,160 27.2 37.3 Direct response 1,097 5,830 11,503 (81.2) (49.3) BOLI 11,780 21,964 22,804 (46.4) (3.7) _____________________________________________ $261,688 $289,645 $224,137 (9.7) 29.2 _____________________________________________
Interest Spread - Universal Life(2) Net investment income yield 6.37% 6.89% 7.42% Interest credited to policyholders 4.88 5.45 5.86 _____________________________________________ Interest spread 1.49% 1.44% 1.56% _____________________________________________
(1) Amounts are not adjusted for reinsurance ceded. (2) Interest spread on average general account values. (3) Represents a favorable (unfavorable) variance as compared to pricing assumptions.
Gross premiums and policy fees grew by 19.9% in 2004 due to the growth in life insurance in-force achieved over the last several quarters, while amounts ceded increased 21.0% (excluding reinsurance recoveries in 2003) as the segment continued to reinsure a significant amount of its new business. Net investment income increased approximately 3% over 2003 reflecting the growth of the segment's assets, offset by lower investment yields. The increase in other income for the year is due primarily to additional income from the segment's direct response and broker-dealer subsidiaries. Due to the nature of these businesses, a significant portion of this additional income is offset by increases in other operating expenses.
Benefits and settlement expenses were 8.2% higher in 2004 due to growth in life insurance in-force and higher benefit costs caused by the implementation of SOP 03-1, offset by lower crediting rates on UL products and normal fluctuations in mortality experience. Mortality for the year was $4.4 million more favorable versus 2003. Amortization of DAC (excluding the effect of reinsurance recoveries in 2003) was 1.7% lower in 2004. The decrease in amortization is primarily due to the segment's adoption of SOP 03-1. Amortization on UL products was reduced by $4.7 million in 2004 due to the application of SOP 03-1 and the resulting change in pattern of gross profits on these products. In addition, a $2.0 million reduction to the previously recorded reinsurance receivable reduced amortization by $1.0 million.
Gross premiums and policy fees increased 27.2% in 2003 due to continued growth through new sales, while amounts ceded increased 29.3% (excluding reinsurance recoveries in 2003 and 2002) as the segment continued to reinsure a significant amount of its new business. Net investment income increased approximately 11% over 2002 reflecting the significant growth of the segment's assets, offset by the 53 basis point drop in investment yields.
CHANGE ______________________ 2004 2003 2002 2004 2003 ______________________________________ ______________________ Insurance Companies: First year commissions $288,990 $ 299,902 $ 220,375 (3.6)% 36.1% Renewal commissions 32,985 30,258 25,702 9.0 17.7 First year ceding allowances (167,196) (188,194) (132,382) (11.2) 42.2 Renewal ceding allowances (159,384) (125,960) (98,376) 26.5 28.0 General & administrative 187,895 182,163 159,872 3.1 13.9 Taxes, licenses and fees 22,851 20,383 18,018 12.1 13.1 ______________________________________ Other operating expenses incurred 206,141 218,552 193,209 (5.7) 13.1
Less commissions, allowances & expenses capitalized (256,338) (268,933) (234,710) (4.7) 14.6 ______________________________________
Other operating expenses for the insurance companies were relatively unchanged versus 2003, as the decrease in expenses incurred was offset by a decline in expense capitalization levels driven by the drop in sales. General and administrative expenses increased a modest 3.1% versus 2003, as lower underwriting costs achieved through rate reductions from certain vendors in the third quarter of 2003 partially offset by normal expense increases. Amounts capitalized as DAC generally include first year commissions and allowances, and other deferrable acquisition expenses. The change in these amounts generally reflects the trend in sales for the year. Other operating expenses for the marketing companies increased 50.8% as compared to 2003 primarily as a result of higher commissions and other expenses in the segment’s direct response and broker-dealer subsidiaries, resulting from higher revenue and the continuing transition to a multi-carrier strategy in the direct response business.
The Acquisitions segment focuses on acquiring, converting, and servicing policies acquired from other companies. The segment’s primary focus is on life insurance policies sold to individuals. Segment results were as follows:
CHANGE _____________________ 2004 2003 2002 2004 2003 ________________________________________ _____________________ REVENUES Gross premiums and policy fees $276,394 $289,906 $300,818 (4.7)% (3.6)% Reinsurance ceded (72,062) (75,994) (76,333) (5.2) (0.4) ________________________________________ Net premiums and policy fees 204,332 213,912 224,485 (4.5) (4.7) Net investment income 232,499 246,143 252,147 (5.5) (2.4) Other income 2,272 2,640 1,636 (13.9) 61.4 ________________________________________ Total operating revenues 439,103 462,695 478,268 (5.1) (3.3)
CHANGE _____________________ 2004 2003 2002 2004 2003 _________________________________________________________________ Average Life Insurance In-Force(1) Traditional $11,694,948 $13,656,841 $14,774,431 (14.4)% (7.6)% Universal life 18,077,468 19,945,426 20,156,647 (9.4) (1.0) ________________________________________
Average Account Values Universal life $1,723,647 $1,747,831 $ 1,744,775 (1.4) 0.2 Fixed annuity(2) 218,087 226,567 225,647 (3.7) 0.4 Variable annuity 89,327 104,129 149,130 (14.2) (30.2) ________________________________________ $2,031,061 $2,078,527 $ 2,119,552 (2.3) (1.9) ________________________________________
(1) Amounts are not adjusted for reinsurance ceded. (2) Includes general account balances held within variable annuity products and is net of reinsurance ceded. (3) Represents a favorable (unfavorable) variance as compared to pricing assumptions.
Operating income was 8.3% lower in 2004 as the earnings from previously acquired blocks continued to decline as the result of lapses, deaths, and other terminations of coverage. In 2003, income was relatively flat as a $9.0 million decline in earnings from previously acquired blocks was offset by a $9.1 million increase in earnings from the June 2002 Conseco transaction.
The Annuities segment manufactures, sells, and supports fixed and variable annuity products. These products are primarily sold through stockbrokers, but are also sold through financial institutions and the Life Marketing segment’s sales force. Segment results were as follows:
BENEFITS AND EXPENSES Benefits and settlement expenses 183,271 197,955 186,107 (7.4) 6.4 Amortization of deferred policy acquisition costs 25,336 19,249 22,688 31.6 (15.2) Other operating expenses 23,159 28,765 30,660 (19.5) (6.2) _________________________________________ Total benefits and expenses 231,766 245,969 239,455 (5.8) 2.7
Realized investment gains (losses) 9,873 22,733 2,277 Related amortization of DAC (6,935) (18,947) (1,981) _________________________________________
INCOME BEFORE INCOME TAX $ 19,405 $ 17,159 $ 15,990 13.1 7.3 _________________________________________
Average Account Values Fixed annuity(1) $3,228,976 $3,302,511 $3,031,896 (2.2) 8.9 Variable annuity 2,022,101 1,595,173 1,526,035 26.8 4.5 _________________________________________ $5,251,077 $4,897,684 $4,557,931 7.2 7.5 _________________________________________
Interest Spread - Fixed Annuities(2) Net investment income yield 6.45% 6.69% 7.15% Interest credited to policyholders 5.61 5.79 5.97 _________________________________________ Interest spread 0.84% 0.90% 1.18% _________________________________________
GMDB - Net amount at risk(3) $182,038 $286,603 $538,583 (36.5)% (46.8)% GMDB - Reserves $4,575 $5,073 $5,581 (9.8) (9.1) S&P 500 Index 1,212 1,112 880 9.0 26.4
(1) Includes general account balances held within variable annuity products. (2) Interest spread on average general account values. (3) Guaranteed death benefit in excess of contract holder account balance.
The decline in average equity market values in 2003 as compared to 2002 resulted in variable annuity account values growing by only 4.5% during 2003. This growth resulted in the modest increase in policy fees during the year. The growth in fixed annuity account values was substantially offset by the 46 basis point decline in yields, resulting in a 1.8% increase in net investment income. Interest spreads on fixed annuities declined 28 basis points in 2003 as lower rates on new investments and the impact of prepayments in the mortgage-backed security portfolio more than offset the effects of crediting rate reductions.
Interest credited in 2003 increased $10.2 million over 2002, as the reductions in crediting rates were more than offset by the 8.9% increase in fixed annuity account values. While the net amount at risk for GMDB declined significantly on a year-end basis, average net amount at risk was relatively flat versus 2002. As a result, GMDB claims were relatively unchanged in 2003. As the level of DAC amortization is largely based on the amount of income (prior to amortization) recognized in a given period, amortization was 15.2% lower than 2002. Other operating expenses decreased $1.9 million, primarily as a result of proactive management of administrative expenses during the year.
BENEFITS AND EXPENSES Benefits and settlement expenses 205,168 186,565 196,576 10.0 (5.1) Amortization of deferred policy acquisition costs 3,480 2,279 2,304 52.7 (1.1) Other operating expenses 6,377 5,349 4,946 19.2 8.1 _________________________________________ Total benefits and expenses 215,025 194,193 203,826 10.7 (4.7)
INCOME BEFORE INCOME TAX $ 66,384 $ 48,667 $ 35,211 36.4 38.2 _________________________________________
The increase in operating income in 2004 was due to the strong growth in average account balances, as well as the widening of spreads. The growth in average account balances was driven by sales of the Company’s registered funding agreement-backed notes program during 2004 and the fourth quarter of 2003. The lower interest rate environment caused both the investment income yield and the interest credited rate to decline from 2003. However, a rebalancing of the segment’s portfolio and replacement of higher rate contracts during 2004 allowed for a widening of interest spreads.
The Asset Protection segment primarily markets extended service contracts and credit life and disability insurance to protect consumers’ investments in automobiles and watercraft. Segment results were as follows:
CHANGE ___________________ 2004 2003 2002 2004 2003 __________________________________________ ___________________ REVENUES Gross premiums and policy fees $ 459,281 $ 441,203 $488,705 4.1% (9.7)% Reinsurance ceded (251,343) (196,434) (202,576) 28.0 (3.0) __________________________________________ Net premiums and policy fees 207,938 244,769 286,129 (15.0) (14.5) Net investment income 30,939 36,652 41,879 (15.6) (12.5) Other income 36,476 42,238 30,765 (13.6) 37.3 __________________________________________ Total operating revenues 275,353 323,659 358,773 (14.9) (9.8)
BENEFITS AND EXPENSES Benefits and settlement expenses 121,007 142,166 204,069 (14.9) (30.3) Amortization of deferred policy acquisition costs 72,273 80,320 75,108 (10.0) 6.9 Other operating expenses 62,994 80,980 94,443 (22.2) (14.3) __________________________________________ Total benefits and expenses 256,274 303,466 373,620 (15.6) (18.8)
Loss Ratios(1) Credit insurance 38.3% 37.3% 36.4% Service contracts 78.4 84.7 103.7 Other products 69.0 89.7 122.1
The decline in net premiums for 2004 was primarily related to a decrease of $33.7 million in the credit insurance lines, due to higher levels of reinsurance. Premiums in the service contract business increased $2.4 million during the year, with the segment's other lines accounting for the remainder of the decline in premiums. The decrease in net investment income was attributable to the overall decline in business resulting in lower levels of invested assets as well as a lower net yield on investments. Excluding the impact of the charter sale gains, other income was relatively flat in 2004.
Benefits and settlement expenses declined in 2004, reflecting the decrease in the segment's net premiums and the overall improvement in loss ratios. Amortization of DAC was lower than 2003 primarily due to the significant decline in the segment's credit business. Other operating expenses decreased due to lower commissions and reductions in other general expenses. General expenses were reduced primarily as a result of the outsourcing of the administration of a portion of the segment's credit insurance business during 2003 and other cost saving initiatives implemented by management during the year.
The Company has an additional segment herein referred to as Corporate and Other. The Corporate and Other segment primarily consists of net investment income and expenses not attributable to the segments above (including net investment income on unallocated capital and interest on all debt). This segment also includes earnings from several non-strategic lines of business (primarily cancer insurance, residual value insurance, surety insurance, and group annuities), various investment-related transactions, and the operations of several small subsidiaries. The surety and residual value insurance lines were moved from the Asset Protection segment to Corporate and Other during 2004, and prior period segment data was restated to reflect the change.
Fixed maturity gains $50,916 $84,556 $ 46,469 $(33,640) $ 38,087 Fixed maturity losses (7,234) (6,270) (10,905) (964) 4,635 Equity gains 3,863 368 1,545 3,495 (1,177) Equity losses (214) (295) (3,230) 81 2,935 Impairments on fixed maturity securities (14,667) (20,530) (27,512) 5,863 6,982 Impairments on equity securities (3,591) (1,800) (2,712) (1,791) 912 Other (768) 2,035 (2,745) (2,803) 4,780 _______________________________________ ________________________ Total realized gains (losses) - investments $28,305 $ 58,064 $ 910 $(29,759) $ 57,154 _______________________________________ ________________________
Realized gains and losses on investments reflect portfolio management activities designed to maintain proper matching of assets and liabilities and to enhance long-term investment portfolio performance. The change in net realized investment gains for 2004 and 2003, excluding impairments, reflects the normal operation of the Company’s asset/liability program within the context of the changing interest rate environment. The reduction in impairments for 2004 and 2003 reflects general improvement in the corporate credit environment. Additional details on the Company’s investment performance and evaluation is provided in the section entitled “Consolidated Investments” included herein.
The Company’s investment portfolio consists primarily of fixed maturity securities (bonds and redeemable preferred stocks) and commercial mortgage loans. The Company generally purchases its investments with the intent to hold to maturity by purchasing investments that match future cash flow needs. However, the Company may sell any of its investments to maintain proper matching of assets and liabilities. Accordingly, the Company has classified $14.1 billion of its fixed maturities and certain other securities as “available for sale.”
The Company’s investments in debt and equity securities are reported at market value, and investments in mortgage loans are reported at amortized cost. At December 31, 2004, the Company’s fixed maturity investments (bonds and redeemable preferred stocks) had a market value of $14.4 billion, which is 5.1% above amortized cost of $13.7 billion. The Company had $3.0 billion in mortgage loans at December 31, 2004. While the Company’s mortgage loans do not have quoted market values, at December 31, 2004, the Company estimates the market value of its mortgage loans to be $3.2 billion (using discounted cash flows from the next call date), which is 5.6% above amortized cost. Most of the Company’s mortgage loans have significant prepayment fees. These assets are invested for terms approximately corresponding to anticipated future benefit payments. Thus, market fluctuations are not expected to adversely affect liquidity.
At December 31, 2003, the Company’s fixed maturity investments had a market value of $13.4 billion, which was 4.8% above amortized cost of $12.7 billion. The Company estimated the market value of its mortgage loans to be $3.0 billion at December 31, 2003, which was 8.2% above amortized cost of $2.7 billion.
The following table shows the reported values of the Company’s invested assets.
December 31 _________________________________________________________________________ 2004 2003 ___________________________________________________________________________________________________________________ (in thousands) Publicly issued bonds $12,519,107 64.6 % $11,377,474 65.3% Privately issued bonds 1,889,905 9.7 1,975,273 11.3 Redeemable preferred stock 3,593 0.0 3,164 0.0 ___________________________________________________________________________________________________________________ Fixed maturities 14,412,605 74.3 13,355,911 76.6 Equity securities 58,941 0.3 46,731 0.3 Mortgage loans 3,005,418 15.5 2,733,722 15.7 Investment real estate 107,246 0.6 18,126 0.1 Policy loans 482,780 2.5 502,748 2.9 Other long-term investments 259,025 1.3 249,494 1.4 Short-term investments 1,059,557 5.5 519,419 3.0 ___________________________________________________________________________________________________________________ Total investments $19,385,572 100.0 % $17,426,151 100.0% ___________________________________________________________________________________________________________________
The Company monitors the overall credit quality of the Company’s portfolio within general guidelines. The following table shows the Company’s available for sale fixed maturities by credit rating at December 31, 2004.
Percent of S&P or Equivalent Designation Market Value Market Value _________________________________________________________________________________________ (in thousands)
Not included in the table above are $398.9 million of investment grade and $11.2 million of less than investment grade fixed maturities classified by the Company as trading securities.
The range of maturity dates for securities in an unrealized loss position at December 31, 2004 varies, with 10.6% maturing in less than 5 years, 23.9% maturing between 5 and 10 years, and 65.5% maturing after 10 years. The following table shows the credit rating of securities in an unrealized loss position at December 31, 2004.
At December 31, 2004, below investment grade securities with a market value of $24.7 million and $11.8 million of unrealized losses were issued in Company-sponsored commercial mortgage loan securitizations, including securities in an unrealized loss position greater than five years with a market value of $24.6 million and $11.8 million of unrealized losses. The Company does not consider these unrealized positions to be other than temporary, because the underlying mortgage loans continue to perform consistently with the Company’s original expectations.
As discussed earlier, the Company’s management considers several factors when determining other than temporary impairments. Although the Company generally intends to hold securities until maturity, the Company may change its position as a result of a change in circumstances. Any such decision is consistent with the Company’s classification of all but a specific portion of its investment portfolio as available for sale. During the year ended December 31, 2004, the Company sold securities in an unrealized loss position with a market value of $503.5 million resulting in a realized loss of $7.4 million. For such securities, the proceeds, realized loss and total time period that the security had been in an unrealized loss position are presented in the table below.
At December 31, 2004, the Company’s capital structure consisted of Medium-Term Notes, Senior Notes, Subordinated Debentures, and share-owners’ equity. The Company also has a $200 million revolving line of credit, under which both Protective Life Corporation and Protective Life Insurance Company may borrow funds at an interest rate of LIBOR plus 0.30%, with balances due July 30, 2009. No compensating balances are required to maintain the line of credit. The line of credit arrangements contain, among other provisions, requirements for maintaining certain financial ratios and restrictions on indebtedness incurred by the Company and its subsidiaries. Additionally, the line of credit arrangements preclude the Company, on a consolidated basis, from incurring debt in excess of 40% of its total capital. At December 31, 2004, the Company was in compliance with all debt covenants.
The Company’s total debt balance increased by $93.2 million in 2004, compared to a total increase of $55.2 million in 2003. Debt issuances of $253.1 million and $250.0 million in 2004 and 2003, respectively, are detailed below.
Debt reductions totaled $159.9 million and $194.8 million, respectively, during 2004 and 2003, as shown below.
Description (scheduled maturity) Amount Interest Rate ______________________________________________________________________________________ Senior Notes (16-year) $ 59,864 7.50% Senior Notes (10-year) 75,000 7.95% Revolving line of credit 25,000 LIBOR + .30% Other, net 32 Various ______________________________________________________________________________________ Senior Notes (2-year) 100,000 LIBOR + .375% Senior Notes (10-year) 49,858 8.00% Senior Notes (15-year) 39,843 8.10% Revolving line of credit 5,000 LIBOR + .30% Other, net 80 Various ______________________________________________________________________________________
A life insurance company’s statutory capital is computed according to rules prescribed by the National Association of Insurance Commissioners (NAIC), as modified by the insurance company’s state of domicile. Statutory accounting rules are different from accounting principles generally accepted in the United States of America and are intended to reflect a more conservative view by, for example, requiring immediate expensing of policy acquisition costs. The NAIC’s risk-based capital requirements require insurance companies to calculate and report information under a risk-based capital formula. The achievement of long-term growth will require growth in the statutory capital of the Company’s insurance subsidiaries. The subsidiaries may secure additional statutory capital through various sources, such as retained statutory earnings or equity contributions by Protective Life Corporation.
Standard & Poor's A.M. Best Fitch Moody's ______________________________________________________________ Protective Life Insurance Company AA A+ AA- Aa3 West Coast Life Insurance Company AA A+ AA- Aa3 Empire General Life Assurance Corporation AA A+ AA- N/A Protective Life and Annuity Insurance Company AA A+ AA- N/A Lyndon Property Insurance Company N/A A- N/A N/A
Derivative instruments that are currently used as part of the Company’s interest rate risk management strategy include interest rate swaps, interest rate futures, and interest rate options. The Company’s inflation risk management strategy involves the use of swaps that require the Company to pay a fixed rate and receive a floating rate that is based on changes in the Consumer Price Index (CPI). The Company also uses foreign currency swaps to manage its exposure to changes in the value of foreign currency denominated stable value contracts.
Percent At December 31 Amount Change _______________________________________________________________ (in millions) Fixed maturities $12,608.0 (5.6)% Mortgage loans 2,816.1 (4.8) Fixed maturities $13,576.7 (5.8)% Mortgage loans 3,021.3 (4.8) _______________________________________________________________
At December 31, 2004, the Company had outstanding mortgage loan commitments of $793.9 million with an estimated fair value of $805.1 million (using discounted cash flows from the first call date). At December 31, 2003, the Company had outstanding commitments of $578.5 million with an estimated fair value of $595.7 million. The following table sets forth the estimated fair value of the Company’s mortgage loan commitments resulting from a hypothetical immediate 1 percentage point increase in interest rate levels prevailing at December 31, and the percent change in fair value the following estimated fair values would represent.
Percent At December 31 Amount Change ____________________________________________________________ (in millions) 2003 $566.1 (5.0)% 2004 $764.8 (5.0)% ____________________________________________________________
The estimated fair values were derived from the durations of the Company’s outstanding mortgage loan commitments. While these estimated fair values generally provide an indication of how sensitive the fair value of the Company’s outstanding commitments are to changes in interest rates, they do not represent management’s view of future market changes, and actual market results may differ from these estimates.
The following table sets forth the December 31 notional amount and fair value of the Company’s interest rate risk related derivative financial instruments, and the estimated fair value resulting from a hypothetical immediate plus and minus one percentage point change in interest rates from levels prevailing at December 31.
Fair Value Resulting From an Immediate +/-10% Notional Fair Value at Change in Foreign Currency Amount December 31 Exchange Rates +10% -10% _______________________________________________________________________________________________ (in millions) Stable Value Contracts $416.1 $ (151.8) $ (208.6) $ (95.0) Foreign Currency Swap 416.1 154.4 180.6 128.2 _______________________________________________________________________________________________ $832.2 $ 2.6 $ (28.0) $ 33.2 _______________________________________________________________________________________________ Stable Value Contracts $389.5 $ (180.2) $ (237.1) $ (123.2) Foreign Currency Swap 389.5 196.0 215.3 176.6 _______________________________________________________________________________________________ $779.0 $ 15.8 $ (21.8) $ 53.4 _______________________________________________________________________________________________
The Company’s runoff residual value line of business exposes the Company to the risk of changes in used vehicle prices. Reserves for this business are established based upon assumptions regarding the level of used vehicle prices. The following table sets forth the estimated changes in the Company’s reserves resulting from hypothetical immediate decreases in the assumed levels of used vehicle prices from those used to value the reserves established at December 31, 2004.
The table below sets forth future maturities of long-term debt, subordinated debt securities, stable value products, notes payable, operating lease obligations, mortgage loan commitments, and liabilities related to variable interest entities.
The operating results of companies in the insurance industry have historically been subject to significant fluctuations. The factors which could affect the Company’s future results include, but are not limited to, general economic conditions and the known trends and uncertainties which are discussed more fully below.
The Company operates in a mature, highly competitive industry, which could limit its ability to gain or maintain its position in the industry.
The Company’s policy claims fluctuate from period to period, and actual results could differ from its expectations.
Mortality, morbidity, and casualty expectations incorporate assumptions about many factors, including, for example, how a product is distributed, persistency and lapses, future progress in the fields of health and medicine, and the projected level of used vehicle values. Actual mortality, morbidity, the projected level of used vehicle values, and casualty claims could differ from expectations if actual results differ from those assumptions. In addition, continued activity in the life settlement industry could have an adverse impact on the Company’s level of persistency and lapses.
The Company’s results may be negatively affected should actual experience differ from management’s assumptions and estimates.
Significant changes in interest rates expose insurance companies to the risk of not earning anticipated spreads between the interest rate earned on investments and the credited interest rates paid on outstanding policies and contracts. Both rising and declining interest rates can negatively affect the Company’s spread income. While the Company develops and maintains asset/liability management programs and procedures designed to preserve spread income in rising or falling interest rate environments, no assurance can be given that changes in interest rates will not affect such spreads.
The Company and its insurance subsidiaries may be subject to regulation by the United States Department of Labor when providing a variety of products and services to employee benefit plans governed by the Employee Retirement Income Security Act (ERISA). Severe penalties are imposed for breach of duties under ERISA.
Changes to tax law or interpretations of existing tax law could adversely affect the Company and its ability to compete with non-insurance products or reduce the demand for certain insurance products.
A number of civil jury verdicts have been returned against insurers, broker-dealers, and other providers of financial services involving sales practices, alleged agent misconduct, failure to properly supervise representatives, relationships with agents or other 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 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 limited appellate review. In addition, in some class action and other lawsuits, companies have made material settlement payments.
The financial services and insurance industry is sometimes the target of law enforcement investigations relating to the numerous laws that govern the financial services and insurance business. The Company cannot predict the impact of any such investigations on the Company or the industry.
The Company’s invested assets and derivative financial instruments are subject to customary risks of credit defaults and changes in market values. The value of the Company’s commercial mortgage loan portfolio depends in part on the financial condition of the tenants occupying the properties which the Company has financed. Factors that may affect the overall default rate on, and market value of, the Company’s invested assets, derivative financial instruments, and mortgage loans include interest rate levels, financial market performance, and general economic conditions as well as particular circumstances affecting the businesses of individual borrowers and tenants.
Certain of these other parties may act on behalf of the Company or represent the Company in various capacities. Consequently, the Company may be held responsible for obligations that arise from the acts or omissions of these other parties.
As with all financial services companies, its ability to conduct business is dependent upon consumer confidence in the industry and its products. Actions of competitors and financial difficulties of other companies in the industry could undermine consumer confidence and adversely affect retention of existing business and future sales of the Company’s insurance and investment products.
The Company and its insurance subsidiaries cede material amounts of insurance and transfer related assets to other insurance companies through reinsurance. The Company may enter into third-party reinsurance arrangements under which the Company will rely on the third party to collect premiums, pay claims, and/or perform customer service functions. However, notwithstanding the transfer of related assets or other issues, the Company remains liable with respect to ceded insurance should any reinsurer fail to meet the obligations assumed by it.
The Company’s ability to compete is dependent on the availability of reinsurance. Premium rates charged by the Company are based, in part, on the assumption that reinsurance will be available at a certain cost. Under certain reinsurance agreements, the reinsurer may increase the rate it charges the Company for the reinsurance. Therefore, if the cost of reinsurance were to increase or if reinsurance were to become unavailable, or if a reinsurer should fail to meet its obligations, the Company could be adversely affected.
A computer virus could affect the data processing systems of the Company or its business partners, destroying valuable data or making it difficult to conduct business. In addition, despite our implementation of network security measures, our servers could be subject to physical and electronic break-ins, and similar disruptions from unauthorized tampering with our computer systems.
Like all publicly traded companies, the Company is required to comply with accounting principles generally accepted in the United States of America (GAAP). A number of organizations are instrumental in the development of GAAP such as the Securities and Exchange Commission (SEC), the Financial Accounting Standards Board (FASB), and the American Institute of Certified Public Accountants (AICPA). GAAP is subject to constant review by these organizations and others in an effort to address emerging issues and otherwise improve financial reporting. In this regard, these organizations adopt new accounting rules and issue interpretive accounting guidance on a continual basis. The Company can give no assurance that future changes to GAAP will not have a negative impact on the Company.
In addition, the Company’s insurance subsidiaries are required to comply with statutory accounting principles (SAP). SAP is subject to constant review by the NAIC and its committees as well as state insurance departments in an effort to address emerging issues and otherwise improve financial reporting. The Company can give no assurance that future changes to SAP will not have a negative impact on the Company.
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” (“SFAS 123(R)”). SFAS 123(R) is a revision of SFAS 123, which was originally issued by the FASB in 1995. SFAS 123(R) will become effective for the Company in the third quarter of 2005. As originally issued, SFAS 123 provided companies with the option to either record expense for share-based payments under a fair value model, or to simply disclose the impact of the expense. SFAS 123(R) requires companies to measure the cost of share-based payments to employees using a fair value model, and to recognize that cost over the relevant service period. In addition, SFAS 123(R) requires that an estimate of future award forfeitures be made at the grant date, while SFAS 123 permitted recognition of forfeitures on an as incurred basis. When SFAS 123 was originally issued, the Company elected to recognize the cost of its share-based compensation plans in its financial statements. Therefore, the Company does not anticipate that adoption of this standard will have a material impact on its financial position or results of operations.
A proposal to amend Actuarial Guideline 38 (currently part of codification of statutory accounting principles) has been exposed for comment, and certain regulators have indicated a desire for the NAIC to adopt the proposal before year-end 2004, with retroactive effect. To date, the actuarial guideline has not been adopted, although the New York Insurance Department adopted it for insurers operating in New York. The New York action does not affect the Company due to its limited product portfolio in New York. Actuarial Guideline 38, also known as AXXX, sets forth the reserve requirements for universal life insurance with secondary guarantees (ULSG). The Company believes that the proposal would increase the reserve levels required for many ULSG products, and thus would make those products more expensive and less competitive as compared to other products. The products could also become less competitive as compared to similar products issued by companies with ready access to surplus-relief reinsurance (primarily large insurers with larger international operations). The Company cannot predict whether the proposal will be adopted and, if so, whether it will be in the form currently proposed and whether it will be retroactive. The Company believes that the impact of the proposal on the Company will be primarily prospective and relate to the competitiveness of its products as compared to traditional whole life or other high cash value insurance products or products sold by companies with ready access to surplus-relief reinsurers. To the extent the additional reserves are generally considered to be economically redundant, capital market or other solutions may emerge to reduce the impact of the proposal, if passed in its current form. The Company cannot predict when or if these solutions may become available.
The California Department of Insurance has promulgated proposed regulations that would characterize some life insurance agents as brokers and impose certain obligations on those agents that may conflict with the interests of insurance carriers or require the agent to, among other things, advise the client with respect to the “best available insurer.” The Company cannot predict the outcome of this regulatory proposal or whether any other state will propose or adopt similar actions.
For supplemental quarterly financial information, please see Note 14, “Consolidated Quarterly Results - Unaudited” of the Notes to Consolidated Financial Statements included herein.
Year Ended December 31 ______________________________________________ 2004 2003 2002 ____________________________________________________________________________________________________________________________ (dollars in thousands, except per share amounts) Revenues Premiums and policy fees $ 1,841,296 $1,670,312 $1,561,717 Reinsurance ceded (1,142,644) (934,435) (751,396) ____________________________________________________________________________________________________________________________ Net of reinsurance ceded 698,652 735,877 810,321 Net investment income 1,084,217 1,030,752 1,022,953 Realized investment gains: Derivative financial instruments 19,591 12,550 28,308 All other investments 28,305 58,064 910 Other income 157,810 120,282 100,196 ____________________________________________________________________________________________________________________________ Total revenues 1,988,575 1,957,525 1,962,688 ____________________________________________________________________________________________________________________________ Benefits and expenses Benefits and settlement expenses (net of reinsurance ceded: 2004 - $1,134,762; 2003 - $932,164; 2002 - $712,866) 1,130,437 1,151,574 1,167,085 Amortization of deferred policy acquisition costs 200,130 225,107 267,662 Other operating expenses (net of reinsurance ceded: 2004 - $169,421; 2003 - $144,921; 2002 - $176,871) 272,807 255,432 262,898 ____________________________________________________________________________________________________________________________ Total benefits and expenses 1,603,374 1,632,113 1,697,645 ____________________________________________________________________________________________________________________________ Income before income tax 385,201 325,412 265,043 ____________________________________________________________________________________________________________________________ Income tax expense Current 126,163 64,513 51,247 Deferred 8,657 43,849 36,441 ____________________________________________________________________________________________________________________________ Total income tax expense 134,820 108,362 87,688 ____________________________________________________________________________________________________________________________ Net income before cumulative effect of change 250,381 217,050 177,355 in accounting principle Cumulative effect of change in accounting principle, net of income tax (15,801) 0 0 ____________________________________________________________________________________________________________________________ Net income $ 234,580 $ 217,050 $ 177,355 ____________________________________________________________________________________________________________________________ Net income before cumulative effect of change in $3.56 $3.10 $2.54 accounting principle per share - basic Net income per share - basic $3.34 $3.10 $2.54 Net income before cumulative effect of change in accounting principle per share - diluted $3.52 $3.07 $2.52 Net income per share - diluted $3.30 $3.07 $2.52 Cash dividends paid per share $ .685 $ .63 $ .59 ____________________________________________________________________________________________________________________________
December 31 _____________________________________ 2004 2003 _____________________________________________________________________________________________________________________ (dollars in thousands) Liabilities Policy liabilities and accruals Future policy benefits and claims $10,014,106 $ 8,948,131 Unearned premiums 666,560 728,190 _____________________________________________________________________________________________________________________ Total policy liabilities and accruals 10,680,666 9,676,321 Stable value product account balances 5,562,997 4,676,531 Annuity account balances 3,463,477 3,480,577 Other policyholders' funds 151,660 158,875 Other liabilities 1,075,949 875,652 Accrued income taxes 13,195 6,120 Deferred income taxes 312,544 337,609 Liabilities related to variable interest entities 482,434 400,000 Long-term debt 451,433 461,329 Subordinated debt securities 324,743 221,650 Liabilities related to separate accounts Variable annuity 2,308,858 2,045,038 Variable universal life 217,095 171,408 Other 0 4,361 _____________________________________________________________________________________________________________________ Total liabilities 25,045,051 22,515,471 _____________________________________________________________________________________________________________________ Commitments and contingent liabilities - Note 6 _____________________________________________________________________________________________________________________ Share-owners' equity Preferred Stock, $1 par value Shares authorized: 3,600,000 Issued: none Junior Participating Cumulative Preferred Stock, $1 par value Shares authorized: 400,000 Issued: none Common Stock, $.50 par value Shares authorized: 2004 and 2003 - 160,000,000 Issued: 2004 and 2003 - 73,251,960 36,626 36,626 Additional paid-in capital 426,927 418,351 Treasury stock, at cost (2004 - 3,802,071 shares; 2003 - 4,260,259 shares) (13,632) (15,275) Stock held in trust (2003 - 97,700 shares) 0 (2,788) Unallocated stock in Employee Stock Ownership Plan (2004 - 609,735 shares; 2003 - 724,068 shares) (1,989) (2,367) Retained earnings 1,422,084 1,235,012 Accumulated other comprehensive income Net unrealized gains on investments (net of income tax: 2004 - $154,913; 2003 - $177,642) 287,695 329,907 Accumulated gain - hedging (net of income tax: 2004 - $4,639; 2003 - $1,442) 8,616 2,678 _____________________________________________________________________________________________________________________ Total share-owners' equity 2,166,327 2,002,144 _____________________________________________________________________________________________________________________ $27,211,378 $24,517,615 _____________________________________________________________________________________________________________________
Total Additional Unallocated Net Unrealized Accumulated Share- Common Paid-In Treasury Stock Held Stock in Retained Gains (Losses) Gain/ (Loss) Owners' (dollars in thousands) Stock Capital Stock In Trust ESOP Earnings on Investments Hedging Equity ________________________________________________________________________________________________________________________________________
Balance, December 31, 2001 $36,626 $405,420 $(15,895) $(1,535) $(3,317) $924,517 $54,328 $0 $1,400,144 __________ Net income for 2002 177,355 177,355 Change in net unrealized gains/losses on investments (net of income tax - $99,209) 184,246 184,246 Reclassification adjustment for amounts included in net income (net of income tax - $(318)) (591) (591) Change in accumulated gains (loss) hedging (net of income tax - $(1,114)) (2,069) (2,069) __________ Comprehensive income for 2002 358,941 __________ Cash dividends ($0.59 per (40,511) (40,511) share) Purchase of common stock (882) (882) Purchase of treasury stock (828) (828) Stock-based compensation 2,928 311 3,239 Reissuance of treasury stock to ESOP 49 10 (59) 0 Allocation of stock to employee accounts 599 599 ________________________________________________________________________________________________________________________________________ Balance, December 31, 2002 36,626 408,397 (16,402) (2,417) (2,777) 1,061,361 237,983 (2,069) 1,720,702 __________ Net income for 2003 217,050 217,050 Change in net unrealized gains/losses on investments (net of income tax - $69,820) 129,666 129,666 Reclassification adjustment for amounts included in net income (net of income tax - $(20,322)) (37,742) (37,742) Change in accumulated gain (loss) hedging (net of income tax - $(2,556)) 4,747 4,747 __________ Comprehensive income for 2003 313,721 __________ Cash dividends ($0.63 per (43,399) (43,399) share) Purchase of common stock (371) (371) Purchase of treasury stock 0 Stock-based compensation 9,195 1,009 10,204 Reissuance of treasury stock to ESOP 759 118 (877) 0 Allocation of stock to employee accounts 1,287 1,287 ________________________________________________________________________________________________________________________________________ Balance, December 31, 2003 36,626 418,351 (15,275) (2,788) (2,367) 1,235,012 329,907 2,678 2,002,144 __________ Net income for 2004 234,580 234,580 Change in net unrealized gains/losses on investments (net of income tax - $(12,823)) (23,814) (23,814) Reclassification adjustment for amounts included in net income (net of income tax - $(9,907)) (18,398) (18,398) Change in accumulated gain (loss) hedging (net of income tax - $(3,197)) 5,938 5,938 __________ Comprehensive income for 2004 198,306 __________ Cash dividends ($0.685 per (47,508) (47,508) share) Sale of common stock 2,788 2,788 Purchase of treasury stock 0 Stock-based compensation 7,774 1,557 9,331 Reissuance of treasury stock to ESOP 802 86 (888) 0 Allocation of stock to employee accounts 1,266 1,266 ________________________________________________________________________________________________________________________________________ Balance, December 31, 2004 - Note 7 $36,626 $426,927 $(13,632) $0 $(1,989) $1,422,084 $287,695 $8,616 $2,166,327 ________________________________________________________________________________________________________________________________________
Year Ended December 31 ________________________________________________ 2004 2003 2002 _____________________________________________________________________________________________________________________ (dollars in thousands) Cash flows from operating activities Net income $ 234,580 $ 217,050 $ 177,355 Adjustments to reconcile net income to net cash provided by operating activities: Realized investment (gains) losses (47,896) (58,064) (910) Amortization of deferred policy acquisition costs 200,130 225,107 239,490 Capitalization of deferred policy acquisition costs (362,882) (381,120) (435,324) Depreciation expense 17,679 12,302 11,015 Deferred income taxes (151) 43,849 36,441 Accrued income taxes 5,060 (3,385) (57,711) Interest credited to universal life and investment products 649,216 647,695 900,930 Policy fees assessed on universal life and investment products (349,057) (324,773) (268,191) Change in accrued investment income and other receivables (392,278) 18,885 (272,362) Change in policy liabilities and other policyholders' funds of traditional life and health products 813,018 500,871 528,122 Net change in trading securities 1,231 0 0 Change in other liabilities (4,915) (187,892) 98,504 Other, net (16,557) 74,992 (51,847) _____________________________________________________________________________________________________________________ Net cash provided by operating activities 747,178 785,517 905,512 _____________________________________________________________________________________________________________________ Cash flows from investing activities Investments available for sale, net of short-term investments: Maturities and principal reductions of investments 1,900,579 4,618,380 3,624,740 Sale of investments 4,262,628 7,539,941 15,272,346 Cost of investments acquired (7,109,138) (13,173,599) (20,014,231) Mortgage loans: New loans (658,276) (604,531) (402,556) Additional borrowings on existing loans (61,234) (16,336) (60,602) Repayments 443,363 405,299 454,483 Change in investment real estate, net 441 2,585 5,638 Change in policy loans, net 19,968 40,413 (21,320) Change in other long-term investments, net 11,899 (26,760) (117,866) Change in short-term investments, net (324,414) 258,442 (211,244) Acquisitions and bulk reinsurance assumptions 0 0 130,515 Purchase of property and equipment (16,788) (16,618) (10,880) _____________________________________________________________________________________________________________________ Net cash used in investing activities (1,530,972) (972,784) (1,350,977) _____________________________________________________________________________________________________________________ Cash flows from financing activities Borrowings under line of credit arrangements and long-term debt 407,400 442,700 69,000 Principal payments on line of credit arrangements and long-term debt (417,296) (387,480) (39,102) Net payments on securities sold under repurchase agreements 0 0 (117,000) Payment of guaranteed preferred beneficial interests 0 0 (75,000) Dividends to share owners (47,508) (43,399) (40,511) Issuance of subordinated debt securities 103,093 0 115,000 Purchase of common stock held in trust 0 (371) (882) Purchase of treasury stock 0 0 (828) Investment product deposits and change in universal life deposits 3,042,453 2,721,579 1,687,213 Investment product withdrawals (2,318,674) (2,511,017) (1,177,030) Other financing activities 8,224 0 0 _____________________________________________________________________________________________________________________ Net cash provided by financing activities 777,692 222,012 420,860 _____________________________________________________________________________________________________________________ Change in cash (6,102) 34,745 (24,605) _____________________________________________________________________________________________________________________ Cash at beginning of year 136,698 101,953 126,558 _____________________________________________________________________________________________________________________ Cash at end of year $ 130,596 $ 136,698 $ 101,953 _____________________________________________________________________________________________________________________
Protective Life Corporation is a holding company whose subsidiaries provide financial services through the production, distribution, and administration of insurance and investment products. The Company markets individual life insurance, credit life and disability insurance, guaranteed investment contracts, guaranteed funding agreements, fixed and variable annuities, and extended service contracts throughout the United States. The Company also maintains a separate division devoted to the acquisition of insurance policies from other companies. Founded in 1907, Protective Life Insurance Company (Protective Life) is the Company’s largest operating subsidiary.
Net income before cumulative effect of change in accounting principle $ 65,305 $ 65,305 Cumulative effect of change in accounting principle, net of tax (10,128) $(5,673) (15,801) _________________________________________________________ Net income $ 55,177 $(5,673) $ 49,504 _________________________________________________________
Incurred claims $3,179 $6,416 $7,599 Paid claims 4,054 7,170 5,989 _______________________________________________________________________________
Account balances of variable annuities with guarantees were invested in variable annuity separate accounts as of December 31 were as follows:
Certain of the Company's universal life products have a sales inducement in the form of a retroactive interest credit (RIC). In addition, certain variable annuity contracts provide a sales inducement in the form of a bonus interest credit. In accordance with SOP 03-1, the Company maintains a reserve for all interest credits earned to date. The Company defers the expense associated with the RIC and bonus interest credits each period and amortizes these costs in a manner similar to that used for deferred policy acquisition costs.
Deferred asset, beginning of period $27,713 $31,557 $29,179 Amounts deferred 12,597 14,041 9,567 Amortization (11,692) (17,885) (7,189) _____________________________________________________________________________________________ Deferred asset, end of period $28,618 $27,713 $31,557 _____________________________________________________________________________________________
In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” (SFAS 123(R)). SFAS 123(R) is a revision of SFAS 123, which was originally issued by the FASB in 1995. SFAS 123(R) will become effective for the Company in the third quarter of 2005. As originally issued, SFAS 123 provided companies with the option to either record expense for share-based payments under a fair value model, or to simply disclose the impact of the expense. SFAS 123(R) requires companies to measure the cost of share-based payments to employees using a fair value model, and to recognize that cost over the relevant service period. In addition, SFAS 123(R) requires that an estimate of future award forfeitures be made at the grant date, while SFAS 123 permitted recognition of forfeitures on an as incurred basis. When SFAS 123 was originally issued, the Company elected to recognize the cost of its share-based compensation plans in its financial statements. The Company is currently evaluating the provisions of SFAS 123(R), but does not anticipate that adoption of this standard will have a material impact on its financial position or results of operations.
Fixed maturities (bonds and redeemable preferred stocks) - at current market value. Where market values are unavailable, the Company obtains estimates from independent pricing services or estimates market value based upon a comparison to quoted issues of the same issuer or issues of other issuers with similar terms and risk characteristics.
Statement of Financial Accounting Standards No. 133 (SFAS 133) requires that all derivative instruments be recognized in the balance sheet at fair value. The Company records its derivative instruments on the balance sheet in “other long-term investments” and “other liabilities”. The accounting for changes in fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge or a hedge related to foreign currency exposure. For derivatives that are designated and qualify as cash flow hedges, the effective portion of the gain or loss realized on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period during which the hedged transaction impacts earnings. The remaining gain or loss on these derivatives is recognized as ineffectiveness in current earnings during the period of the change. For derivatives that are designated and qualify as fair value hedges, the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings during the period of change in fair values. Effectiveness of the Company’s hedge relationships is assessed on a quarterly basis. The Company accounts for changes in fair values of derivatives that are not part of a qualifying hedge relationship through earnings in the period of change. Changes in the fair value of derivatives that are recognized in current earnings are reported in “realized investment gains (losses) - derivative financial instruments”.
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 the present value of the 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,” the Company makes certain assumptions regarding the mortality, persistency, expenses, and interest rates (equal to the rate used to compute liabilities for future policy benefits; currently 2.3% to 12.6%) 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 the Company’s universal life and investment products had been realized. Acquisition costs for stable value contracts are amortized over the term of the contracts using the effective yield method.
The goodwill balance at December 31, 2004 was $46.6 million and $47.3 million on December 31, 2003. The $0.7 million reduction in the goodwill balance in 2004 relates to the sale of a small subsidiary by the Asset Protection segment. At October 31, 2004, and 2003, the Company evaluated its goodwill and determined that fair value had not decreased below carrying value and no adjustment to impair goodwill was necessary in accordance with SFAS No. 142.
Property and equipment are reported at cost less accumulated depreciation. The Company primarily uses the straight-line method of depreciation based upon the estimated useful lives of the assets. The Company’s Home Office building is depreciated over a thirty-nine year useful life, furniture is depreciated over a ten year useful life, office equipment and machines are depreciated over a five year useful life, and software and computers are depreciated over a three year useful life. Major repairs or improvements are capitalized and depreciated over the estimated useful lives of the assets. Other repairs are expensed as incurred. The cost and related accumulated depreciation of property and equipment sold or retired are removed from the accounts, and resulting gains or losses are included in income.
Liabilities for future policy benefits on traditional life insurance products have been computed using a net level method including assumptions as to investment yields, mortality, persistency, and other assumptions based on the Company’s experience, modified as necessary to reflect anticipated trends and to include provisions for possible adverse deviation. Reserve investment yield assumptions on December 31, 2004 range from 6.6% to 7.0%. The liability for future policy benefits and claims on traditional life, health, and credit insurance products includes estimated unpaid claims that have been reported to the Company and claims incurred but not yet reported. Policy claims are charged to expense in the period in which the claims are incurred.
Balance beginning of year $121,832 $116,214 $100,023 Less reinsurance 55,395 54,765 33,723 __________________________________________________________________________________________ Net balance beginning of year 66,437 61,449 66,300 __________________________________________________________________________________________ Incurred related to: 256,754 266,676 258,612 Current year Prior year (30) (1,783) (338) __________________________________________________________________________________________ Total incurred 256,724 264,893 258,274 __________________________________________________________________________________________ Paid related to: 210,943 261,311 243,206 Current year Prior year 43,991 (1,406) 22,528 __________________________________________________________________________________________ Total paid 254,934 259,905 265,734 __________________________________________________________________________________________ Other changes: Acquisitions and reserve transfers 0 0 2,609 __________________________________________________________________________________________ Net balance end of year 68,227 66,437 61,449 Plus reinsurance 66,788 55,395 54,765 __________________________________________________________________________________________ Balance end of year $135,015 $121,832 $116,214 __________________________________________________________________________________________
2004 2003 2002 ______________________________________________________________________________________________________________ Net income $234,580 $217,050 $177,355 ______________________________________________________________________________________________________________ Average shares issued and outstanding 69,358,641 68,886,442 68,659,881 Stock held in trust (60,478) (102,412) (67,566) Issuable under various deferred compensation plans 1,001,307 1,249,258 1,331,640 ______________________________________________________________________________________________________________ Average shares outstanding - basic 70,299,470 70,033,288 69,923,955 Stock held in trust 60,478 102,412 67,566 Stock appreciation rights 313,984 248,289 220,500 Issuable under various other stock-based compensation plans 390,607 260,653 250,776 ______________________________________________________________________________________________________________ Average shares outstanding - diluted 71,064,539 70,644,642 70,462,797 ______________________________________________________________________________________________________________
Fixed maturities $29,015 $57,756 $ 8,052 Equity securities 58 (1,727) (4,397) Mortgage loans and other investments (768) 2,035 (2,745) ________________________________________________________________________________________________ $28,305 $58,064 $ 910 ________________________________________________________________________________________________
Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Market Value ________________________________________________________________________________________________________________________ Fixed maturities: Bonds: Mortgage-backed securities $ 4,812,610 $110,269 $(22,997) $ 4,899,882 United States Government and authorities 79,225 7,042 (267) 86,000 States, municipalities, and political subdivisions 27,915 2,488 0 30,403 Public utilities 1,605,276 122,636 (4,759) 1,723,153 Convertibles and bonds with warrants 10,439 597 (89) 10,947 All other corporate bonds 6,766,424 505,220 (23,120) 7,248,524 Redeemable preferred stocks 3,406 187 0 3,593 ________________________________________________________________________________________________________________________ 13,305,295 748,439 (51,232) 14,002,502 Equity securities 56,049 3,491 (599) 58,941 Short-term investments 1,052,357 0 0 1,052,357 ________________________________________________________________________________________________________________________ $14,413,701 $751,930 $(51,831) $15,113,800 ________________________________________________________________________________________________________________________
December 31, 2004, the Company had an additional $410.1 million of fixed maturities and $7.2 million of short-term investments classified as trading securities.
The amortized cost and estimated market value of available for sale fixed maturities at December 31, 2004, by expected maturity, are shown as follows. Expected maturities are derived from rates of prepayment that may differ from actual rates of prepayment.
Each quarter the Company reviews investments with unrealized losses and tests for other-than-temporary impairments. The Company analyzes various factors to determine if any specific other than temporary asset impairments exist. These include, but are not limited to: 1) actions taken by rating agencies, 2) default by the issuer, 3) the significance of the decline, 4) the intent and ability of the Company to hold the investment until recovery, 5) the time period during which the decline has occurred, 6) an economic analysis of the issuer’s industry, and 7) the financial strength, liquidity, and recoverability of the issuer. Management performs a security by security review each quarter in evaluating the need for any other-than-temporary impairments. Although no set formula is used in this process, the investment performance and continued viability of the issuer are significant measures considered. Once a determination has been made that a specific other-than-temporary impairment exists, a realized loss is incurred and the cost basis of the impaired asset is adjusted to its fair value. During 2004, 2003, and 2002, the Company recorded other-than-temporary impairments in its investments of $18.3 million, $22.3 million, and $30.2 million, respectively.
For mortgage-backed securities in an unrealized loss position for greater than 12 months, $4.8 million of the unrealized loss relates to securities issued in Company-sponsored commercial loan securitizations. The Company does not consider these unrealized loss positions to be other than temporary, because the underlying mortgage loans continue to perform consistently with the Company’s original expectations.
The other corporate bonds category has gross unrealized losses greater than 12 months of $10.3 million at December 31, 2004, including $6.3 million of electrical industry securities. The public utilities category has gross unrealized losses greater than 12 months of $4.0 million. The aggregate decline in market value of these securities was deemed temporary due to positive factors supporting the recoverability of the respective investments. Positive factors considered included credit ratings, the financial health of the investee, the continued access of the investee to capital markets, and other pertinent information including the Company’s ability and intent to hold these securities to recovery.
The change in unrealized gains (losses), net of income tax, on fixed maturity and equity securities, classified as available for sale, for the years ended December 31 is summarized as follows:
The Company participates in securities lending, primarily as an investment yield enhancement, whereby securities that are held as investments are loaned to third parties for short periods of time. The Company requires collateral of 102% of the market value of the loaned securities to be separately maintained. The loaned securities’ market value is monitored, on a daily basis, with additional collateral obtained as necessary. At December 31, 2004, securities with a market value of $535.4 million were loaned under these agreements. As collateral for the loaned securities, the Company receives short-term investments, which are recorded in “short-term investments” with a corresponding liability recorded in “other liabilities” to account for the Company’s obligation to return the collateral.
Many of the mortgage loans have call provisions between 3 and 10 years. Assuming the loans are called at their next call dates, approximately $167.5 million would become due in 2005, $605.8 million in 2006 through 2009, $432.2 million in 2010 through 2014, and $78.3 million thereafter.
At December 31, 2004 and 2003, the Company’s problem mortgage loans (over sixty days past due) and foreclosed properties totaled $10.8 million and $11.8 million, respectively. Since the Company’s mortgage loans are collateralized by real estate, any assessment of impairment is based upon the estimated fair value of the real estate. At December 31, 2004 and 2003, the Company had an allowance for mortgage loan credit losses of $3.3 million and $4.7 million, respectively. This allowance is calculated through analysis of specific loans that are believed to be at a higher risk of becoming impaired in the near future.
Taxes estimated to be payable currently: Federal $122,309 $62,602 $48,162 State 3,854 1,911 3,085 ____________________________________________________________________________________________________ Total current $126,163 $64,513 $51,247 ____________________________________________________________________________________________________ Taxes deferred: ____________________________________________________________________________________________________ Federal $149 $43,849 $36,441 ____________________________________________________________________________________________________
2004 2003 _____________________________________________________________________________________ Deferred income tax assets: Policy and policyholder liability reserves $317,946 $262,094 Other 36,058 24,790 _____________________________________________________________________________________ 354,004 286,884 _____________________________________________________________________________________
Under pre-1984 life insurance company income tax laws, a portion of the Company’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, 2004, was approximately $70.5 million. Should the accumulation in the Policyholders’ Surplus account of the life insurance subsidiaries exceed certain stated maximums, or should distributions including cash dividends be made to Protective Life Corporation in excess of approximately $1.8 billion, such excess would be subject to federal income taxes at rates then effective. Legislation was enacted in 2004 which will suspend application of this provision for tax years 2005 and 2006. Deferred income taxes have not been provided on amounts designated as Policyholders’ Surplus. Under current income tax laws, the Company does not anticipate paying income tax on amounts in the Policyholders’ Surplus accounts.
Future maturities of long-term debt and subordinated debt securities are as follows:
As of December 31, 2003, the Company consolidated a special-purpose entity, as a result of the implementation of FIN 46. The consolidated entity included a $430.6 million investment portfolio, $400.0 million of notes payable, $15.0 million of derivative liabilities, and $15.6 million of minority interest. In accordance with FIN 46, the Company also consolidated, as of March 31, 2004, two real estate investment companies previously reported as investments. This consolidation resulted in the recognition of notes payable owed by the investment companies. The $482.4 million and $400.0 million of notes payable reported on the balance sheet in “liabilities related to variable interest entities” at December 31, 2004 and 2003, respectively, are not the legal obligations of the Company, but will be repaid with cash flows generated by the separate entities’ operations.
The Company uses interest rate swap agreements to convert a portion of its debt from a fixed interest rate to a floating rate. These interest rate swap agreements do not qualify as hedges of the corresponding long-term debt or subordinated debt securities, under SFAS 133. All net interest settlements and mark-to-market adjustments for these interest rate swap agreements are recorded as "Realized investment gains (losses) - derivative financial instruments." Interest expense on all debt totaled $49.7 million, $43.6 million, and $40.7 million in 2004, 2003, and 2002, respectively.
(unaudited) 2002 ____________________________________________________________ Total revenues $2,003,158 Net income 179,981 Net income per share - basic 2.57 Net income per share - diluted 2.55 ____________________________________________________________
Balance, December 31, 2001 73,251,960 4,696,788 68,555,172 Reissuance of treasury stock (150,177) 150,177 Repurchase of treasury stock 29,455 (29,455) ____________________________________________________________________________________________ Balance, December 31, 2002 73,251,960 4,576,066 68,675,894 Reissuance of treasury stock (315,807) 315,807 ____________________________________________________________________________________________ Balance, December 31, 2003 73,251,960 4,260,259 68,991,701 Reissuance of treasury stock (458,188) 458,188 ____________________________________________________________________________________________ Balance, December 31, 2004 73,251,960 3,802,071 69,449,889 ____________________________________________________________________________________________
Share owners have authorized 4,000,000 shares of Preferred Stock, $1.00 par value. Other terms, including preferences, voting, and conversion rights, may be established by the Board of Directors. In connection with the Rights Agreement, 400,000 of these shares have been designated as Series A Junior Participating Cumulative Preferred Stock, $1.00 par value, and were unissued at December 31, 2004. The remaining 3,600,000 shares of Preferred Stock, $1.00 par value, were also unissued at December 31, 2004.
The Company may, from time to time, reissue treasury shares or buy in the open market additional shares of Common Stock to complete its 401(k) obligations. Accordingly, in 2003, the Company reissued from treasury 38,317 shares of Common Stock to the 401(k) Plan and reissued from treasury another 72,497 shares during 2004.
Since 1973, the Company has had stock-based incentive plans to motivate management to focus on the Company’s long-range performance through the awarding of stock-based compensation. Under plans approved by share owners in 1997 and 2003, up to 6,500,000 shares may be issued in payment of awards.
Performance shares and performance-based stock appreciation rights (P-SARs) awarded in 2004, 2003, 2002, 2001, and 2000 and the estimated fair value of the awards at grant date are as follows:
SARs Remaining Life Currently Base Price Outstanding in Years Exercisable _____________________________________________________________________________
$17.44 235,000 1 235,000 26.49 15,000 2 15,000 32.00 30,000 2 30,000 22.31 720,443 5 542,943 31.26 50,000 6 0 31.29 2,500 6 0 32.00 435,000 7 0 26.49 80,000 8 0 _____________________________________________________________________________
The expense recorded by the Company for its stock-based compensation plans was $4.8 million, $5.5 million, and $5.2 million in 2004, 2003, and 2002, respectively. The Company’s obligations of its stock-based compensation plans that are expected to be settled in shares of the Company’s Common Stock are reported as a component of share-owners’ equity.
The Company has established deferred compensation plans for directors, officers, and others. Compensation deferred is credited to the participants in cash, Common Stock equivalents, or a combination thereof. The Company may, from time to time, reissue treasury shares or buy in the open market shares of Common Stock to fulfill its obligation under the plans. At December 31, 2004, the plans had 991,763 shares of Common Stock equivalents credited to participants.
Certain corporations with which the Company’s directors were affiliated paid the Company premiums and policy fees or other amounts for various types of insurance and investment products. Such premiums, policy fees, and other amounts totaled $10.5 million, $12.2 million, and $16.0 million in 2004, 2003, and 2002, respectively. The Company paid commissions, interest on debt and investment products, and fees to these same corporations totaling $2.6 million, $2.1 million, and $1.6 million in 2004, 2003, and 2002, respectively. In addition, at December 31, 2003, the Company had a swap contract with a related party having a notional amount of $303.7 million and a gain position of $31.0 million.
The net income and share-owners’ equity prepared in conformity with statutory reporting practices compared to that reported in the accompanying consolidated financial statements are as follows:
Net Income (Loss) Share-Owners' Equity ____________________________________________________________________________________ 2004 2003 2002 2004 2003 2002 _________________________________________________________________________________________________________________________ In conformity with statutory reporting practices(1) $202,980 $274,244 $ (2,418) $1,317,719 $1,135,942 $ 852,645 _________________________________________________________________________________________________________________________ In conformity with GAAP $234,580 $217,050 $177,355 $2,166,327 $2,002,144 $1,720,702 _________________________________________________________________________________________________________________________ (1) Consolidated _________________________________________________________________________________________________________________________
The Annuities segment manufactures, sells, and supports fixed and variable annuity products. These products are primarily sold through stockbrokers, but are also sold through financial institutions and the Life Marketing segment’s sales force.
The following tables summarize financial information for the Company’s segments. Asset adjustments represent the inclusion of assets related to discontinued operations.
Revenues Life Marketing $ 541,570 $ 489,852 $ 485,558 Acquisitions 439,103 462,695 478,268 Annuities 258,106 282,075 257,426 Stable Value Products 281,409 242,860 239,037 Asset Protection 275,353 323,659 358,773 Corporate and Other 193,034 156,384 143,626 ______________________________________________ Total revenues $1,988,575 $1,957,525 $1,962,688 ______________________________________________ Segment Operating Income Life Marketing $ 165,897 $ 159,157 $ 125,550 Acquisitions 87,300 95,150 95,097 Annuities 16,467 13,373 15,694 Stable Value Products 53,159 38,911 42,272 Asset Protection 19,079 20,193 (14,847) Corporate and Other 21,560 (31,952) (2,888) ______________________________________________ Total segment operating income 363,462 294,832 260,878 ______________________________________________
Realized investment gains (losses) - investments(1) 21,370 39,117 (1,071) Realized investment gains (losses) - derivatives(2) 369 (8,537) 5,236 Income tax expense (134,820) (108,362) (87,688) ______________________________________________ Net income before cumulative effect of change in accounting 250,381 217,050 177,355 principle Cumulative effect of change in accounting principle (15,801) ______________________________________________ Net income $ 234,580 $ 217,050 $ 177,355 ______________________________________________
Investments and other assets $ 879,385 $3,027,486 $46,261 $25,342,787 Deferred policy acquisition costs 113,918 8,493 1,821,972 Goodwill 36,182 83 46,619 _______________________________________________________________________________ Total assets $1,029,485 $3,036,062 $46,261 $27,211,378 _______________________________________________________________________________
Operating Segment Assets December 31, 2003 _______________________________________________________________________________ Life Stable Value Marketing Acquisitions Annuities Products _______________________________________________________________________________
Investments and other assets $4,987,757 $4,356,929 $5,436,619 $4,520,955 Deferred policy acquisition costs 1,185,102 385,042 101,096 7,186 Goodwill 10,354 _______________________________________________________________________________ Total assets $6,183,213 $4,741,971 $5,537,715 $4,528,141 _______________________________________________________________________________
Service cost $5,408 $ 4,513 $ 3,723 Interest cost 5,506 4,666 4,111 Expected return on plan assets (6,864) (5,604) (4,265) Amortization of prior service cost 214 214 263 Amortization of losses 1,920 1,049 302 ______________________________________________________________________________________________ Net pension cost $6,184 $ 4,838 $ 4,134 ______________________________________________________________________________________________
Assumptions used to determine the net pension cost for the years ended December 31 are as follows:
Weighted average discount rate 6.25% 6.75% 7.25% Rates of increase in compensation level 4.00 4.50 5.00 Expected long-term rate of return on assets 8.50 8.50 8.50 ______________________________________________________________________________________________________
Cash and cash equivalents 2% 2.7% 4.4% Equity securities 60 68.8 72.1 Fixed income 38 28.5 23.5 ______________________________________________________________________________________________ Total 100% 100.0% 100.0% ______________________________________________________________________________________________
2005 $ 1,675 2006 1,985 2007 2,317 2008 2,749 2009 3,137 2010-2014 25,302
2004 2003 2002 ______________________________________________________________________________________________________ Weighted average discount rate 6.25% 6.75% 7.25% Rates of increase in compensation level 5.00 5.50 6.00 Expected long-term rate of return on assets 8.50 8.50 8.50 ______________________________________________________________________________________________________
In addition to pension benefits, the Company provides limited healthcare benefits to eligible retired employees until age 65. This postretirement benefit is provided by an unfunded plan. This benefit has no material effect on the Company’s consolidated financial statements. For a closed group of retirees over age 65, Protective provides a prescription drug benefit. At December 31, 2004 and 2003, the Company’s liability related to this benefit was $0.3 million and $0.3 million, respectively. The Company’s obligation is not materially affected by a 1% change in the healthcare cost trend assumptions used in the calculation of the obligation.
The Company sponsors a defined contribution retirement plan which covers substantially all employees. Employee contributions are made on a before-tax basis as provided by Section 401(k) of the Internal Revenue Code. The Company has established an Employee Stock Ownership Plan (ESOP) to match voluntary employee contributions to the Company’s 401(k) Plan. In 1994, a stock bonus component was added to the 401(k) Plan for employees who are not otherwise under a bonus or sales incentive plan. Expense related to the ESOP consists of the cost of the shares allocated to participating employees plus the interest expense on the ESOP’s note payable to the Company less dividends on shares held by the ESOP. All shares held by the ESOP are treated as outstanding for purposes of computing earnings per share. At December 31, 2004, the Company had committed approximately 105,405 shares to be released to fund the 401(k) Plan match. The expense recorded by the Company for these employee benefits was $0.0 million, $0.6 million, and $0.1 million in 2004, 2003, and 2002, respectively.
Effective as of January 1, 2005, the Company adopted a supplemental matching contribution program, which is a nonqualified plan that provides supplemental matching contributions in excess of the limits imposed on qualified defined contribution plans by federal tax law. The first allocations under this program will be made in early 2006, with respect to the 2005 plan year.
The Company continues to monitor the consolidation of reinsurers and the concentration of credit risk the Company has with any reinsurer. At December 31, 2004, the Company had reinsured approximately 86.7% of the face value of its life insurance in force. The Company had reinsured approximately 51.7% of the face value of its life insurance in force with three reinsurers. These reinsurers had a minimum Standard & Poor’s rating of AA- and a minimum A. M. Best rating of A+. The Company has not experienced any credit losses for the years ended December 31, 2004, 2003, or 2002 related to these reinsurers.
Net income before cumulative effect of change in $0.93 $0.87 $0.95 $0.81 accounting principle per share - basic Net income per share - basic $0.71 $0.87 $0.95 $0.81 Average shares outstanding - basic 70,142,108 70,284,893 70,337,248 70,431,763 Net income before cumulative effect of change in accounting principle per share - diluted $0.92 $0.86 $0.94 $0.80 Net income per share - diluted $0.70 $0.86 $0.94 $0.80 Average shares outstanding - diluted 70,887,591 71,030,983 71,115,468 71,221,826 _______________________________________________________________________________________________________________________
Premiums and policy fees $ 387,094 $ 397,652 $ 424,590 $460,976 Reinsurance ceded (189,417) (205,268) (237,996) (301,754) _______________________________________________________________________________________________________________________ Net of reinsurance ceded 197,677 192,384 186,594 159,222 Net investment income 257,701 262,744 248,915 261,392 Realized investment gains (losses) (6,058) 33,858 17,994 24,820 Other income 25,309 39,981 26,128 28,864 _______________________________________________________________________________________________________________________ Total revenues 474,629 528,967 479,631 474,298 Benefits and expenses 418,590 439,675 400,839 373,009 _______________________________________________________________________________________________________________________ Income before income tax 56,039 89,292 78,792 101,289 Income tax expense 18,334 29,916 26,383 33,729 _______________________________________________________________________________________________________________________ Net income $ 37,705 $ 59,376 $ 52,409 $ 67,560 _______________________________________________________________________________________________________________________ Net income per share - basic $0.54 $0.85 $0.75 $0.96 Average shares outstanding - basic 69,956,505 70,004,109 70,091,080 70,079,471 Net income per share - diluted $0.53 $0.84 $0.74 $0.95 Average shares outstanding - diluted 70,483,448 70,561,795 70,722,885 70,806,034 _______________________________________________________________________________________________________________________
We have completed an integrated audit of Protective Life Corporation’s 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2004 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control - Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.