YEAR ENDED PERCENTAGE DECEMBER 31 INCREASE (DECREASE) --------------------------------------------- 2000 1999 ---- ---- (in thousands)
Premiums and policy fees............. $ 723,519 $ 599,223 20.7% Net investment income................ 696,937 623,231 11.8% Realized investment gains (losses)... (14,599) 4,760 (406.7)% Other income......................... 51,202 27,102 88.9% --------- --------- $1,457,059 $1,254,316 ========= =========
In 2000, premiums and policy fees, net of reinsurance (premiums and policy fees) increased $124.3 million or 20.7% over 1999. The Individual Life Division’s premiums and policy fees decreased $18.7 million due to an increased use of reinsurance ceded by the Division. Premiums and policy fees from the West Coast Division increased $2.8 million. The West Coast Division has also increased its use of reinsurance. Premiums and policy fees in the Acquisition Division, are expected to decline with time (due to the lapsing of policies resulting from deaths of insureds or terminations of coverage) unless new acquisitions are made. No acquisitions were completed in this Division in 1999 or 2000 resulting in a decrease of $11.9 million in premiums and policy fees in 2000. In October 2000, PLC transferred ownership of twenty companies (that provide prepaid dental products) to Protective. The operations of these companies are included in Protective’s Dental Benefits Division and resulted in a $29.6 million increase in premiums and policy fees in the Division. Premiums and policy fees related to the Dental Benefits Division’s other businesses increased $20.6 million. In January 2000, the Financial Institutions Division acquired the Lyndon Insurance Group (Lyndon) which resulted in a $97.1 million increase in premium and policy fees. Premiums and policy fees related to the Financial Institutions Division’s other businesses increased $15.4 million. The increase in premiums and policy fees from the Investment Products Division was $5.9 million. Premium and policy fees relating to various health insurance lines in the Corporate and Other segment decreased $16.5 million.
Other income consists primarily of revenues from Protective’s direct response business, service contract business, non-insurance subsidiaries and rental of space in its administrative building to PLC. In 2000, revenues from Protective’s direct response business and service contract business increased $7.5 million and $13.3 million, respectively. Income from other sources increased $3.3 million.
YEAR ENDED DECEMBER 31 (IN THOUSANDS) 2000 1999 ---- ---- Operating Income (Loss)(1) Life Insurance Individual Life $ 39,439 $ 31,433 West Coast 36,367 26,063 Acquisitions 53,624 64,460 Specialty Insurance Products Dental 22,059 18,335 Financial Institutions 34,826 22,570 Retirement Savings and Investment Products Stable Value Products 31,208 29,465 Investment Products 13,584 11,360 Corporate and Other (23,992) (5,563) --------------------------------------------------------------------------------------- Total operating income 207,115 198,123 --------------------------------------------------------------------------------------- Realized Investment Gains (Losses) Stable Value Products (6,556) (549) Investment Products 410 1,446 Unallocated Realized Investment Gains (Losses) (8,453) 3,863 Related Amortization of Deferred Policy Acquisition Costs Investment Products (410) (1,446) --------------------------------------------------------------------------------------- Total net (15,009) 3,314 --------------------------------------------------------------------------------------- Income (Loss) Before Income Tax Life Insurance Individual Life 39,439 31,433 West Coast 36,367 26,063 Acquisitions 53,624 64,460 Specialty Insurance Products Dental 22,059 18,335 Financial Institutions 34,826 22,570 Retirement Savings and Investment Products Stable Value Products 24,652 28,916 Investment Products 13,584 11,360 Corporate and Other (23,992) (5,563) Unallocated Realized Investment Gains (Losses) (8,453) 3,863 --------------------------------------------------------------------------------------- Total income before income tax $192,106 $201,437 --------------------------------------------------------------------------------------- (1) Income before income tax excluding realized investment gains and losses and related amortization of deferred policy acquisition costs.
In the ordinary course of business, the Acquisitions Division regularly considers acquisitions of blocks of policies or smaller insurance companies. Policies acquired through the Division are usually administered as “closed” blocks; i.e., no new policies are being marketed. Therefore, earnings from the Acquisitions Division are normally expected to decline over time (due to the lapsing of policies resulting from deaths of insureds of terminations of coverage) unless new acquisitions are made. The Division did not make an acquisition in 1999 or 2000.
The Acquisitions Division’s 2000 pretax operating income was $53.6 million, $10.8 million below 1999. The Division’s mortality experience was approximately $5.8 million better than expected in 2000 as compared to being approximately $8.9 million better than expected in 1999. Additionally, in the fourth quarter of 1999, adjustments were made to the Division’s investment portfolio which had the effect of transferring approximately $10 million of investment income to the Corporate and Other segment during 2000.
The Dental Division’s 2000 pretax income was $22.1 million compared to $18.3 million in 1999. The aforementioned transfer of companies from PLC resulted in a $2.6 million increase in pretax operating income. The remainder of the increase reflects the Division’s growth through sales.
The Stable Value Products Division’s 2000 pretax operating income increased $1.7 million to $31.2 million. The increase was due to higher account balances which was partially offset by lower interest rate spreads. Operating spreads in 2000 were compressed due to higher interest rates and an inverted yield curve. Realized investment losses associated with this Division in 2000 were $6.5 million as compared to realized investment losses of $0.5 million in 1999. As a result, total pretax income was $24.7 million in 2000 and $28.9 million in 1999.
YEAR ENDED EFFECTIVE INCOME DECEMBER 31 TAX RATES ----------------------------------------------------- 2000 ............................... 35.4% 1999 ............................... 36.3% 1998 ............................... 35.0%
Management's current estimate of the effective income tax rate for 2001 is between 34% and 35%.
Report of Independent Accountants.......................................................... Consolidated Statements of Income for the years ended December 31, 2000, 1999, and 1998... Consolidated Balance Sheets as of December 31, 2000 and 1999............................... Consolidated Statements of Share-Owner’s Equity for the years ended December 31, 2000, 1999, and 1998....................................................... Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998. Notes to Consolidated Financial Statements................................................. Financial Statement Schedules: Schedule III - Supplementary Insurance Information................................... Schedule IV - Reinsurance ...........................................................
PROTECTIVE LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands)
DECEMBER 31 -------------------------- 2000 1999 ASSETS ---- ---- Investments: Fixed maturities, at market (amortized cost: 2000 - $7,463,700; 1999 - $6,546,798).. $ 7,390,110 $ 6,304,554 Equity securities, at market (cost: 2000 - $44,450; 1999 - $32,092)................. 41,792 30,696 Mortgage loans on real estate....................................................... 2,268,224 1,946,690 Investment real estate, net of accumulated depreciation (2000 - $1,226; 1999 - $1,014) 12,566 15,582 Policy loans........................................................................ 230,527 232,126 Other long-term investments......................................................... 66,646 39,943 Short-term investments.............................................................. 172,699 81,171 ---------- --------- Total investments............................................................... 10,182,564 8,650,762 Cash.................................................................................... 33,517 Accrued investment income............................................................... 121,996 101,120 Accounts and premiums receivable, net of allowance for uncollectible amounts (2000 - $2,195; 1999 - $2,540).............................................. 72,189 45,852 Reinsurance receivables................................................................. 1,099,574 859,684 Deferred policy acquisition costs....................................................... 1,189,380 1,011,524 Goodwill, net........................................................................... 241,831 Property and equipment, net............................................................. 51,166 49,002 Other assets............................................................................ 120,874 27,712 Receivable from related parties......................................................... 4,768 13,059 Assets related to separate accounts..................................................... Variable Annuity.................................................................... 1,841,439 1,778,618 Variable Universal Life............................................................. 63,504 40,293 Other............................................................................... 3,746 3,517 ---------- ---------- $15,026,548 $12,581,143 LIABILITIES ========== ========== Policy liabilities and accruals: Future policy benefits and claims.................................................. $ 5,033,397 $ 4,566,426 Unearned premiums.................................................................. 935,605 507,659 --------- --------- Total policy liabilities and accruals.............................................. 5,969,002 5,074,085 Stable value investment contract deposits............................................... 3,177,863 2,680,009 Annuity deposits........................................................................ 1,916,894 1,639,231 Other policyholders' funds.............................................................. 125,336 116,815 Other liabilities....................................................................... 324,901 293,862 Accrued income taxes.................................................................... (10,932) (25,833) Deferred income taxes................................................................... 72,065 (32,335) Note payable............................................................................ 2,315 2,338 Indebtedness to related parties......................................................... 10,000 14,000 Liabilities related to separate accounts................................................ Variable Annuity................................................................... 1,841,439 1,778,618 Variable Universal Life............................................................ 63,504 40,293 Other.............................................................................. 3,746 3,517 ---------- ---------- Total liabilities................................................................ 13,496,133 11,584,600 ---------- ---------- COMMITMENTS AND CONTINGENT LIABILITIES - NOTE G SHARE-OWNER’S EQUITY Preferred Stock, $1.00 par value, shares authorized and issued: 2,000, liquidation preference $2,000.......................... 2 2 Common Stock, $1.00 par value, shares authorized and issued: 5,000,000..................................................... 5,000 5,000 Additional paid-in capital.............................................................. 632,805 327,992 Note receivable from PLC Employee Stock Ownership Plan.................................. (4,841) (5,148) Retained earnings....................................................................... 948,819 814,777 Accumulated other comprehensive income Net unrealized gains (losses) on investments (net of income tax: 2000-$(27,661); 1999-$(78,658))................................... (51,370) (146,080) --------- ---------- Total share-owner’s equity....................................................... 1,530,415 996,543 ---------- ---------- ................................................................................... $15,026,548 $12,581,143 ========== ========== See notes to consolidated financial statements
NOTE RECEIVABLE NET ADDITIONAL FROM UNREALIZED TOTAL PREFERRED COMMON PAID-IN PLC RETAINED GAINS(LOSSES) SHARE-OWNER’S STOCK STOCK CAPITAL ESOP EARNINGS ON INVESTMENTS EQUITY --------- ------ -------- -------- -------- -------------- ---------
Balance, December 31, 1997 $ 2 $5,000 $327,992 $(5,378) $629,436 $61,727 $1,018,779 --------- Net income for 1998 117,183 117,183 Decrease in net unrealized gains on investments (net of income tax - $(2,844)) (5,281) (5,281) Reclassification adjustment for amounts included in net income (net of income tax - $(747)) (1,389) (1,389) ------- Comprehensive income for 1998 110,513 ------- Common dividends ($12 per share) (60,000) (60,000) Preferred dividends ($50 per share) (100) (100) Decrease in note receivable from PLC ESOP 179 179 ---- ----- ------- ------ ------- ------- --------- Balance, December 31, 1998 2 5,000 327,992 (5,199) 686,519 55,057 1,069,371 --------- Net income for 1999 128,258 128,258 Decrease in net unrealized gains on investments (net of income tax - $(106,638)) (198,043) (198,043) Reclassification adjustment for amounts included in net income (net of income tax - $(1,666)) (3,094) (3,094) --------- Comprehensive loss for 1999 (72,879) --------- Decrease in note receivable from PLC ESOP 51 51 ---- ----- ------- ------- ------- --------- --------- Balance, December 31, 1999 2 5,000 327,992 (5,148) 814,777 (146,080) 996,543 --------- Net income for 2000 124,035 124,035 Decrease in net unrealized losses on investments (net of income tax - $45,887) 85,221 85,221 Reclassification adjustment for amounts included in net income (net of income tax - $5,110) 9,489 9,489 --------- Comprehensive income for 2000 218,745 --------- Capital contribution 81,000 81,000 Transfer of subsidiaries from PLC (see Note A) 223,813 10,007 233,820 Decrease in note receivable from PLC ESOP 307 307 ---- ------ -------- ------- -------- -------- --------- Balance, December 31, 2000 $ 2 $5,000 $632,805 $(4,841) $948,819 $(51,370) $1,530,415 ==== ====== ======== ======= ======== ======== =========
PROTECTIVE LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) DECEMBER 31 -------------------------------------- 2000 1999 1998 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income..............................................................................$ 124,035 $ 128,258 $ 117,183 Adjustments to reconcile net income to net cash provided by operating activities: Realized investment (gains) losses.................................................. 14,599 (4,760) (2,136) Amortization of deferred policy acquisition costs................................... 149,574 104,913 111,188 Amortization of goodwill............................................................ 3,867 Capitalization of deferred policy acquisition costs................................. (338,685) (239,483) (192,838) Depreciation expense................................................................ 9,581 10,513 7,110 Deferred income taxes............................................................... 55,161 24,234 14,925 Accrued income taxes................................................................ 13,265 (14,841) (11,933) Interest credited to universal life and investment products......................... 766,004 331,746 352,721 Policy fees assessed on universal life and investment products...................... (197,581) (165,818) (139,689) Change in accrued investment income and other receivables........................... (160,488) (119,183) (159,362) Change in policy liabilities and other policyholder funds of traditional life and health products............................................ 508,454 215,201 322,464 Change in other liabilities......................................................... 1,809 67,552 (19,771) Other (net)......................................................................... (34,626) (5,526) (22,634) ------- ------- ------- Net cash provided by operating activities.................................................... 914,969 332,806 377,228 ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES Maturities and principal reduction of investments: Investments available for sale...................................................... 12,828,276 9,973,742 10,445,407 Other............................................................................... 133,814 243,280 198,559 Sale of investments: Investment available for sale....................................................... 810,716 537,343 1,080,265 Other............................................................................... 5,222 267,892 155,906 Cost of investments acquired: Investments available for sale...................................................... (14,384,625) (10,625,354)(11,505,098) Other............................................................................... (463,909) (864,100) (662,350) Acquisitions and bulk reinsurance assumptions........................................... (141,040) 46,508 Purchase of property and equipment...................................................... (5,085) (18,075) (13,077) Sale of property and equipment.......................................................... 151 ---------- ---------- --------- Net cash used in investing activities........................................................ (1,216,631) (438,613) (300,388) ---------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES Borrowings under line of credit arrangements and long-term debt......................... 2,197,800 4,351,177 1,975,800 Capital contribution from PLC........................................................... 81,000 Principal payments on line of credit arrangements and long-term debt.................... (2,197,823) (4,351,203) (1,973,437) Principal payment on surplus note to PLC................................................ (4,000) (4,000) (2,000) Dividends to share owner................................................................ (60,100) Investment product deposits and change in universal life deposits....................... 1,811,484 1,300,736 981,124 Investment product withdrawals.......................................................... (1,553,282) (1,190,903) (1,037,424) --------- --------- --------- Net cash provided by (used in) financing activities.......................................... 335,179 105,807 (116,037) --------- --------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year: Interest on debt....................................................................$ 3,310 $ 5,611 $ 8,338 Income taxes........................................................................$ 25,638 $ 56,192 $ 57,429
On October 1, 2000, PLC transferred its ownership of twenty companies (that market prepaid dental products) to Protective. This transfer was accounted for in a manner similar to that in pooling-of-interests accounting, which resulted in the assets and liabilities of these companies being transferred at amounts equal to PLC’s bases (including approximately $200 million of goodwill). In addition, Protective’s share-owner’s equity was adjusted by an amount equal to the companies’ share-owner’s equity at October 1, 2000. The results of operations of these companies have been included in the accompanying financial statements since the effective date of the transfer.
Protective provides financial services through the production, distribution, and administration of insurance and investment products. Protective markets individual life insurance, indemnity and prepaid dental products, credit life and disability insurance, guaranteed investment contracts, guaranteed funding agreements, fixed and variable annuities, and extended service contracts throughout the United States. Protective also maintains a separate division devoted exclusively to the acquisition of insurance policies from other companies.
Note A-- SIGNIFICANT ACCOUNTING POLICIES (Continued) through net income. If the derivative is a hedge, its change in fair value is either offset against the change in fair value of the hedged item through net income or recorded in share-owners’ equity until the hedged item is recognized in net income. The fair value of derivatives increases or decreases as interest rates and general economic conditions change. The adoption of SFAS No. 133 on January 1, 2001, will result in a cumulative after-tax charge to net income of approximately $8.3 million and a cumulative after-tax increase to other comprehensive income of approximately $4.0 million in the first quarter of fiscal 2001. The adoption will also impact assets and liabilities recorded on the balance sheet. Prospectively, the adoption may introduce volatility into Protective’s reported net income and other comprehensive income depending on future market conditions and Protective’s hedging activities.
In September 2000, the FASB issued SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of SFAS No. 125.” SFAS No. 140 revises the standards of accounting for securitizations and other transfers of financial assets. This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001.
• Equity securities (common and nonredeemable preferred stocks) - at current market value.
As prescribed by SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” certain investments are recorded at their market values with the resulting unrealized gains and losses reduced by a related adjustment to deferred policy acquisition costs, net of income tax, reported as a component of share-owner’s equity. The market values of fixed maturities increase or decrease as interest rates fall or rise. Therefore, although the adoption of SFAS No. 115 does not affect Protective’s operations, its reported share-owner’s equity will fluctuate significantly as interest rates change.
Deferred income taxes................$ 100,256 $ 46,243 All other liabilities................ 13,424,068 11,616,935 ---------- ---------- 13,524,324 11,663,178 Share-owner’s equity................. 1,581,785 1,142,623 ---------- ---------- $15,106,109 $12,805,801 ========== ==========
Combinations of interest rate swap contracts, options, and futures contracts are sometimes used as hedges against changes in interest rates for certain investments, primarily outstanding mortgage loan commitments, mortgage loans, and mortgage-backed securities, and liabilities arising from interest-sensitive products. Realized gains and losses on certain contracts are deferred and amortized over the life of the hedged asset or liability, and such amortization is recorded in investment income or interest expense. Any unamortized gain or loss is recorded as a realized investment gain or loss upon the early termination of a hedged asset or liability, or when the anticipated transaction is no longer likely to occur. No realized gains or losses were deferred in 2000 and 1999.
Universal Life and Investment Products - Universal life and investment products include universal life insurance, guaranteed investment contracts, deferred annuities, and annuities without life contingencies. Revenues for universal life and investment products consist of policy fees that have been assessed against policy account balances for the costs of insurance, policy administration, and surrenders. Benefit reserves for universal life and investment products represent policy account balances before applicable surrender charges plus certain deferred policy initiation fees that are recognized in income over the term of the policies. Policy benefits and claims that are charged to expense include benefit claims incurred in the period in excess of related policy account balances and interest credited to policy account balances. Interest credit rates for universal life and investment products ranged from 3.6% to 9.4% in 2000.
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," Protective makes certain assumptions regarding the mortality, persistency, expenses, and interest rates it expects to experience in future periods. These assumptions are to be best estimates and are to be periodically updated whenever actual experience and/or expectations for the future change from that assumed. Additionally, relating to SFAS No. 115, these costs have been adjusted by an amount equal to the amortization that would have been recorded if unrealized gains or losses on investments associated with Protective's universal life and investment products had been realized.
The cost to acquire blocks of insurance representing the present value of future profits from such blocks of insurance is also included in deferred policy acquisition costs. Protective amortizes the present value of future profits over the premium payment period, including accrued interest of up to approximately 8%. The
Note A-- SIGNIFICANT ACCOUNTING POLICIES (Continued) unamortized present value of future profits for all acquisitions was approximately $343.6 million and $340.6 million at December 31, 2000 and 1999, respectively. During 2000 $47.3 million of present value of future profits was capitalized (relating to acquisitions made during the year) and $44.3 million was amortized. During 1999 $13.3 million of present value of future profits was capitalized, and $43.0 million was amortized.
Goodwill is being amortized straight-line over periods ranging from 20 to 40 years. Goodwill at December 31, 2000, is as follows:
Protective periodically evaluates the recoverability of its goodwill by comparing expected future cash flows to the amount of unamortized goodwill. If this evaluation were to indicate the unamortized goodwill is impaired, the goodwill would be reduced to an amount representing the present value of applicable estimated future cash flows.
Certain reclassifications have been made in the previously reported financial statements and accompanying notes to make the prior year amounts comparable to those of the current year. Such reclassifications had no effect on previously reported net income, total assets, or share-owner’s equity.
In conformity with statutory reporting practices:(1)................................... $ 66,694 $ 75,114 $147,077 $ 628,274 $ 567,634 $ 531,956 Additions (deductions) by adjustment: Deferred policy acquisition costs, net of amortization.............................. 157,617 120,644 68,155 1,189,380 1,011,524 841,425 Deferred income tax......................... (52,580) (25,675) (14,925) (72,065) 32,335 (51,735) Asset Valuation Reserve..................... 103,853 41,104 66,922 Interest Maintenance Reserve................ (3,540) (226) (1,355) 9,715 19,328 15,507 Nonadmitted items........................... 97,447 51,350 42,835 Other timing and valuation adjustments...... (43,757) 72,527 (76,214) (204,985) (467,130) (282,480) Noninsurance affiliates..................... 21,276 20,698 18,171 Consolidation elimination................... (21,675) (134,824) (23,726) (221,204) (259,602) (95,059) ------- ------- ------- --------- ------- ---------- In conformity with generally accepted accounting principles........................... $124,035 $128,258 $117,183 $1,530,415 $ 996,543 $1,069,371 ======= ======= ======= ========= ======= ========= (1) Consolidated
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET 1999 COST GAINS LOSSES VALUES ---- --------- ---------- ---------- --------- Fixed maturities: Bonds: Mortgage-backed securities...... $2,619,918 $ 18,491 $101,150 $2,537,259 United States Government and authorities................... 154,954 138 1,257 153,835 States, municipalities, and political subdivisions........ 27,254 7 295 26,966 Public utilities................ 537,834 301 14,690 523,445 Convertibles and bonds with warrants...................... 693 0 155 538 All other corporate bonds....... 3,204,963 5,938 149,591 3,061,310 Redeemable preferred stocks.......... 1,182 19 0 1,201 --------- ------ ------- --------- 6,546,798 24,894 267,138 6,304,554 Equity securities....................... 32,092 644 2,040 30,696 Short-term investments.................. 81,171 0 0 81,171 --------- ------ ------- --------- $6,660,061 $ 25,538 $269,178 $6,416,421 ========= ====== ======= =========
ESTIMATED AMORTIZED MARKET COST VALUES 2000 ---------- ---------- ---- Due in one year or less................. $ 508,619 $ 505,081 Due after one year through five years... 3,946,183 3,930,126 Due after five years through ten years.. 2,125,817 2,108,270 Due after ten years..................... 883,081 846,633 --------- --------- $7,463,700 $7,390,110 ========= =========
ESTIMATED AMORTIZED MARKET COST VALUES 1999 ---------- ----------- ---- Due in one year or less................. $ 322,576 $ 322,074 Due after one year through five years... 2,926,510 2,877,029 Due after five years through ten years.. 2,161,638 2,058,897 Due after ten years..................... 1,136,074 1,046,554 --------- --------- $6,546,798 $6,304,554 ========= =========
At December 31, 2000 and 1999, Protective had bonds which were rated less than investment grade of $226.5 million and $243.6 million, respectively, having an amortized cost of $306.0 million and $293.1 million, respectively. At December 31, 2000, approximately $70.1 million of the bonds rated less than investment grade were securities issued in company-sponsored commercial mortgage loan securitizations. Approximately $1,160.5 million of bonds are not publicly traded.
2000 1999 1998 ---- ---- ---- Fixed maturities........... $109,625 $(217,901) $(21,705) Equity securities.......... (820) 973 4,605
At December 31, 2000, all of Protective’s mortgage loans were commercial loans of which 76% were retail, 11% were apartments, 6% were office buildings, and 5% were warehouses, and 2% other. Protective specializes in making mortgage loans on either credit-oriented or credit-anchored commercial properties, most of which are strip shopping centers in smaller towns and cities. No single tenant’s leased space represents more than 5% of mortgage loans. Approximately 75% of the mortgage loans are on properties located in the following states listed in decreasing order of significance: Texas, Tennessee, Georgia, Florida, Alabama, South Carolina, Virginia, North Carolina, Mississippi, Washington, Ohio, and Kentucky.
2000 1999 ---- ---- Deferred income tax assets: Policy and policyholder liability reserves.................. $205,815 $ 217,642 Other....................................................... 1,959 2,088 ------- ------- 207,774 219,730 ======= ======= Deferred income tax liabilities: Deferred policy acquisition costs........................... 302,631 257,816 Unrealized losses on investments............................ (22,792) (70,421) ------- ------- 279,839 187,395 ------- ------- Net deferred income tax liability $ 72,065 $ (32,335) ======= =======
Interest expense on debt totaled $3.8 million, $5.1 million, and $8.3 million in 2000, 1999, and 1998, respectively.
Note F-- RECENT ACQUISITIONS In October 1998 Protective coinsured a block of life insurance policies from Lincoln National Corporation. The policies represent the payroll deduction business originally marketed and underwritten by Aetna. In September 1999, Protective recaptured a block of credit life and disability policies which it had previously ceded.
In January 2000, Protective acquired the Lyndon Insurance Group (Lyndon). The assets acquired included $47.3 million of present value of future profits and $41.4 million of goodwill.
On January 19, 2001, Protective coinsured a block of individual life insurance policies with approximately $80 million of annual premium and $725 million of policy liabilities.
A number of civil jury verdicts have been returned against insurers and other providers of financial services involving the sales practices, alleged agent misconduct, failure to properly supervise representatives, and other matters. Increasingly these lawsuits have resulted in the award of substantial judgments that are disproportionate to the actual damages, including material amounts of punitive damages. In some states, including Alabama, (where Protective maintains its headquarters), juries have substantial discretion in awarding punitive and non-economic compensatory damages which creates the potential for unpredictable material adverse judgments in any given lawsuit. In addition, in some class action and other lawsuits, companies have made material settlement payments. Protective and its subsidiaries, like other financial service companies, in the ordinary course of business, are involved in such litigation or, alternatively in arbitration. Although the outcome of any litigation or arbitration cannot be predicted, Protective believes that at the present time there are no pending or threatened lawsuits that are reasonably likely to have a material adverse effect on the financial position, results of operations, or liquidity of Protective.
Note H-- SHARE-OWNER'S EQUITY AND RESTRICTIONS At December 31, 2000, approximately $1,122.9 million of consolidated share-owner's equity, excluding net unrealized gains on investments, represented net assets of Protective and its subsidiaries that cannot be transferred to PLC. In addition, Protective and its subsidiaries are subject to various state statutory and regulatory restrictions on their ability to pay dividends to PLC. In general, dividends up to specified levels are considered ordinary and may be paid thirty days after written notice to the insurance commissioner of the state of domicile unless such commissioner objects to the dividend prior to the expiration of such period. Dividends in larger amounts are considered extraordinary and are subject to affirmative prior approval by such commissioner. The maximum amount that would qualify as ordinary dividends to PLC by Protective in 2001 is estimated to be $83.6 million.
Note I-- PREFERRED STOCK PLC owns all of the 2,000 shares of preferred stock issued by Protective's subsidiary, Protective Life and Annuity Insurance Company (PL&A). Prior to November 1998, the stock paid, when and if declared, annual minimum cumulative dividends of $50 per share, and noncumulative participating dividends to the extent PL&A’s statutory earnings for the immediately preceding fiscal year exceeded $1 million. PL&A paid no preferred dividends during 2000 or 1999. Dividends of $0.1 million were paid to PLC in 1998. Effective November 3, 1998, PL&A’s articles of incorporation were amended such that the provision for an annual minimum cumulative dividend was removed.
Protective leases furnished office space and computers to affiliates. Lease revenues were $4.0 million in 2000, $3.7 million in 1999, and $3.0 million in 1998. Protective purchases data processing, legal, investment and management services from affiliates. The costs of such services were $76.7 million, $69.2 million, and $56.2 million in 2000, 1999, and 1998, respectively. Commissions paid to affiliated marketing organizations of $12.0 million, $11.4 million, and $8.4 million in 2000, 1999, and 1998, respectively, were included in deferred policy acquisition costs.
Certain corporations with which PLC's directors were affiliated paid Protective premiums and policy fees or other amounts for various types of insurance and investment products. Such premiums, policy fees, and other amounts totaled $50.9 million, $70.3 million and $28.6 million in 2000, 1999, and 1998, respectively. Protective and/or PLC paid commissions, interest on debt and investment products, and fees to these same corporations totaling $28.2 million, $16.7 million and $7.3 million in 2000, 1999, and 1998, respectively.
Specialty Insurance Products The Dental Benefits Division's primary focus is on indemnity and prepaid dental products.
Retirement Savings and Investment Products The Stable Value Products Division markets guaranteed investment contracts to 401(k) and other qualified retirement savings plans. The Division also markets fixed and floating rate funding agreements (to the trustees of municipal bond proceeds, institutional investors, bank trust departments, and money market funds) and long-term annuity contracts.
In the first quarter of 2000, certain health insurance lines were transferred from the Dental Benefits Division to the Corporate and Other segment in order to reflect management's current focus. Prior period segment results have been restated to reflect the change.
RETIREMENT SAVINGS AND SPECIALTY INSURANCE PRODUCTS INVESTMENT PRODUCTS DENTAL FINANCIAL STABLE VALUE INVESTMENT CORPORATE TOTAL BENEFITS INSTITUTIONS PRODUCTS PRODUCTS AND OTHER ADJUSTMENTS (1) CONSOLIDATED -------------------------------------------------------------------------------------------------------------------------
$ 218,773 $ 301,230 $ 18,809 $ 58,741 $ 1,027,340 (85,753) (188,958) (459,215) ------------------------------------------------------------------------------------------------------------------------- 133,020 112,272 18,809 58,741 568,125 11,166 25,068 $ 213,136 105,827 17,173 603,795 1,609 1,318 $ (791) 2,136 4,848 10,302 1,799 1,463 20,201 ------------------------------------------------------------------------------------------------------------------------- 149,034 147,642 214,745 127,753 77,377 1,194,257 ------------------------------------------------------------------------------------------------------------------------- 101,586 52,629 178,745 85,045 39,515 730,496 6,859 28,526 735 17,213 3,494 111,188 31,142 48,837 2,876 14,428 27,891 172,228 ------------------------------------------------------------------------------------------------------------------------- 139,587 129,992 182,356 116,686 70,900 1,013,912 ------------------------------------------------------------------------------------------------------------------------- 9,447 17,650 32,389 11,067 6,477 180,345 63,162 63,162 ------------------------------------------------------------------------------------------------------------------------- $ 117,183 -------------------------------------------------------------------------------------------------------------------------
$ 192,906 $1,369,915 $3,340,099 $3,844,168 $428,951 $13,595,337 214,770 150,984 2,144 127,334 81,711 1,431,211 ------------------------------------------------------------------------------------------------------------------------- $ 407,676 $1,520,899 $3,342,243 $3,971,502 $510,662 $15,026,548 -------------------------------------------------------------------------------------------------------------------------
$ 197,337 $ 645,909 $2,869,304 $2,542,536 $700,417 $10,781,470 23,836 39,212 1,448 75,177 9 841,425 ------------------------------------------------------------------------------------------------------------------------- $ 221,173 $ 685,121 $2,870,752 $2,617,713 $700,426 $11,622,895 -------------------------------------------------------------------------------------------------------------------------
Note L-- EMPLOYEE BENEFIT PLANS PLC has a defined benefit pension plan covering substantially all of its employees. The plan is not separable by affiliates participating in the plan. However, approximately 86% of the participants in the plan are employees of Protective. The benefits are based on years of service and the employee’s highest thirty-six consecutive months of compensation. PLC’s funding policy is to contribute amounts to the plan sufficient to meet the minimum finding requirements of ERISA plus such additional amounts as PLC may determine to be appropriate from time to time. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future.
2000 1999 1998 ---- ---- ---- Service cost.............................................................. $ 3,338 $ 3,270 $ 2,585 Interest cost............................................................. 3,195 2,779 2,203 Expected return on plan assets............................................ (3,049) (2,348) (1,950) Amortization of prior service cost........................................ 176 115 112 Amortization of transition asset.......................................... (17) (17) (17) Recognized net actuarial loss............................................. 494 305 ----- ----- ----- Net pension cost.......................................................... $ 3,643 $ 4,293 $ 3,238 ===== ===== =====
Protective's share of the net pension cost was approximately $4.1 million, $3.6 million, and $2.6 million, in 2000, 1999, and 1998, respectively.
2000 1999 1998 ---- ---- ---- Weighted average discount rate........................................... 7.50% 8.00% 6.75% Rates of increase in compensation level.................................. 5.25% 5.75% 4.75% Expected long-term rate of return on assets............................... 8.50% 8.50% 8.50%
At December 31, 2000, approximately $20.9 million of the assets of the pension plan were in a group annuity contract with Protective and therefore are included in the general assets of Protective. Approximately $19.9 million of the assets of the pension plan are invested in a collective trust managed by Northern Trust Corporation.
Service cost............................................................$ 736 $ 695 $ 611 Interest cost........................................................... 1,067 887 722 Amortization of prior service cost...................................... 19 113 112 Amortization of transition asset........................................ 37 37 37 Recognized net actuarial loss........................................... 194 265 173 ----- ----- ----- Net pension cost........................................................ $2,053 $1,997 $1,655 ===== ===== =====
In addition to pension benefits, PLC provides limited healthcare benefits to eligible retired employees until age 65. The postretirement benefit is provided by an unfunded plan. At December 31, 2000 and 1999, the liability for such benefits was approximately $1.2 million. The expense recorded by PLC was $0.1 million in 2000, 1999 and 1998. PLC’s obligation is not materially affected by a 1% change in the healthcare cost trend assumptions used in the calculation of the obligation.
Note M-- STOCK BASED COMPENSATION Certain Protective employees participate in PLC’s stock-based incentive plans and receive stock appreciation rights (SARs) from PLC.
Since 1973, PLC has had stock-based incentive plans to motivate management to focus on PLC’s long-range performance through the awarding of stock-based compensation. Under plans approved by share owners in 1997 and 1998, up to 5,000,000 shares may be issued in payment of awards.
The criteria for payment of performance awards is based upon a comparison of PLC’s average return on average equity and total rate of return over a four year award period (earlier upon the death, disability, or retirement of the executive, or in certain circumstances, of a change in control of PLC) to that of a comparison group of publicly held life and multiline insurance companies. If PLC’s results are below the median of the comparison group, no portion of the award is earned. If PLC’s results are at or above the 90th percentile, the award maximum is earned.
The 1996 SARs have a base price of $17.4375. The 2000 SARs have a base price of $22.31. The fair value of the 2000 SARs was estimated using a Black-Sholes option pricing model. Assumptions used in the model were as follows: expected volatility of 23.65% (approximately equal to that of the S&P Life Insurance Index), a risk-free interest rate of 6.5%, a dividend rate of 2.15%, and an expected exercise date of March 7, 2007.
Protective has reinsured approximately $126.0 billion, $93.5 billion, and $64.8 billion in face amount of life insurance risks with other insurers representing $496.4 million, $364.7 million, and $294.4 million of premium income for 2000, 1999, and 1998, respectively. Protective has also reinsured accident and health risks representing $262.2 million, $172.8 million, and $164.8 million of premium income for 2000, 1999, and 1998, respectively. In 2000 and 1999, policy and claim reserves relating to insurance ceded of $988.4 million and $739.3 million respectively, are included in reinsurance receivables. Should any of the reinsurers be unable to meet its obligation at the time of the claim, obligation to pay such claim would remain with Protective. At December 31, 2000 and 1999, Protective had paid $33.5 million and $46.8 million, respectively, of ceded benefits which are recoverable from reinsurers. In addition, at December 31, 2000, Protective had receivables of $78.2 million related to insurance assumed.
Liabilities (see Notes A and E): Stable value account balances....... 3,177,863 3,250,991 2,680,009 2,649,616 Annuity account balances............ 1,916,894 1,893,749 1,639,231 1,598,993 Notes payable....................... 2,315 2,315 2,338 2,338 Other (see Note A): Derivative Financial Instruments.... (6,079) (13,011) 5,273 3,564
Except as noted below, fair values were estimated using quoted market prices. Protective estimates the fair value of its mortgage loans using discounted cash flows from the next call date. Protective believes the fair value of its short-term investments and notes payable to banks approximates book value due to either being short-term or having a variable rate of interest. Protective estimates the fair value of its guaranteed investment contracts and annuities using discounted cash flows and surrender values, respectively. Protective believes it is not practicable to determine the fair value of its policy loans since there is no stated maturity, and policy loans are often repaid by reductions to policy benefits.
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION PROTECTIVE LIFE INSURANCE COMPANY AND SUBSIDIARIES (in thousands) ----------------------------------------------------------------------------------------------------------------------------------- COL. A COL. B COL. C COL. D COL. E COL. F COL. G COL. H COL. I COL. J -----------------------------------------------------------------------------------------------------------------------------------
STABLE VALUE AND FUTURE ANNUITY AMORTIZATION DEFERRED POLICY DEPOSITS PREMIUMS BENEFITS OF DEFERRED POLICY BENEFITS AND OTHER AND NET AND POLICY OTHER ACQUISITION AND UNEARNED POLICYHOLDERS' POLICY INVESTMENT SETTLEMENT ACQUISITION OPERATING SEGMENT COSTS CLAIMS PREMIUMS FUNDS FEES INCOME(1) EXPENSES COSTS EXPENSES(1) ------- ---------- --------- ---------- ----------- --------- -------- --------- --------- -------- Year Ended December 31, 2000: Life Insurance Individual Life $ 354,320 $1,222,673 $ 315$ 14,878 $ 73,826 $ 60,629 $ 70,365 $ 33,767 $ (10,495) West Coast 276,518 1,499,173 0 86,227 25,987 91,688 79,065 15,003 (12,760) Acquisitions 223,430 1,364,830 484 238,465 102,997 116,940 125,151 17,081 24,077 Specialty Insurance Products Dental Benefits 11,788 95,665 2,602 63,351 215,613 8,913 151,202 6,386 60,158 Financial Institutions 112,135 294,458 929,943 3,945 220,466 46,464 135,494 50,132 74,830 Retirement Savings and Investment Products Stable Value Products 2,144 162,236 0 3,177,863 0 243,133 207,143 900 3,882 Investment Products 127,334 306,021 0 1,633,203 30,127 132,204 109,607 24,156 18,203 Corporate and Other 81,711 88,341 2,261 2,161 54,503 (3,034) 46,183 2,149 33,274 --------- --------- ------- --------- ------- ------- ------- ------- ------- TOTAL $1,189,380 $5,033,397 $935,605 $5,220,093 $723,519 $696,937 $924,210 $149,574 $191,169 ========= ========= ======= ========= ======= ======= ======= ======= ======= Year Ended December 31, 1999: Life Insurance Individual Life $ 379,117 $1,210,188$ 338$ 17,159 $ 92,506 $ 59,916 $ 74,455 $ 23,434 $ 20,851 West Coast 200,605 1,279,554 0 74,831 23,208 78,126 73,176 6,047 (2,649) Acquisitions 235,903 1,374,445 558 260,267 114,866 129,806 129,581 19,444 31,178 Specialty Insurance Products Dental Benefits 25,819 126,592 2,994 74,204 165,409 11,141 119,950 5,534 40,359 Financial Institutions 51,339 150,888 503,735 9,044 107,962 24,122 55,899 24,718 44,728 Retirement Savings and Investment Products Stable Value Products 1,156 167,415 0 2,680,009 0 210,209 175,290 744 4,708 Investment Products 117,577 254,492 0 1,320,453 24,248 106,599 88,642 19,820 14,617 Corporate and Other 8 2,852 34 88 71,024 3,312 54,534 5,172 22,647 --------- --------- ------- --------- ------- ------- ------- ------- -------- TOTAL $1,011,524 $4,566,426 $507,659 $4,436,055 $599,223 $623,231 $771,527 $104,913 $176,439 ========= ========= ======= ========= ======= ======= ======= ======= ======= Year Ended December 31, 1998: Life Insurance Individual Life $ 301,941 $1,054,253 $ 355 $ 10,802 $126,168 $ 55,779 $106,308 $ 30,543 $ 14,983 West Coast 144,455 1,006,280 0 77,254 22,380 63,492 54,617 4,924 5,354 Acquisitions 255,347 1,383,759 553 233,846 96,735 112,154 112,051 18,894 26,717 Specialty Insurance Products Dental Benefits 23,836 111,916 3,341 78,224 133,020 11,166 101,586 4,171 33,830 Financial Institutions 39,212 215,451 385,006 105,434 112,272 25,068 52,629 28,526 48,837 Retirement Savings and Investment Products Stable Value Contracts 1,448 172,674 0 2,691,697 0 213,136 178,745 735 2,876 Investment Products 75,177 194,726 0 1,233,528 18,809 105,827 85,045 17,213 14,428 Corporate and Other 9 944 39 88 58,741 17,173 39,515 6,182 25,203 ------- --------- ------- --------- ------- ------- ------- ------- ------- TOTAL $ 841,425 $4,140,003 $389,294 $4,430,873 $568,125 $603,795 $730,496 $111,188 $172,228 ======= ========= ======= ========= ======= ======= ======= ======= ======= (1) Allocations of Net Investment Income and Other Operating Expenses are based on a number of assumptions and estimates and results would change if different methods were applied.
SCHEDULE IV - REINSURANCE PROTECTIVE LIFE INSURANCE COMPANY AND SUBSIDIARIES (Dollars in thousands)
------------------------------------------------------------------------------------------------------------------------------------ COL. A COL. B COL. C COL. D COL. E COL. F ------------------------------------------------------------------------------------------------------------------------------------ PERCENTAGE CEDED TO ASSUMED OF AMOUNT GROSS OTHER FROM OTHER NET ASSUMED AMOUNT COMPANIES COMPANIES AMOUNT TO NET ------------ ------------- ------------ ----------- --------- Year Ended December 31, 2000: Life insurance in force........................... $153,371,754 $128,374,583 $17,050,342 $42,047,513 40.6% =========== =========== ========== ========== ====
Premiums and policy fees: Life insurance.................................... $691,153 $ 496,715 $ 112,669 $ 307,107 36.7% Accident and health insurance..................... 545,240 261,940 24,393 307,693 7.9% Property and liability insurance.................. 159,346 63,795 13,168 108,719 12.1% --------- ------- ------- ------- TOTAL......................................... $ 1,395,739 $ 822,450 $ 150,230 $ 723,519 ========= ======= ======= ======= Year Ended December 31, 1999: Life insurance in force........................... $112,726,959 $ 92,566,755 $17,089,627 $37,249,831 45.9% =========== ========== ========== ========== Premiums and policy fees: Life insurance.................................... $ 540,430 $ 364,680 $ 131,855 $ 307,605 42.9% Accident and health insurance..................... 403,491 172,852 27,266 257,905 10.6% Property and liability insurance.................. 34,104 501 110 33,713 0.3% ------- ------- ------- ------- TOTAL......................................... $ 978,025 $ 538,033 $ 159,231 $ 599,223 ======= ======= ======= ======= Year Ended December 31, 1998: Life insurance in force........................... $ 91,980,657 $ 64,846,246 $18,010,434 $45,144,845 39.9% ========== ========== ========== ========== ==== Premiums and policy fees: Life insurance.................................... $ 537,002 $ 294,363 $ 87,965 $ 330,604 26.6% Accident and health insurance..................... 361,705 164,852 14,279 211,132 6.8% Property and liability insurance.................. 26,389 26,389 0.0% ------- ------- ------- ------- TOTAL $ 925,096 $ 459,215 $ 102,244 $ 568,125 ======= ======= ======= ========