Premiums and policy fees.......................... $31,205,079 $36,130,966 (13.6)% Net investment income............................. 31,692,497 28,714,951 10.4 Realized investment gains......................... 42,148 89,550 (52.9) Other income (loss)............................... (6,551) 90,289 - ------------ ----------- $62,933,173 $65,025,756 ============ ===========
The Company maintains an allowance for uncollectible amounts on investments, which totaled $0.5 million at December 31, 2000. There were no additions or reductions to the allowance during 2000. Realized investment gains in 2000 were approximately $27 thousand and realized investment losses were approximately $98 thousand.
Income Before Income Tax The following table sets forth operating income or loss and income or loss before income tax by business segment for the periods shown:
Operating Income (Loss) and Income (Loss) Before Income Tax Year Ended December 31 --------------------------------------------------- 2000 1999 ---------------------- -------------------
(1) Income before income tax excluding realized investment gains and losses and related amortization of deferred policy acquisition costs.
The Dental Benefits Division’s 2000 pretax earnings decreased $0.6 million as compared to 1999 primarily due to the termination of a group life customer effective December 31, 1999.
Income Tax Expense The following table sets forth the effective income tax rates for the periods shown:
Net Income ---------------------------------- Percentage Year Ended Increase December 31 Amount (Decrease) ----------- ------------ -----------
In our opinion, the financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Protective Life and Annuity Insurance Company at December 31, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related financial statements. These financial statements and financial statement schedules are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
Year Ended December 31 ------------------------------------- 2000 1999 1998 ------------ ------------ -----------
December 31 ------------------------------- 2000 1999 ------------ ------------- ASSETS Investments: Fixed maturities, at market (amortized cost:2000-$428,392,599; 1999-$384,291,937) $418,756,679 $366,838,300 Mortgage loans on real estate.................................................... 3,215,344 3,683,311 Investment real estate, net of accumulated depreciation (1999 - $3,750).......... 1,096,250 Policy loans..................................................................... 54,465,893 54,824,429 Short-term investments........................................................... 4,000,000 7,493,877 ------------ ------------- Total investments............................................................ 480,437,916 433,936,167 Cash................................................................................. 1,165,410 4,021,839 Accrued investment income............................................................ 8,914,306 7,718,388 Accounts and premiums receivable, net of allowance for uncollectible amounts (2000 - $7,000; 1999 - $7,000)........................................... 1,952,449 4,256,931 Reinsurance receivables.............................................................. 23,136,896 26,779,589 Deferred policy acquisition costs.................................................... 128,228,360 127,792,025 Other assets......................................................................... 27,333 41,731 Assets related to separate accounts Variable annuity................................................................. 9,037,035 4,951,159 ------------ ------------- $652,899,705 $609,497,829 ============ ============= LIABILITIES Policy liabilities and accruals: Future policy benefits and claims............................................... $452,212,971 $445,284,973 Unearned premiums............................................................... 8,154,233 7,852,424 ------------ ------------- 460,367,204 453,137,397 Annuity deposits..................................................................... 28,059,246 12,253,056 Other policyholders' funds........................................................... 5,794,289 5,410,510 Other liabilities.................................................................... 21,209,531 18,338,059 Deferred income taxes................................................................ 9,063,941 109,523 Liabilities related to separate accounts Variable annuity................................................................ 9,037,035 4,951,159 ------------ ------------- Total liabilities............................................................ 533,531,246 494,199,704 ------------ -------------
Net Unrealized Additional Gains Total Preferred Common Paid-In Retained (Losses) On Share-Owners' Stock Stock Capital Earnings Investments Equity ------------ ---------- ------------- ----------- ------------- ---------------
December 31 ------------------------------------------- 2000 1999 1998 ------------ ----------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income.........................................................................$ 8,743,668 $ 9,401,173 $ 2,414,538 Adjustments to reconcile net income to net cash provided by operating activities: Realized investment(gains)...................................................... (42,148) (89,550) (127,769) Amortization of deferred policy acquisition costs............................... 6,765,446 6,835,492 1,711,138 Capitalization of deferred policy acquisition costs............................. (2,593,858) (1,352,066) (783,304) Deferred income taxes........................................................... 4,605,444 3,656,012 938,986 Interest credited to universal life and investment products..................... 33,753,870 18,114,354 2,422,680 Policy fees assessed on universal life and investment products.................. (37,777,093) (18,758,319) (1,004,958) Change in accrued investment income and other receivables....................... 4,751,257 (8,078,299) (19,671,587) Change in policy liabilities and other policyholder funds of traditional life and health products............................................................ 3,848,851 (12,255,924) 12,188,685 Change in other liabilities..................................................... 2,871,472 10,396,783 (1,023,377) Other (net)..................................................................... 432,557 14,237 14,841 ------------ ----------- ------------- Net cash provided by (used in) operating activities.................................... 25,359,466 7,883,893 (2,920,127) ------------ ----------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES Dividends to share owners.......................................................... (12,750,000) (5,000,000) (100,000) Investment product deposits and change in universal life deposits.................. 47,248,477 36,600,618 7,980,628 Investment product withdrawals..................................................... (23,654,329) (10,806,493) (13,812,984) ------------ ----------- ------------- Net cash provided by (used in) financing activities.................................... 10,844,148 20,794,125 (5,932,356) ------------ ----------- -------------
INCREASE (DECREASE) IN CASH............................................................ (2,856,429) 4,021,839 (2,218,201) CASH AT BEGINNING OF YEAR.............................................................. 4,021,839 0 2,218,201 ------------ ----------- ------------- CASH AT END OF YEAR....................................................................$ 1,165,410 $ 4,021,839 $ 0 ============ =========== =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year: Income taxes....................................................................$ 0 $ 0 $ 350,000
RECENTLY ISSUED ACCOUNTING STANDARDS In 1999, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise," and Statement of Position 98-1, "Accounting for the Costs of Computer software Developed or Obtained for Internal Use," and Statement of Positions 97-3, "Accounting by Insurance and Other Enterprises for Insurance Related Assessments" issued by the American Institute of Certified Public Accountants. The adoption of these accounting standards did not have a material effect on the Company's financial statements.
The Financial Accounting Standards Board (FASB) has issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." Effective January 1, 2001, SFAS No. 133 (as amended by SFAS Nos. 137 and 138) requires the Company to record derivative financial instruments, including certain derivative instruments embedded in other contracts, on its balance sheet and to carry such derivatives at fair value. Derivatives that are not designated to be part of a qualifying hedging relationship must be adjusted to fair value each period 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 $0.3 million and a cumulative after-tax increase to other comprehensive income of approximately $0.3 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 the Company's reported net income and other comprehensive income depending on future market conditions and the Company's hedging activities.
Substantially all short-term investments have maturities of three months or less at the time of acquisition.
CASH Cash includes all demand deposits reduced by the amount of outstanding checks and drafts. The Company has deposits with certain financial institutions which exceed federally insured limits. The Company has reviewed the credit worthiness of these financial institutions and believes there is minimal risk of a material loss.
DEFERRED POLICY ACQUISITION COSTS Commissions and other costs of acquiring traditional life and health insurance, credit insurance, universal life insurance, and investment products that vary with and are primarily related to the production of new business have been deferred. Traditional life and health insurance acquisition costs are being 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 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.
The cost to acquire blocks of insurance representing the present value of future profits from such blocks of insurance is also included in deferred policy acquisition costs. The Company amortizes the present value of future profits over the premium payment period, including accrued interest of up to approximately 8.0%. The unamortized present value of future profits was approximately $119.8 million and $125.6 million at December 31, 2000 and 1999, respectively. During 2000, $5.8 million of present value of future profits was amortized. No amounts were capitalized during 2000. During 1999, $6.4 million of present value of future profits was amortized and $0.8 million was capitalized.
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 are graded and range from 2.5 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.
Paid related to: Current year............................................. 9,504,618 8,999,287 5,904,526 Prior year............................................... 1,276,856 286,811 1,026,981 ------------ ------------ ---------- Total paid........................................... 10,781,474 9,286,098 6,931,507 ------------ ------------ ----------
Net balance end of year.................................. 5,418,046 4,632,922 3,595,595 Plus reinsurance..................................... 1,954,392 4,924,705 494,064 ----------- ------------ ---------- Balance end of year...................................... $ 7,372,438 $9,557,627 $4,089,659 =========== ============ ===========
Universal Life and Investment Products - Universal life and investment products include universal life insurance, deferred annuities, and annuities without life contingencies. Premiums and policy fees 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.
The National Association of Insurance Commissioners has adopted the Codification of Statutory Accounting Principles (Codification). Codification changes current statutory accounting rules in several areas and is effective January 1, 2001. Although the Company has not estimated the potential effect, it does not believe Codification will have a material effect on the financial position, results of operations, or liquidity of the Company.
Fixed maturities: Bonds: Mortgage-backed securities................. $ 6,008,883 $ 74,844 $ 34,384 $ 6,049,343 United States Government and authorities................................ 10,206,255 52,292 238,867 10,019,680 States, municipalities, and political subdivisions...................... 3,056,009 0 26,039 3,029,970 Public utilities........................... 54,683,099 120,250 2,193,490 52,609,859 Convertibles and bonds with warrants.................................... 694,978 0 155,978 539,000 All other corporate bonds................... 309,642,713 71,357 15,123,622 294,590,448 --------------- ------------ ------------ ------------ 384,291,937 318,743 17,772,380 366,838,300 Short-term investments............................. 7,493,877 0 0 7,493,877 --------------- ------------ ------------ ------------- $ 391,785,814 $ 318,743 $17,772,380 $374,332,177 =============== ============ ============ =============
At December 31, 2000 and 1999, the Company had bonds which were rated less than investment grade of $11.6 million and $11.9 million, respectively, having an amortized cost of $13.7 million and $12.7 million, respectively. Approximately $53.8 million of bonds are not publicly traded.
Some of the mortgage loans have call provisions. Assuming these loans are called at their next call dates, approximately $0.2 million would become due in 2001.
The Company’s effective income tax rate varied from the maximum federal income tax rate as follows:
Dividends on common stock are noncumulative and are paid as determined by the Board of Directors. At December 31, 2000, approximately $96.6 million of share-owners’ equity excluding net unrealized gains and losses represented net assets of the Company that cannot be transferred to Protective. 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 Protective by the Company in 2001 is estimated to be $12.9 million.
Prior to November 1998, the Company’s preferred stock had a provision for an annual minimum cumulative dividend, when and if declared, of $50.00 per share, and additional dividends to the extent the Company’s statutory earnings for the immediately preceding year exceeded $1.0 million. The minimum dividend and any accumulation was to be paid before any dividend on any other class of capital stock was paid. The additional dividends were noncumulative and were in preference to any other dividend on any other class of capital stock. Dividends of $100,000 were declared and paid in 1998 on the preferred stock. Effective November 3, 1998, the Company’s articles of incorporation were amended such that the provision for an annual minimum cumulative dividend was removed. No preferred dividends were paid in either 2000 or 1999.
Receivables from and payables to related parties consisted of receivables from and payables to affiliates under control of PLC in the amount of a $1,666,742 payable at December 31, 2000 and a $5,582,845 receivable at December 31, 1999. The Company routinely receives from or pays to affiliates under the control of PLC reimbursements for expenses incurred on one another’s behalf. Receivables and payables among affiliates are generally settled monthly.
Specialty Insurance Products The Dental Benefits Division’s primary focus is on indemnity and prepaid dental products.
The Investment Products Division manufactures, sells, and supports fixed and variable annuity products. These products are primarily sold through stockbrokers, but are also sold through financial institutions and the Individual Life Division’s sales force.
The Company has an additional business 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 Divisions above (including net investment income on unallocated capital).
Dental Financial Investment Corporate Operating Segment Income Acquisitions Benefits Institutions Products and Other Adjustments(1) Total ------------------------- ------------- ----------- ------------ ----------- ----------- ------------- ------------
---- Premiums and policy fees, net....... $32,290,715 $1,750,639 $2,059,410 $ 30,202 $36,130,966 Net investment income............... 27,604,825 442,048 269,670 250,000 $ 148,408 28,714,951 Realized investment gains........... $ 89,550 89,550 Other income (loss)................ (8,718) 89,757 9,250 90,289 ------------- ----------- ------------ ----------- ---------- ------------- ----------- Total revenues.............. 59,886,822 2,192,687 2,418,837 289,452 148,408 89,550 65,025,756 ------------- ----------- ------------ ----------- ---------- ------------- ----------- Benefits and settlement expenses.... 29,333,105 1,657,675 974,013 242,354 32,207,147 Amortization of deferred policy acquisition costs........... 6,334,661 500,831 6,835,492 Other operating expenses............ 12,059,458 45,833 33,574 761,937 25,130 12,925,932 ------------- ----------- ------------ ----------- ---------- ------------- ----------- Total benefits and expenses. 47,727,224 1,703,508 1,508,418 1,004,291 25,130 51,968,571 ------------- ----------- ------------ ----------- ---------- ------------- ----------- Income before income tax............ 12,159,598 489,179 910,419 (714,839) 123,278 89,550 13,057,185 Income tax expense.................. 3,656,012 3,656,012 ------------- ----------- Net income ....................... $ 9,401,173 =========== ----- Premiums and policy fees, net....... $ 7,414,597 $1,503,364 $ 848,682 $ 501 $ 9,767,144 Net investment income............... 11,071,366 718,492 136,472 $(1,248,164) 10,678,166 Realized investment gains........... $ 127,769 127,769 Other income (loss)................. (598) (598) ------------- ----------- ------------ ----------- ---------- ------------- ----------- Total revenues.............. 18,485,963 2,221,856 985,154 (97) (1,248,164) 127,769 20,572,481 ------------- ----------- ------------ ----------- ---------- ------------- ----------- Benefits and settlement expenses.... 7,594,508 1,340,838 316,900 8,754 9,261,000 Amortization of deferred policy acquisition costs........... 1,535,385 175,753 1,711,138 Other operating expenses............ 5,947,115 144,257 105,307 50,140 6,246,819 ------------- ----------- ------------ ----------- ---------- ------------- ----------- Total benefits and expenses. 15,077,008 1,485,095 597,960 58,894 17,218,957 ------------- ----------- ------------ ----------- ---------- ------------- ----------- Income before income tax............ 3,408,955 736,761 387,194 (58,991) (1,248,164) 127,769 3,353,524 Income tax expense.................. 938,986 938,986 ------------- ---------- Net income ....................... $ 2,414,538 ==========
Note J-- OPERATING SEGMENTS (continued) Dental Financial Investment Corporate Acquisitions Benefits Institutions Products and Other Total ------------ ----------- ------------ ------------ ------------ ----------
Investments and other assets........ $434,928,613 $6,642,241 $ 2,658,668 $ 774,504 $26,350,089 $471,354,115 Deferred policy acquisition costs... 132,582,526 692,925 133,275,451 ------------- ---------- ------------ ------------ ----------- ------------ Total assets ....................... $567,511,139 $6,642,241 $ 3,351,593 $ 774,504 $26,350,089 $604,629,566 ============= ========== ============ ============ =========== ============
Note K-- REINSURANCE The Company reinsures certain of its risks with, and assumes risks from, other insurers under yearly renewable term, coinsurance, and modified coinsurance agreements. Under yearly renewable term agreements, the Company generally pays specific premiums to the reinsurer as reimbursement for certain expenses. Coinsurance agreements are accounted for by passing a portion of the risk to the reinsurer. Generally, the reinsurer receives a proportionate part of the premiums less commissions and is liable for a corresponding part of all benefit payments. Modified coinsurance is accounted for similarly to coinsurance except that the liability for future policy benefits is held by the original company, and settlements are made on a net basis between the companies. A substantial portion of the Company’s new life insurance and credit insurance sales is being reinsured. The Company reviews the financial condition of its reinsurers and monitors the amount of reinsurance it has with its reinsurers.
Approximately 58% and 60% of the reinsurance receivable balances at December 31, 2000 and 1999, respectively, relate to one insurance company rated “A+” (Superior) by the A. M. Best Company, an independent rating organization.
Estimated Estimated Carrying Fair Carrying Fair Amount Values Amount Values ---------- -------------- ----------- ----------- Assets (see Notes A and C): Investments: Fixed maturities................... $418,756,679 $418,756,679 $366,838,300 $366,838,300 Mortgage loans on real estate...... 3,215,344 3,364,675 3,683,311 3,793,364 Short-term investments............. 4,000,000 4,000,000 7,493,877 7,493,877 Cash .................................. 1,165,410 1,165,410 4,021,839 4,021,839 Liabilities (see Note A): Annuity deposits................... 28,059,246 27,507,238 12,253,056 11,925,142
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
--------------------------------------------------------------------------------------------------------------------------------------------------- COL. A COL. B COL. C COL. D COL. E COL. F COL. G COL. H COL. I COL. J ---------------------------------------------------------------------------------------------------------------------------------------------------
Future Annuity Amortization Deferred Policy Deposits Premiums Benefits of Deferred Policy Benefits and Other and Net and Policy Other Acquisition and Unearned Policyholders' Policy Investment Settlement Acquisition Operating Segment Costs Claims Premiums Funds Fees Income (1) Expenses Costs Expenses (1) ------------ ------------ ------------ ----------- ------------ -------- ------------ ----------- ------------ ------------
Year Ended December 31, 1998: Life Insurance Acquisitions...... $132,582,526 $439,215,364 $ 54,170 $ 8,600,060 $ 7,414,597 $11,071,366 $ 7,594,508 $1,535,385 $5,947,115 Specialty Insurance Products Dental Benefits... 0 172,903 189 6,445,537 1,503,364 718,492 1,340,838 0 144,257 Financial Institutions 692,925 213,835 2,432,918 0 848,682 136,472 316,900 175,753 105,307 Retirement Savings and Investment Products Investment Products 0 240,000 0 531,751 501 0 8,754 0 50,140 Corporate and Other.. 0 0 0 0 0 (1,248,164) 0 0 0 ------------- ------------ ----------- ----------- ------------ ------------ ----------- ----------- ---------- TOTAL........ $133,275,451 $439,842,102 $ 2,487,277 $15,577,348 $ 9,767,144 $10,678,166 $ 9,261,000 $1,711,138 $6,246,819 ============= ============ =========== =========== ============ ============ =========== =========== ==========
------------------------------------------------------------------------------------------------------------------------------------- COL. A COL. B COL. C COL. D COL. E COL. F -------------------------------------------------------------------------------------------------------------------------------------
Percentage Ceded to Assumed of Amount Gross Other from Other Net Assumed Amount Companies Companies Amount to Net ------------ ------------ ------------- ----------- ------------
Year Ended December 31,1999: Life insurance in force(1)........................ $ 308,419 $ 5,833,675 $ 7,260,439 $ 1,735,183 418.4% ============ =========== =========== ============ =========
Premiums and policy fees: Life insurance.................................... $ 7,207,635 $20,061,073 $47,053,071 $ 34,199,633 137.6% Accident and health insurance..................... 2,698,776 797,021 29,578 1,931,333 1.5% ------------ ----------- ----------- ------------ TOTAL......................................... $ 9,906,411 $20,858,094 $47,082,649 $ 36,130,966 ============ =========== =========== ============
Year Ended December 31,1998: Life insurance in force(1)........................ $ 282,231 $ 7,575,418 $ 7,914,524 $ 621,337 1,273.8% =========== =========== =========== ============ =========