Forward-Looking Statements - Cautionary Language This report reviews the Company’s financial condition and results of operations. Historical information is presented and discussed. Where appropriate, factors that may affect future financial performance are also identified and discussed. Certain statements made in this report include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include any statement that may predict, forecast, indicate or imply future results, performance or achievements instead of historical facts, and may contain words like “believe,” “expect,” “estimate,” “project,” “budget,” “forecast,” “anticipate,” “plan,” “will,” “shall,” and other words, phrases or expressions with similar meaning. Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from the results contained in the forward-looking statements, and the Company cannot give assurances that such statements will prove to be correct. Given these risks and uncertainties, undue reliance should not be placed on forward-looking statements as a prediction of actual results.
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 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.
Premiums and policy fees........................... $27,558,996 $29,086,430 (5.3)% Net investment income.............................. 36,245,837 33,876,409 7.0 Realized investment losses......................... (696,209) (1,113,538) 37.5 Other income....................................... 11,087 5,731 93.5 ----------- ----------- $63,119,711 $61,855,032 =========== ===========
Premiums and policy fees, net of reinsurance (“premiums and policy fees”) decreased $1.5 million or 5.3% in 2002 as compared to 2001. Premiums and policy fees in the Acquisitions segment are expected to decline with time unless new acquisitions are made. There were no new acquisitions made in 2002, resulting in a decrease of $1.4 million. Premiums and policy fees from the Asset Protection segment were $0.3 million lower in 2002 as compared to 2001. The Annuities segment's premiums in 2002 were approximately the same as in 2001. The Company became involved with PLC's Life Marketing segment in 2002 which added $0.1 million in premiums for the year.
Realized investment gains in 2002 were approximately $2.7 million and realized investment losses were approximately $3.4 million. During 2002, the Company recorded other than temporary impairments in its investments of $4.3 million.
Each quarter the Company reviews investments with material unrealized losses and tests for other-than-temporary impairments. Management analyzes various factors to determine if any specific other than temporary asset impairments exist. Once a determination has been made that a specific other-than-temporary impairment exists, a realized loss is recognized and the cost basis of the impaired asset is adjusted to its fair value. An other-than-temporary impairment loss is recognized based upon all relevant facts and circumstances for each investment. With respect to unrealized losses due to issuer-specific events, the Company considers the creditworthiness and financial performance of the issuer and other available information. With respect to unrealized losses that are not due to issuer-specific events, such as losses due to interest rate fluctuations, general market conditions or industry-related events, the Company considers its intent and ability to hold the investment to allow for a market recovery or to maturity together with an assessment of the likelihood of full recovery.
(1) Income (loss) from continuing operations before income tax excluding realized investment gains and losses and related amortization of deferred policy acquisition costs.
The Company became involved with PLC's Life Marketing segment during 2002, resulting in additional pretax earnings of $0.1 million.
Pretax earnings from the Acquisitions segment increased $0.2 million in 2002 as compared to 2001. Earnings from the Acquisitions segment are normally expected to decline over time (due to the lapsing of policies resulting from deaths of insureds or terminations of coverage) unless new acquisitions are made. However, the decline in premium income was more than offset by increased net investment income and increases in other income.
In accordance with statutory accounting practices prescribed or permitted by regulatory authorities (which require the assumption that equity markets will significantly worsen), the Company reported GMDB related policy liabilities and accruals of $0.2 million at December 31, 2002.
Net income from continuing operations before cumulative effect of change in accounting principle in 2002 increased 6.2%, compared to 2001, reflecting improved operating earnings in the Life Marketing, Acquisitions, Asset Protection and the Annuities segments offset by lower operating earnings in the Corporate and Other segment.
Year Ended December 31 ------------------------------------------------- 2002 2001 2000 ---- ---- ----
BENEFITS AND EXPENSES Benefits and settlement expenses (net of reinsurance ceded: 2002-$18,296,707; 2001-$13,449,131; 2000-$15,454,285)................. 33,299,046 33,344,929 32,765,035 Amortization of deferred policy acquisition costs..................... 8,639,183 7,034,480 6,765,446 Other operating expenses (net of reinsurance ceded: 2002-$31,857,142; 2001-397,265; 2000-$286,602)........................................ 7,934,561 9,189,295 9,321,713 ------------ ------------ ------------ 49,872,790 49,568,704 48,852,194 ------------ ------------ ------------
Net income from continuing operations before cumulative effect of change in accounting principle...................................................... 8,624,649 8,121,263 8,794,674 Income (loss) from discontinued operations, net of income tax............. 158,889 (51,006) Gain from sale of discontinued operations, net of income tax.............. 1,625,000 ------------ ------------ ------------
Net income before cumulative effect of change in accounting principle..... 8,624,649 9,905,152 8,743,668 Cumulative effect of change in accounting principle, net of income tax.... (284,968) ------------ ------------ ------------
SHARE-OWNERS' EQUITY Preferred Stock, $1.00 par value, shares authorized, issued and outstanding: 2,000........................................... 2,000 2,000 Common Stock, $10.00 par value Shares authorized: 2002 and 2001 - 500,000 Shares issued and outstanding: 2002 and 2001 - 250,000............................... 2,500,000 2,500,000 Additional paid-in capital............................................................... 171,386,324 101,386,324 Retained earnings........................................................................ 9,343,166 15,468,517 Accumulated other comprehensive income: Net unrealized gains (losses) on investments (net of income tax: 2002-$5,118,918; 2001 - $1,285,982)............................. 9,506,562 2,388,252 ------------ ------------ Total share-owners' equity.......................................................... 192,738,052 121,745,093 ------------ ------------ $940,498,772 $684,749,075 ============ ============
Net Unrealized Additional Gains Total Preferred Common Paid-In Retained (Losses) On Share-Owners' Stock Stock Capital Earnings Investments Equity --------- --------- ----------- ---------- ------------- ------------ Balance, December 31, 1999.............. $2,000 $2,500,000 $101,386,324 $22,754,665 $(11,344,864) $115,298,125 Net income for 2000................... 8,743,668 8,743,668 Change in net unrealized gains/losses on investments (net of income tax: $4,363,726)..... 8,104,062 8,104,062 Reclassification adjustment for amounts included in net income (net of income tax: ($14,752))...... (27,396) (27,396) ------------- Comprehensive income for 2000......... 16,820,334 ------------- Common dividends ($51 per share)...... (12,750,000) (12,750,000) --------- --------- ----------- ---------- ------------- ------------ Balance, December 31, 2000.............. 2,000 2,500,000 101,386,324 18,748,333 (3,268,198) 119,368,459 ------------ Net income for 2001................... 9,620,184 9,620,184 Change in net unrealized gains/losses on investments (net of income tax: $2,502,598)..... 4,647,682 4,647,682 Reclassification adjustment for amounts included in net income (net of income tax: $389,738)........ 723,800 723,800 Transition adjustment on derivative financial instruments (net of income tax: $153,444)....................... 284,968 284,968 ----------- Comprehensive income for 2001......... 15,276,634 ----------- Common dividends ($47.60 per share)... (11,900,000) (11,900,000) Preferred dividends ($500.00 per share) (1,000,000) (1,000,000) --------- --------- ----------- ---------- ------------- ------------ Balance, December 31, 2001 2,000 2,500,000 101,386,324 15,468,517 2,388,252 121,745,093 ------------ Net income for 2002................... 8,624,649 $8,624,649 Change in net unrealized gains/losses on investments (net of income tax: $3,589,263)...... 6,665,774 6,665,774 Reclassification adjustment for amounts included in net income (net of income tax: $243,673)........ 452,536 452,536 ------------ Comprehensive income for 2002......... 15,742,959 ------------ Preferred dividends ($25 per share)... (50,000) (50,000) Common dividends ($58.80 per share)... (14,700,000) (14,700,000) Capital contribution.................. 70,000,000 70,000,000 --------- --------- ----------- ---------- ------------- ------------ Balance, December 31, 2002.............. $2,000 $2,500,000 $171,386,324 $ 9,343,166 $9,506,562 $192,738,052 ========= ========= =========== ========== ============= ============
CASH FLOWS FROM INVESTING ACTIVITIES Maturities and principal reduction of investments: Investments available for sale.......................................... 76,794,609 134,614,161 401,392,138 Other................................................................... 1,174,629 415,557 845,893 Sale of investments: Investments available for sale.......................................... 265,621,383 103,958,267 11,251,538 Other................................................................... 0 0 1,197,324 Cost of investments acquired: Investments available for sale.......................................... (529,845,244) (262,462,048) (453,746,936) Sale of discontinued operations............................................. 0 2,500,000 0 ------------ ------------- ------------ Net cash used in investing activities........................................... (186,254,623) (20,974,063) (39,060,043) ------------ ------------- ------------
INCREASE (DECREASE) IN CASH..................................................... (2,614,725) 3,118,847 (2,856,429) CASH AT BEGINNING OF YEAR....................................................... 4,284,257 1,165,410 4,021,839 ------------ ------------- ------------ CASH AT END OF YEAR............................................................. $ 1,669,532 $ 4,284,257 $ 1,165,410 ============ ============= ============
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 142 revises the standards for accounting for acquired goodwill and other intangible assets. The standard replaces the requirements to amortize goodwill to one that calls for an annual impairment test, among other provisions. The Company adopted SFAS No. 142 in the first quarter of 2002. The adoption of SFAS No. 142 did not have a material effect on the Company’s financial position or results of operations.
In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations”. SFAS No. 143 requires that companies record the fair value of a liability for an asset retirement obligation in the period in which the liability is incurred. The Statement is effective for fiscal years beginning after June 15, 2002. The Company does not expect the adoption of SFAS No. 143 to have a material effect on the Company’s financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of SFAS No. 123.” SFAS No. 148 amends SFAS No. 123 to offer alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. PLC adopted the fair value based method prescribed by SFAS No. 123 in 1995, therefore SFAS No. 148 will have no effect on the Company’s financial position or results of operations.
In January, 2003, the FASB issued FIN 46 “Consolidation of Variable Interest Entities.” FIN 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated support from the other parties. The Company does not expect the adoption of FIN 46 to have a material effect on the Company’s financial position or results of operations.
In May 2002, the Derivatives Implementation group of the FASB exposed for comment issue No. B36, “Bifurcation of Embedded Credit Derivatives” (DIG B36). DIG B36 would require the bifurcation of potential embedded derivatives within modified coinsurance and funds withheld coinsurance arrangements in which the terms require the future payment of a principal amount plus a return based on a specified proportion of the ceding company’s return on either its general account assets or a specified block of those assets. The proposed effective date of the implementation guidance in DIG B36 is for the first fiscal quarter beginning after June 15, 2003 and would be applied on a prospective basis. The Company is currently evaluating the impact of this pronouncement on its financial statements but does not anticipate a material impact on its financial condition 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.
* Other long-term investments-- at a variety of methods similar to those listed above, as deemed appropriate for the specific investment.
As prescribed by generally accepted accounting principles 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-owners’ equity. The market values of fixed maturities increase or decrease as interest rates fall or rise.
Total investments................................... $702,933,934 $512,427,543 Deferred policy acquisition costs................... 111,900,779 118,378,695 All other assets.................................... 111,038,579 50,268,603 ------------ ------------ $925,873,292 $681,074,841 ============ ============
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 $106.5 million and $113.7 million at December 31, 2002 and 2001, respectively. During 2002, $7.2 million of present value of future profits was amortized. During 2001, $6.1 million of present value of future profits was amortized. No amounts were capitalized during 2002 or 2001.
REVENUES AND BENEFITS EXPENSE • Traditional Life, Health, and Credit Insurance Products - Traditional life insurance products consist principally of those products with fixed and guaranteed premiums and benefits and include whole life insurance policies, term and term-like life insurance policies, limited-payment life insurance policies, and certain annuities with life contingencies. Life insurance and immediate annuity premiums are recognized as revenue when due. Health and credit insurance premiums are recognized as revenue over the terms of the policies. Benefits and expenses are associated with earned premiums so that profits are recognized over the life of the contracts. This is accomplished by means of the provision for liabilities for future policy benefits and the amortization of deferred policy acquisition costs. Gross premiums in excess of net premiums related to immediate annuities are deferred and recognized over the life of the policy.
Balance beginning of year.............................. $7,074,480 $ 7,372,438 $ 9,557,627 Less reinsurance.................................... 1,459,829 1,954,392 4,924,705 ---------- ----------- -----------
Net balance beginning of year.......................... 5,614,651 5,418,046 4,632,922 ---------- ----------- -----------
Incurred related to: Current year........................................... 11,448,215 11,883,729 11,780,396 Prior year............................................. 181,838 584,972 (213,798) ---------- ----------- ----------- Total incurred...................................... 11,630,053 12,468,701 11,566,598 ---------- ----------- -----------
Net balance end of year................................ 5,494,776 5,614,651 5,418,046 Plus reinsurance.................................... 2,339,338 1,459,829 1,954,392 ---------- ----------- ----------- Balance end of year.................................... $7,834,114 $ 7,074,480 $ 7,372,438 ========== =========== ===========
Net Income Share-Owners' Equity ---------------------------------------- ------------------------------------------- 2002 2001 2000 2002 2001 2000 ---- ---- ---- ---- ---- ----
Fixed maturities................................... $33,778,487 $31,496,317 $28,808,155 Mortgage loans..................................... 170,428 282,544 314,376 Investment real estate............................. 0 0 211,521 Policy loans....................................... 3,748,912 3,691,041 3,625,750 Other, principally short-term investments.......... 312,989 236,511 556,879 ----------- ----------- ----------- 38,010,816 35,706,413 33,516,681 Investment expenses................................ (1,764,979) (1,830,004) (1,830,233) ----------- ----------- ----------- $36,245,837 $33,876,409 $31,686,448 =========== =========== ===========
Fixed maturities.................................. $(480,629) $(1,113,538) $ (70,176) Mortgage loans and other investments.............. (215,580) 112,324 ---------- ------------ ---------- $(696,209) $(1,113,538) $ 42,148 ========== ============ ==========
Each quarter the Company reviews investments with material 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. 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 2002 and 2001, the Company recorded other than temporary impairments in its investments of $4.3 million and $1.9 million, respectively. There were no other-than-temporary impairments recorded in 2000.
Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Values -------------- -------------- ------------- ---------------- ---- Fixed maturities: Bonds: Mortgage-backed securities.............. $ 17,963,051 $ 995,934 $ 0 $ 18,958,985 United States Government and authorities............................. 8,822,336 268,990 0 9,091,326 Public utilities........................ 76,359,211 2,799,099 3,751,446 75,406,864 All other corporate bonds............... 363,779,488 28,095,926 6,630,782 385,244,632 ------------- ----------- ------------ ----------- 466,924,086 32,159,949 10,382,228 488,701,807 Short-term investments........................... 178,805,245 0 0 178,805,245 ------------- ----------- ------------ ----------- $645,729,331 $32,159,949 $ 10,382,228 $667,507,052 ============= =========== ============ ===========
At December 31, 2002, the average mortgage loan was $0.3 million, and the weighted average interest rate was 8.2%. The largest single mortgage loan was $1.1 million.
At December 31, 2002 and 2001, the Company had no problem mortgage loans (over ninety days past due) and foreclosed properties. 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. Based on the Company’s evaluation of its mortgage loan portfolio, the Company does not expect any material losses on its mortgage loans.
Protective and the Company also entered into a guaranty agreement on December 31, 1995, whereby Protective guaranteed that the Company will perform all of the obligations of Protective pursuant to the terms and conditions of an indemnity coinsurance agreement between Protective and an unaffiliated life insurance company. Total liabilities related to this coinsurance agreement were $9.7 million and $10.1 million at December 31, 2002 and 2001, respectively.
PLC, through its subsidiaries, operates business segments each having a strategic focus which can be grouped into three general categories: life insurance, retirement savings and investment products, and specialty insurance products. An operating segment is generally distinguished by products and/or channels of distribution. A brief description of each division the Company operates in follows.
The Asset Protection segment markets credit life and disability insurance products through banks, consumer finance companies and automobile dealers, and markets vehicle and recreational marine extended service contracts.
The Company uses the same accounting policies and procedures to measure operating segment income and assets as it uses to measure its net income and assets. Operating segment income is generally income before income tax. Premiums and policy fees, other income, benefits and settlement expenses, and amortization of deferred policy acquisition costs are attributed directly to each operating segment. Net investment income is allocated based on directly related assets required for transacting the business of that segment. Realized investment gains (losses) and other operating expenses are allocated to the segments in a manner which most appropriately reflects the operations of that segment. Unallocated realized investment gains (losses) are deemed not to be associated with any specific segment.
In December 2001, the Company sold substantially all of its Dental Division, and discontinued other Dental related operations. Prior period segment results have been restated to reflect these changes.
Corporate Life Asset and Operating Segment Income Marketing Acquisitions Protection Annuities Other Adjustments Total ------------------------ --------- ------------ ---------- --------- ---------- ----------- -----
Premiums and policy fees, net.... $25,209,340 $3,721,792 $ 155,298 $29,086,430 Net investment income............ 29,892,723 606,345 1,909,607 $1,467,734 33,876,409 Realized investment gains (losses) $(1,113,538) (1,113,538) Other income (loss).............. 244 5,487 5,731 ----------- ---------- --------- --------- ---------- ------------ Total revenues............. 55,102,307 4,328,137 2,070,392 1,467,734 (1,113,538) 61,855,032 ----------- ---------- --------- --------- ---------- ------------ Benefits and settlement expenses. 28,533,646 2,567,742 2,243,541 33,344,929 Amortization of deferred policy acquisition costs.......... 6,092,729 694,491 247,260 7,034,480 Other operating expenses......... 8,937,528 89,248 226,297 (63,778) 9,189,295 ----------- ---------- --------- --------- ---------- ------------ Total benefits and expenses 43,563,903 3,351,481 2,717,098 (63,778) 49,568,704 ----------- ---------- --------- --------- ---------- ------------ Income (loss) from continuing operations before income tax. 11,538,404 976,656 (646,706) 1,531,512 (1,113,538) 12,286,328 Income tax expense............... 4,165,065 4,165,065 Discontinued operations, net of income taz ................. 1,783,889 1,783,889 Change in accounting principle, net of income tax........... (284,968) (284,968) ------------ Net income....................... $ 9,620,184 ============
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 and receives specific amounts from 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.
The Company has reinsured approximately $6.6 billion, $4.9 billion, and $5.3 billion in face amount of life insurance risks with other insurers representing $18.1 million, $17.6 million, and $17.4 million of premium income for 2002, 2001, and 2000, respectively. The Company has also reinsured accident and health risks representing $0.8 million, $0.1 million, and $0.7 million of premium income for 2002, 2001, and 2000, respectively. In 2002 and 2001, policy and claim reserves relating to insurance ceded of $89.9 million and $19.2 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 the Company. At December 31, 2002 and 2001, the Company had paid $2.3 million and $1.5 million, respectively, of ceded benefits which are recoverable from reinsurers.
Estimated Estimated Carrying Fair Carrying Fair Amount Values Amount Values -------- ----------- ----------- --------------
The Company estimates the fair value of its annuities using surrender values.
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 Acquisitions............ $124,984,368 $447,949,295 $ 50,335 $ 4,925,125 $27,443,897 $29,275,899 $29,247,353 $5,871,420 $9,991,067 Specialty Insurance Prodcuts Asset Protection 1,596,654 3,037,218 8,101,233 323,800 2,997,130 628,572 2,250,237 714,278 57,601 Retirement Savings and Investment Products Annuities............... 1,647,338 619,322 0 25,179,780 116,106 1,416,117 1,267,445 179,748 (787,364) Corporate and Other....... 0 0 0 0 0 365,860 0 0 60,409 Adjustments (2) .......... 0 607,136 2,665 3,424,830 0 0 0 0 0 ----------- ------------ ----------- ----------- ----------- ----------- ---------- ---------- ----------- TOTAL............... $128,228,360 $452,212,971 $ 8,154,233 $33,853,535 $30,557,133 $31,686,448 $32,765,035 $6,765,446 $9,321,713 =========== ============ =========== =========== =========== =========== =========== ========== ===========
------------------------------------------------------------ -------------- -------------- -------------- -------------- ------------- 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 ----------- ----------- ----------- ----------- ------------
Premiums and policy fees: Life insurance.................................. $4,372,841 $17,244,402 $41,747,694 $28,876,133 144.6% Accident and health insurance................... 1,751,478 74,844 4,366 1,681,000 ---------- ----------- ------------ ----------- 0.3% TOTAL........................................ $6,124,319 $17,319,246 $41,752,060 $30,557,133 ========== =========== ============ ===========