The Company has no properties. The Company has contracts with PLC and Protective under which it receives investment, legal, and data processing services on a fee basis and other managerial and administrative services on a shared cost basis.
Protective’s administrative office building is located at 2801 Highway 280 South, Birmingham, Alabama 35223.
The Company has a deferred policy acquisition costs asset of approximately $0.9 million related to its variable annuity product lines with an account balance of $14.3 million at December 31, 2003. The Company monitors the rate of amortization of the deferred policy acquisition costs associated with its variable annuity product line. The methodologies employ varying assumptions about how much and how quickly the stock markets will appreciate. The primary assumptions used to project future profits as part of the recoverability analysis include: a long-term equity market growth rate of 9%, reversion to the mean methodology with a reversion to the mean cap rate of 14%, reversion to the mean period of 5 years, and an amortization period of 20 years. A recovery in equity markets, or methodologies and assumptions that anticipate a recovery, result in lower amounts of amortization, and a worsening of equity markets results in higher amounts of amortization.
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. The Company’s GMDB at December 31, 2003, are subject to a dollar-for-dollar reduction upon withdrawal of related annuity deposits on contracts issued prior to January 1, 2003.
Determining whether a decline in the current fair value of invested assets is an other-than-temporary decline in value can involve a variety of assumptions and estimates, particularly for investments that are not actively traded on established markets. For example, assessing the value of some investments requires the Company to perform an analysis of expected future cash flows or rates of prepayments. Other investments, such as collateralized mortgage or bond obligations, represent selected tranches of a structured transaction, supported overall by underlying investments in a wide variety of issuers. The Company’s specific accounting policies related to its invested assets are discussed in the Notes to the Financial Statements.
Year Ended Percentage December 31 Increase/(Decrease) ----------------------------------- --------------------- 2003 2002 ---- ----
Premiums and policy fees........................... $ 24,898,748 $ 27,558,996 (9.7)% Net investment income.............................. 41,295,486 36,245,837 13.9 Realized investment gains (losses)................. 3,347,309 (696,209) 581.0 Other income....................................... 156,495 11,087 1,311.5 ------------- ------------- $ 69,698,038 $ 63,119,711 ============= =============
Premiums and policy fees, net of reinsurance (“premiums and policy fees”) decreased $2.7 million or 9.7% in 2003 as compared to 2002. Premiums and policy fees in the Life Marketing segment increased $0.1 million in 2003 as compared to 2002. 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 2003, resulting in a decrease of $2.9 million. Premiums and policy fees from the Asset Protection segment were relatively unchanged in 2003 as compared to 2002. The Annuities segment’s premiums in 2003 increased $0.1 million as compared to 2002.
Net investment income for 2003 was $41.3 million, 13.9% higher than for the preceding year primarily due to a full year of higher average invested assets in 2003. The percentage earned on average cash and investments was 5.9% in 2003 and 6.3% in 2002. Investment returns have been negatively affected by higher prepayments on mortgage-backed securities and lower interest rates.
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.
Management evaluates the results of the Company’s segments on a before-income-tax basis as adjusted for certain items which management believes are not indicative of the Company’s core operations. Segment operating income (loss) excludes net realized investment gains and losses and the related amortization of deferred policy acquisition costs because fluctuations in these items are due to changes in interest rates and other financial market factors instead of mortality and morbidity. Also, operating segment income (loss) excludes any net gains or losses on disposals of businesses, discontinued operations, extraordinary items, the cumulative effect of accounting changes, and any other items, that, in each case, are neither normal nor recurring. Although the items excluded from segment operating income (loss) may be significant components in understanding and assessing the Company’s overall financial performance, management believes that operating segment income (loss) enhances an investor’s understanding of the Company’s results of operations by highlighting the income (loss) attributable to the normal, recurring operations of the insurance business (i.e., mortality and morbidity), consistent with industry practice. However, the Company’s segment income (loss) measures may not be comparable to similarly titled measures reported by other companies. Segment income (loss) should not be construed as a substitute for net income (loss) determined in accordance with accounting principles generally accepted in the United States of America (GAAP). “Total income from continuing operations before income tax” is a GAAP measure to which the non-GAAP measure “total operating income” may be compared. Unlike total operating income, total income before income tax includes net realized investment gains and losses, and the related amortization of deferred policy acquisition costs. In the Annuities and Corporate and Other segments, operating income excludes realized investment gains and losses and the related amortization.
Year Ended December 31 ------------------------------------------------- 2003 2002 ---- ---- Operating Income (Loss)(1) Life Marketing................................ $ 771,259 $ 142,070 Acquisitions.................................. 10,690,666 11,732,882 Annuities..................................... (189,642) (536,584) Asset Protection.............................. 639,252 1,593,905 Corporate and Other........................... 7,970,227 1,010,857 ------------ ------------ Realized Investment Gains (Losses) Annuities..................................... 262,490 79,719 Corporate and Other........................... 3,084,819 (775,928) ------------ ------------ Income (Loss) Before Income Tax Life Marketing................................ 771,259 142,070 Acquisitions.................................. 10,690,666 11,732,882 Annuities..................................... 72,848 (456,865) Asset Protection.............................. 639,252 1,593,905 Corporate and Other........................... 11,055,046 234,929 ------------ ------------ Total income from continuing operations before income tax $23,229,071 $13,246,921 ============ ============
The Company became involved with PLC’s Life Marketing segment during 2002. Pretax earnings increased $0.6 million in 2003 as compared to 2002, primarily due to increased sales momentum.
Pretax earnings from the Acquisitions segment decreased $1.0 million in 2003 as compared to 2002. 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. No new acquisitions were made in 2003.
The Asset Protection segment’s 2003 pretax earnings decreased $1.0 million as compared to 2002 primarily due to an increase in benefits and settlement expenses because much of the segment’s credit business is in runoff mode and the decrease in ceding commissions related to reinsurance agreements with affiliates. The reinsurance arrangements are discussed more fully in Note 9 to the Company’s financial statements included herein.
Management’s current estimate of the effective income tax rate for 2004 is 34.9%.
For information regarding recently issued accounting standards see Note 1 to the financial statements included herein.
At December 31, 2002, the Company’s fixed maturity investments had a market value of $488.7 million, which was 4.7% above amortized cost of $466.9 million. The Company estimated the market value of its mortgage loans to be $1.9 million at December 31, 2002, which was 3.9% above amortized cost of $1.8 million.
Estimated Market Values Resulting From An Immediate 1 Percentage Point Increase In Interest Rates
AAA........................................... 9.7% 8.3% AA............................................ 6.7 7.2 A............................................. 38.4 38.2 BBB........................................... 40.0 40.7 BB or Less.................................... 5.2 5.6 ----- ----- 100.0% 100.0% ===== =====
The Company’s management considers a number of factors when determining the impairment status of individual securities. These include the economic condition of various industry segments and geographic locations and other areas of identified risks. Although it is possible for the impairment of one investment to affect other investments, the Company engages in ongoing risk management to safeguard against and limit any further risk to its investment portfolio. Special attention is given to correlative risks within specific industries, related parties and business markets.
The information presented below relates to investments at a certain point in time and is not necessarily indicative of the status of the portfolio at any time after December 31, 2003, the balance sheet date. Furthermore, since the timing of recognizing realized gains and losses is largely based on management’s decisions as to the timing and selection of investments to be sold, the tables and information provided below should be considered within the context of the overall unrealized gain (loss) position of the portfolio. At December 31, 2003, the Company had an overall net unrealized gain of $37.5 million.
Estimated % Market % Amortized Unrealized % Unrealized Market Value Value Amortized Cost Cost Loss Loss ---------------------------------------------------------------------------------------------------------------------------- = 90 days $23,786,890 26.4% $23,906,291 25.5% $ (119,401) 3.1% 90 days but =180 days 33,708,155 37.5 34,933,725 37.2 (1,225,570) 31.7 180 days but =270 days 22,404,572 24.9 24,009,553 25.6 (1,604,981) 41.6 270 days but =1 year 0 0.0 0 0.0 0 0.0 1 year but =2 years 0 0.0 0 0.0 0 0.0 2 years but =3 years 5,542,500 6.2 5,952,412 6.3 (409,912) 10.6 3 years but =4 years 0 0.0 0 0.0 0 0.0 4 years but =5 years 4,515,000 5.0 5,016,681 5.4 (501,681) 13.0 5 years 0 0.0 0 0.0 0 0.0 ----------------------------------------------------------------------------------------------------------------------------- Total $89,957,117 100.0% $93,818,662 100.0% $(3,861,545) 100.0% -----------------------------------------------------------------------------------------------------------------------------
S&Por Equivalent Estimated % Market Amortized Cost % Amortized Unrealized % Unrealized Designation Market Value Value Cost Loss Loss ---------------------------- --------------- ------------ --------------- -------------- ---------------- -------------- AAA/AA/A $62,572,950 69.6% $65,007,146 69.3% $(2,434,196) 63.0% BBB 14,466,667 16.1 14,966,785 16.0 (500,118) 13.0 ---------------------------- --------------- ------------ --------------- -------------- ---------------- -------------- Investment grade 77,039,617 85.7 79,973,931 85.3 (2,934,314) 76.0 ---------------------------- --------------- ------------ --------------- -------------- ---------------- -------------- BB 0 0.0 0 0.0 0 0.0 B 10,297,500 11.4 10,802,695 11.5 (505,195) 13.1 CCC or lower 2,610,000 2.9 3,017,036 3.2 (407,036) 10.5 In or near default 10,000 0.0 25,000 0.0 (15,000) 0.4 ---------------------------- --------------- ------------ --------------- -------------- ---------------- -------------- Below investment grade 12,917,500 14.3 13,844,731 14.7 (927,231) 24.0 ---------------------------- --------------- ------------ --------------- -------------- ---------------- -------------- Total $89,957,117 100.0% $93,818,662 100.0% $(3,861,545) 100.0% ---------------------------- --------------- ------------ --------------- -------------- ---------------- --------------
At December 31, 2003, 85.7% of total securities in an unrealized loss position were rated as investment grade. Bonds rated less than investment grade were 4.8% of invested assets. The Company generally purchases its investments with the intent to hold to maturity. The Company does not consider these unrealized losses as other-than-temporary impairments.
During the year ended December 31, 2003, the Company recorded pretax other-than-temporary impairments in its investments of $0.3 million as compared to $4.3 million in the year ended December 31, 2002.
As discussed earlier, the Company’s management considers several factors when determining other than temporary impairments. Although the Company generally intends to hold securities until maturity, the Company may change its position as a result of a change in circumstances. Any such decision is consistent with the Company’s classification of all but a specific portion of its investment portfolio as available for sale. During the year ended December 31, 2003, the Company sold securities in an unrealized loss position with a market value of $24.7 million resulting in a realized loss of $0.2 million. For such securities, the proceeds, realized loss and total time period that the security had been in an unrealized loss position are presented in the table below.
The following table sets forth the estimated fair values of the Company's annuity account balances resulting from a hypothetical immediate 1 percentage point decrease in interest rates from levels prevailing at December 31, and the percent change in fair value the following estimated fair values would represent.
Estimated fair values were derived from the durations of the Company's annuity account balances. While these estimated fair values generally provide an indication of how sensitive the fair values of the Company's annuity account balances are to changes in interest rates, they do not represent management's view of future market changes, and actual market results may differ from these estimates.
Approximately 20% of the Company's liabilities relate to products (primary whole life insurance) the profitability of which could be affected by changes in interest rates. The effect of such changes in any one year is not expected to be material.
Report of Independent Auditors........................................................................... 15 Statements of Income for the years ended December 31, 2003, 2002, and 2001............................... 16 Balance Sheets as of December 31, 2003 and 2002.......................................................... 17 Statements of Share-Owners' Equity for the years ended December 31, 2003, 2002, and 2001..................................................................... 18 Statements of Cash Flows for the years ended December 31, 2003, 2002, and 2001........................... 19 Notes to Financial Statements............................................................................ 20 Financial Statement Schedules: Schedule III-- Supplementary Insurance Information...................................................... 34 Schedule IV-- Reinsurance............................................................................... 35
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, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 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 ------------------------------------------------- 2003 2002 2001 ---- ---- ----
Revenues Premiums and policy fees.............................................. $ 72,195,967 $ 51,293,397 $ 47,707,465 Reinsurance ceded..................................................... (47,297,219) (23,734,401) (18,621,035) ------------ ------------ ------------ Net of reinsurance ceded............................................ 24,898,748 27,558,996 29,086,430 Net investment income................................................. 41,295,486 36,245,837 33,876,409 Realized investment gains (losses).................................... 3,347,309 (696,209) (1,113,538) Other income.......................................................... 156,495 11,087 5,731 ------------ ------------ ------------ 69,698,038 63,119,711 61,855,032 ------------ ------------ ------------ Benefits and Expenses Benefits and settlement expenses (net of reinsurance ceded: 2003-$30,371,296; ........................................................ 30,776,253 33,299,046 33,344,929 2002-$18,296,707; 2001-$13,449,131)....................................... 7,890,345 8,639,183 7,034,480 Amortization of deferred policy acquisition costs..................... Other operating expenses (net of reinsurance ceded: 2003-$(1,700,478); 7,802,369 7,934,561 9,189,295 ------------ ------------ ------------ 2002-$31,857,142; 2001-397,265)..................................... 46,468,967 49,872,790 49,568,704 ------------ ------------ ------------
Net income before cumulative effect of change in accounting principle..... 15,117,367 8,624,649 9,905,152 Cumulative effect of change in accounting principle, net of income tax.... (284,968) ------------ ------------ ------------
LIABILITIES Policy liabilities and accruals: Future policy benefits and claims................................................... $496,884,724 $517,624,864 Unearned premiums................................................................... 13,824,017 26,349,028 ------------ ------------ 510,708,741 543,973,892 Annuity account balances................................................................. 57,894,232 60,080,082 Other policyholders' funds............................................................... 2,695,070 6,025,066 Funds held-coinsurance................................................................... 46,762,354 89,552,015 Other liabilities........................................................................ 15,506,447 14,214,260 Accrued income taxes..................................................................... 702,883 0 Deferred income taxes.................................................................... 36,842,882 25,533,038 Liabilities related to separate accounts Variable annuity.................................................................... 10,987,259 8,382,367 ------------ ------------ Total liabilities................................................................ 682,099,868 747,760,720 ------------ ------------
Net Unrealized Additional Gains Total Preferred Common Paid-In Retained (Losses) On Share-Owners' Stock Stock Capital Earnings Investments Equity --------- ---------- ------------ ----------- ------------ -------------
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 ------------ Common dividends ($58.80 per share)... (14,700,000) (14,700,000) Preferred dividends ($25 per share)... (50,000) (50,000) 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 ------------ Net income for 2003................... 15,117,367 15,117,367 Change in net unrealized gains/losses on investments (net of income tax: $5,072,581)...... 9,420,507 9,420,507 Reclassification adjustment for amounts included in net income (net of income tax: $(1,171,558)) (2,175,751) (2,175,751) ------------ Comprehensive income for 2003......... 22,362,123 ------------ Common dividends ($48.20 per share)... (12,050,000) (12,050,000) --------- ---------- ------------ ----------- ------------ ------------- Balance, December 31, 2003.................. $2,000 $2,500,000 $171,386,324 $12,410,533 $16,751,318 $203,050,175 ========= ========== ============ =========== ============ =============
CASH FLOWS FROM OPERATING ACTIVITIES Net income...................................................................... $ 15,117,367 $ 8,624,649 $ 9,620,184 Adjustments to reconcile net income to net cash provided by operating activities: Realized investment losses (gains).......................................... (3,347,309) 696,209 1,113,538 Amortization of deferred policy acquisition costs........................... 7,890,345 8,639,183 7,034,480 Capitalization of deferred policy acquisition costs......................... (2,813,504) (2,161,267) (1,792,738) Gain on sale of discontinued operations..................................... 0 0 (1,625,000) Deferred income taxes....................................................... 7,408,821 4,622,272 5,121,553 Interest credited to universal life and investment products................. 21,321,965 29,693,764 37,752,197 Policy fees assessed on universal life and investment products.............. (33,916,456) (34,641,740) (36,063,990) Change in accrued investment income and other receivables................... 28,158,814 (64,001,084) (2,959,990) Change in policy liabilities and other policyholder funds of traditional life and health products........................................................ (40,194,549) 70,326,971 1,495,557 Change in funds held-coinsurance............................................ (42,789,661) 86,607,188 (239,299) Change in other liabilities................................................. 1,292,187 (231,372) (3,579,771) Other (net)................................................................. 7,058 (2,266) (1,013,986) ------------- ------------- -------------- Net cash (used in) provided by operating activities............................. (41,864,922) 108,172,507 14,862,735 ------------- ------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES Investments available for sale, net of short-term investments Maturities and principal reductions of investments.......................... 94,119,188 54,755,061 24,176,348 Sale of investments......................................................... 81,324,718 80,524,090 103,550,588 Cost of investments acquired................................................ (303,472,324) (155,307,511) (140,629,695) Decrease in mortgage loans, net................................................. 399,870 923,905 497,849 Decrease (Increase) in policy loans, net........................................ 741,026 (242,135) (99,123) Decrease (Increase) in other long-term investments, net......................... 572,818 (102,788) (470,030) Decrease (Increase) in short-term investments, net.............................. 177,604,832 (166,805,245) (8,000,000) ------------- ------------- -------------- Net cash provided by (used in) investing activities............................. 51,290,128 (186,254,623) (20,974,063) ------------- ------------- --------------
The accompanying financial statements of Protective Life and Annuity Insurance Company (“the Company”) are prepared on the basis of accounting principles generally accepted in the United States of America. Such accounting principles differ from statutory reporting practices used by insurance companies in reporting to state regulatory authorities. (See also Note 2.)
In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. (FIN) 46 “Consolidation of Variable Interest Entities,” which was revised in December 2003. 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 other parties. The effective date of FIN 46 is March 31, 2004, for the Company. 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 July 2003, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts.” SOP 03-1 is effective for fiscal years beginning after December 15, 2003. SOP 03-1 provides guidance related to the reporting and disclosure of certain insurance contracts and separate accounts, including the calculation of guaranteed minimum death benefits (GMDB). SOP 03-1 also addresses the capitalization and amortization of sales inducements to contract holders. Although the original intent of SOP 03-1 was to address the accounting for contract provisions not addressed by SFAS No. 97, such as guaranteed minimum death benefits within a variable annuity contract, it appears that SOP 03-1 contains language that may impact the accounting for universal life products in a material way. The life insurance industry and some insurance companies have filed letters with the American Institute of Certified Public Accountants seeking clarification, guidance, delay and/or revision to more appropriately reflect the underlying economic issues of universal life insurance products. The Company is currently evaluating the impact of SOP 03-1 on the accounting for its universal life products.
The Company has classified all of its investments in fixed maturities and short-term investments as “available for sale.”
Fixed maturities (bonds) - 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.
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.
2003 2002 2001 ---- ---- ---- Balance beginning of year.............................. $ 7,834,114 $ 7,074,480 $ 7,372,438 Less reinsurance.................................... 2,339,338 1,459,829 1,954,392 ------------ ------------ ------------
Net balance beginning of year.......................... 5,494,776 5,614,651 5,418,046 ------------ ------------ ------------
Incurred related to: Current year........................................... 13,466,361 11,448,215 11,883,729 Prior year............................................. 776,513 181,838 584,972 ------------ ------------ ------------ Total incurred...................................... 14,242,874 11,630,053 12,468,701 ------------ ------------ ------------
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. Such fees are recognized when assessed and earned. 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 ranged from 4.6% to 6.5% and investment products ranged from 2.6% to 4.8% in 2003.
In conformity with statutory reporting practices........................... $23,154,434 $10,879,132 $13,895,381 $108,738,317 $102,550,549 $ 34,354,020 In conformity with generally accepted accounting principles............... $15,117,367 $ 8,624,649 $ 9,620,184 $203,050,175 $192,738,052 $ 121,745,093
In 2003, gross gains on the sale of investments available for sale (fixed maturities and short-term investments) were approximately $3.6 million and gross losses were approximately $0.3 million. In 2002, gross gains were approximately $2.1 million and gross losses were approximately $2.8 million. In 2001, gross gains were approximately $1.1 million and gross losses were approximately $2.2 million.
The following table shows the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous loss position at December 31, 2003.
The corporate bonds category has gross unrealized losses, in an unrealized loss position for greater than 12 months, of $0.8 million at December 31, 2003. The aggregate decline in market value of these securities was deemed temporary due to positive factors supporting the recoverability of the respective investments. Positive factors considered included credit ratings, the financial health of the investee, the continued access of the investee to capital markets, and other pertinent information.
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.
Deferred policy acquisition costs............................ $ 6,813,224 $(8,924,591) $ 10,448,277 Benefit and other policy liability changes................... 2,896,389 15,201,433 (6,335,100) Temporary differences of investment income................... (1,503,693) (1,654,570) 51,888 Other ....................................................... (797,099) ----------- ----------- ------------ $ 7,408,821 $ 4,622,272 $ 4,165,065 =========== =========== ============
Deferred income tax assets: Policy and policyholder liability reserves............... $ 3,364,248 $ 6,260,637 Unrealized (gains) losses on investments................. (6,041,629) (3,644,299) ------------ ----------- (2,677,381) 2,616,338 ------------ ----------- Deferred income tax liabilities: Deferred policy acquisition costs........................ 34,322,937 27,509,713 Other.................................................... (157,436) 639,663 ------------ ----------- 34,165,501 28,149,376 ------------ ----------- Net deferred income tax liability........................ $36,842,882 $25,533,038 ============ ===========
A number of civil jury verdicts have been returned against insurers and other providers of financial services involving sales practices, alleged agent misconduct, failure to properly supervise representatives, relationships with agents or persons with whom the insurer does business, and other matters. Increasingly these lawsuits have resulted in the award of substantial judgments that are disproportionate to the actual damages, including material amounts of punitive and non-economic compensatory damages. In some states, juries, judges and arbitrators have substantial discretion in awarding punitive and non-economic compensatory damages which creates the potential for unpredictable material adverse judgments or awards in any given lawsuit or arbitration. Arbitration awards are subject to very little appellate review. In addition, in some class action and other lawsuits, companies have made material settlement payments. The Company, like other financial service companies, in the ordinary course of business, is involved in such litigation or, alternatively, in arbitration. Although the outcome of any such litigation or arbitration cannot be predicted, the Company 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 the Company.
The Company’s preferred stock pays, when and if declared, noncumulative participating dividends to the extent the Company’s statutory earnings for the immediately preceding year exceeded $1.0 million. No preferred dividends were paid in 2003. In 2002, the Company paid $50,000 of preferred dividends. In 2001, the Company paid $1.0 million of preferred dividends.
The Company has no employees; therefore, the Company purchases data processing, legal, investment, and other management services from PLC and other affiliates. The cost of such services was $9.6 million in 2003, $8.4 million in 2002, and $8.6 million in 2001.
Receivables from and payables to related parties consisted of receivables from and payables to affiliates under control of PLC in the amount of a $7.5 million payable at December 31, 2003 and a $6.5 million payable at December 31, 2002. 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.
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 $9.4 million and $9.7 million at December 31, 2003 and 2002, respectively.
PLC, through its subsidiaries, operates several business segments each having a strategic focus. An operating segment is generally distinguished by products and/or channels of distribution. A brief description of each segment follows.
The Annuities segment manufactures, sells, and supports fixed annuity products. These products are primarily sold through stockbrokers, but are also sold through financial institutions and the Life Marketing segment’s sales force. Beginning in 2003, the Company no longer markets variable annuity products.
The Asset Protection segment markets extended service contracts and credit life and disability insurance to protect consumers’ investments in automobile and marine vehicles.
The Company has an additional segment herein referred to as Corporate and Other. The Corporate and Other segment primarily consists of net investment income and expenses not attributable to the segments above (including net investment income on unallocated capital).
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.
The following table sets forth total operating segment income and assets for the periods shown. Adjustments represent the recognition of income tax expense and income from discontinued operations and cumulative effect of change in accounting. Asset adjustments represent the inclusion of assets related to discontinued operations.
Corporate Life Asset and Operating Segment Income Marketing Acquisitions Protection Annuities Other Adjustments Total -----------------------------------------------------------------------------------------------------------------------------
Premiums and policy fees......... $ 1,026,426 $ 43,313,961 $ 6,799,480 $ 153,530 $ 51,293,397 Reinsurance ceded................ (883,972) (19,505,909) (3,344,520) (23,734,401) ----------------------------------------------------------------------------------------------------------------------------- Net of reinsurance ceded......... 142,454 23,808,052 3,454,960 153,530 27,558,996 Net investment income............ 8,123 30,989,460 571,275 3,729,514 $ 947,465 36,245,837 Realized investment gains(losses) 79,719 (775,928) (696,209) Other income (loss).............. 5,072 6,015 11,087 ----------------------------------------------------------------------------------------------------------------------------- Total revenues............. 150,577 54,802,584 4,026,235 3,968,778 171,537 63,119,711 ----------------------------------------------------------------------------------------------------------------------------- Benefits and settlement expenses 186,800 27,513,318 2,087,070 3,511,858 171,537 33,299,046 Amortization of deferred policy acquisition costs.......... 76,132 7,225,750 669,620 667,681 8,639,183 Other operating expenses......... (254,425) 8,330,634 (324,360) 246,104 (63,392) 7,934,561 ----------------------------------------------------------------------------------------------------------------------------- Total benefits and expenses 8,507 43,069,702 2,432,330 4,425,643 (63,392) 49,872,790 ----------------------------------------------------------------------------------------------------------------------------- Income (loss) before income tax.. 142,070 11,732,882 1,593,905 (456,865) 234,929 13,246,921 Less: realized investment gains (losses) 79,719 (775,928) ----------------------------------------------------------------------------------------------------------------------------- Operating income 142,070 11,732,882 1,593,905 (536,584) 1,010,857 Income tax expense............... $4,622,272 4,622,272 -------------- Net Income ...................... $ 8,624,649 ==============
Premiums and policy fees......... $ 43,891,160 $3,661,007 $ 155,298 $ 47,707,465 Reinsurance ceded................ (18,681,820) 60,785 (18,621,035) ------------------------------------------------------------------------------------------------------------------------------ Net of reinsurance ceded......... 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 2,070,392 354,196 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) before income tax.. 11,538,404 976,656 (646,706) 417,974 12,286,328 Less: realized investment gains (losses) (1,113,538) ------------------------------------------------------------------------------------------------------------------------------ Operating income................. 11,538,404 976,656 (646,706) 1,531,512 Income tax expense............... $4,165,065 4,165,065 Discontinued operations, net of income tax.................. 1,783,889 1,783,889 Change in accounting principle, net of income tax........... (284,968) (284,968) ------------- Net Income....................... $ 9,620,184 =============
Life Asset Corporate Operating Segment Assets Marketing Acquisitions Protection Annuities and Other Adjustments Total ------------------------------------------------------------------------------------------------------------------------------ Investments and other assets..... $3,114,579 $580,346,285 $43,040,563 $57,121,591 $106,236,317 $ 122,046 $789,981,381 Deferred policy acquisition costs. 2,114,680 89,265,855 1,495,557 2,292,570 95,168,662 --------------------------------------------------------------------------------------------------------------------------------- Total assets..................... $5,229,259 $669,612,140 $44,536,120 $59,414,161 $106,236,317 $ 122,046 $885,150,043 =================================================================================================================================
Investments and other assets......$ 689,662 $590,688,434 $81,335,035 $59,234,421 $100,048,550 $3,723,088 $835,719,190 Deferred policy acquisition costs. 583,131 100,007,935 1,607,207 2,581,309 104,779,582 --------------------------------------------------------------------------------------------------------------------------------- Total assets................. $1,272,793 $690,696,369 $82,942,242 $61,815,730 $100,048,550 $3,723,088 $940,498,772 =================================================================================================================================
Approximately 28% and 16% of the reinsurance receivable balances at December 31, 2003 and 2002, respectively, relate to one unaffiliated insurance company rated “A+” (Superior) by the A. M. Best Company, an independent rating organization. Another $34.7 million or 57% and $73.1 million or 70% of the reinsurance receivable balances at December 31, 2003 and 2002, respectively relates to Protective.
2003 2002 -------------------------------- ------------------------------- Estimated Estimated Carrying Fair Carrying Fair Amount Values Amount Values
Assets (see Notes 1 and 3): Investments: Fixed maturities...................... $636,460,275 $636,460,275 $488,701,807 $488,701,807 Mortgage loans on real estate......... 1,393,720 1,428,543 1,793,590 1,863,134 Short-term investments................ 1,200,413 1,200,413 178,805,245 178,805,245 Cash 13,052,781 13,052,781 1,669,532 1,669,532 Liabilities (see Note 1): Annuity account balances.............. 57,894,232 62,162,330 60,080,082 62,984,955
Future Annuity Net Amortization Deferred Policy Account Balances 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, 2003 Life Marketing........... $ 2,114,680 $ 3,110,738$ 0 $ 3,841 $ 218,088 $ 38,387 $ (4,920) $ 335,099 $ (844,963) Acquisitions............. 89,265,855 462,928,399 39,188 4,931,676 20,944,667 29,143,524 24,672,248 6,461,913 8,258,319 Asset Protection......... 1,495,557 28,646,283 13,784,829 609,451 3,449,446 499,944 2,374,123 778,226 157,789 Annuities................ 2,292,570 2,077,258 0 55,044,334 286,547 3,720,590 3,734,802 315,107 171,779 Corporate and Other...... 0 0 0 0 0 7,893,041 0 0 59,445 Adjustments (2).......... 0 122,046 0 0 0 0 0 0 0 ------------------------------------------------------------------------------------------------------------------------------------------------- TOTAL................. $95,168,662 $496,884,724 $13,824,017 $ 60,589,302 $ 24,898,748 $41,295,486 $30,776,253 $7,890,345 $7,802,369 =================================================================================================================================================
Percentage Ceded to Assumed of Amount Gross Other from Other Net Assumed Amount Companies Companies Amount to Net
Year Ended December 31, 2003: Life insurance in force(1) ................... $ 2,448,523 $ 7,022,711 $ 6,147,583 $ 1,573,395 390.7% ====================================================================================================================================
Premiums and policy fees: Life insurance................................ $ 7,116,906 $50,146,129 $ 66,002,444 $ 22,973,221 287.3% Accident and health insurance................. 2,513,551 (2,848,910) (3,436,934) 1,925,527 - ----------------------------------------------------------------------------------------------------------------------- TOTAL...................................... $ 9,630,457 $47,297,219 $ 62,565,510 $ 24,898,748 =======================================================================================================================