Percentage Earned Year Ended Percentage on Average Cash December31 Amount Increase and Investments ----------------------------------------------------------------------------------- (in thousands) 2001 $835,203 20.7% 7.0% 2002 971,808 16.4 6.8 2003 980,743 0.9 6.1 -----------------------------------------------------------------------------------
Year Ended December 31 -------------------------------------------------------- 2003 2002 2001 --------------------------------------------------------------------------------------------------------------------- (in thousands) Operating income (loss) 1 Life Marketing $159,957 $125,419 $ 92,016 Acquisitions 96,700 96,418 69,251 Annuities 13,190 14,656 15,093 Stable Value Products 38,911 42,272 33,150 Asset Protection 10,566 (15,192) 35,731 Corporate and Other (15,382) (19,324) (22,446) --------------------------------------------------------------------------------------------------------------------- Realized investment gains (losses) Annuities 22,733 2,277 1,139 Stable Value Products 9,756 (7,061) 7,218 Corporate and Other 42,524 12,390 (12,298) Less derivative gains related to investments 2 Corporate and Other (10,036) (8,251) (3,900) Related amortization of deferred policy acquisition costs Annuities (18,947) (1,981) (996) --------------------------------------------------------------------------------------------------------------------- Income (loss) before income tax Life Marketing 159,957 125,419 92,016 Acquisitions 96,700 96,418 69,251 Annuities 16,976 14,952 15,236 Stable Value Products 48,667 35,211 40,368 Asset Protection 10,566 (15,192) 35,731 Corporate and Other 17,106 (15,185) (38,644) --------------------------------------------------------------------------------------------------------------------- Total income before income tax $349,972 $241,623 $213,958 ---------------------------------------------------------------------------------------------------------------------
In 2003, the segment had a pretax operating loss of $15.4 million, $3.9 million less than 2002. An increase investment income allocated to the segment of $7.4 million was partially offset by $3.5 million increase in expenses related to employee incentive plans and other corporate expenses. Realized investment gains (net of derivative gains related to investments) in 2003 were $32.5 million. As a result, total pretax income in 2003 was $17.1 million.
Interest-rate fluctuations could negatively affect Protective’s spread income or otherwise impact its business.
Other types of regulation that could affect Protective and its subsidiaries include insurance company investment laws and regulations, state statutory accounting practices, state anti-trust laws, minimum solvency requirements, state securities laws, federal privacy laws, federal money laundering and anti-terrorism laws, and because Protective owns and operates real property state, federal, and local environmental laws. Protective cannot predict what form any future changes in these or other areas of regulation affecting the insurance industry might take or what effect, if any, such proposals might have on Protective if enacted into law.
Protective, like other financial services companies, in the ordinary course of business is involved in such litigation and arbitration. Although Protective cannot predict the outcome of any such litigation or arbitration, Protective does not believe that any such outcome will have a material impact on the financial condition or results of operations of Protective.
Protective may not realize its anticipated financial results from its acquisitions strategy.
Protective’s reinsurers could fail to meet assumed obligations, increase rates or be subject to adverse developments that could affect Protective.
Recently, certain commentators on the insurance industry have speculated that reinsurance might become more costly or less available in the future, which could have a negative effect on Protective’s ability to compete. In recent years, the number of life reinsurers has decreased as the reinsurance industry has consolidated. The decreased number of participants in the life reinsurance market results in increased concentration risk for insurers, including Protective. In addition, some reinsurers have indicated an unwillingness to continue to reinsure new sales of long-term guarantee products. If the reinsurance markets for these products further contracts, Protective’s ability to continue to offer such products would be adversely impacted.
The following table shows the carrying values of Protective’s invested assets.
Percent of S&P or Equivalent Designation Market Value Market Value ----------------------------------------------------------------------------------- (in thousands) AAA $ 4,713,838 36.5% AA 774,834 6.0 A 2,977,975 23.0 BBB 3,474,563 26.9 ----------------------------------------------------------------------------------- Investment grade 11,941,210 92.4 ----------------------------------------------------------------------------------- BB 664,131 5.2 B 300,974 2.3 CCC or lower 13,344 0.1 In or near default 4,697 0.0 ----------------------------------------------------------------------------------- Below investment grade 983,146 7.6 ----------------------------------------------------------------------------------- Redeemable preferred stock 3,164 0.0 ----------------------------------------------------------------------------------- Total $12,927,520 100.0% -----------------------------------------------------------------------------------
At December 31, 2003, 88.3% of total securities in an unrealized loss position were rated as investment grade. Bonds rated less than investment grade were 5.8% of invested assets. Protective generally purchases its investments with the intent to hold to maturity. Protective does not consider these unrealized losses as other-than-temporary impairments.
As discussed earlier, Protective’s management considers several factors when determining other-than-temporary impairments. Although Protective generally intends to hold securities until maturity, Protective may change its position as a result of a change in circumstances. Any such decision is consistent with Protective’s classification of its investment portfolio as available for sale. During the year ended December 31, 2003, Protective sold securities in an unrealized loss position with a market value of $524.8 million resulting in a realized loss of $6.3 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.
For several years Protective has offered a type of commercial mortgage loan under which Protective will permit a slightly higher loan-to-value ratio in exchange for a participating interest in the cash flows from the underlying real estate. As of December 31, 2003, approximately $382.7 million of Protective’s mortgage loans have this participation feature.
At December 31, 2002, Protective had $4.0 billion of stable value product account balances with an estimated fair value of $4.1 billion, and $3.7 billion of annuity account balances with an estimated fair value of $3.8 billion.
Fair Value Resulting From an Immediate +/-1% Change in Notional Fair Value at Interest Rates Amount December 31 +1% -1% ------------------------------------------------------------------------------------------- (in millions) Options Puts $4,000.0 $ 1.2 $ 2.5 $ 0.0 Futures 570.0 (11.9) 8.3 (30.9) Fixed to floating Swaps 731.5 35.7 22.1 50.2 Floating to fixed Swaps 135.0 (16.7) (11.7) (21.6) ------------------------------------------------------------------------------------------- $5,436.5 $ 8.3 $ 21.2 $ (2.3) ------------------------------------------------------------------------------------------- Options Puts $1,300.0 $ 0.5 $ 1.2 $ 0.0 Fixed to floating Swaps 303.7 31.0 21.0 41.5 Floating to fixed Swaps 175.1 (16.1) (12.3) (19.0) ------------------------------------------------------------------------------------------- $1,778.8 $ 15.4 $ 9.9 $ 22.5 -------------------------------------------------------------------------------------------
As discussed in Note A of the Notes to the Consolidated Financial Statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” and effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities.”
Net Income Share-Owner's Equity ---------------------------------------- ---------------------------------------- 2003 2002 2001 2003 2002 2001 ------------------------------------------------------------------------------------------------------------------------------------- In conformity with statutory reporting practices(1) $274,244 $ (2,418) $163,181 $1,135,942 $ 852,645 $775,138 ------------------------------------------------------------------------------------------------------------------------------------- In conformity with generally accepted accounting principles $232,040 $157,394 $107,550 $2,629,798 $2,285,284 $1,883,333 -------------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001 ----------------------------------------------------------------------------- Derivative financial instruments $8,249 $(4,708) $2,182 -----------------------------------------------------------------------------
At December 31, 2003 and 2002, Protective had bonds which were rated less than investment grade of $983.1 million and $860.6 million, respectively, having an amortized cost of $978.9 million and $960.8 million, respectively. At December 31, 2003, approximately $66.9 million of the bonds rated less than investment grade were securities issued in Protective-sponsored commercial mortgage loan securitizations. Approximately $1,956.7 million of bonds are not publicly traded.
Interest expense on debt totaled $1.6 million, $1.4 million, and $1.8 million in 2003, 2002, and 2001, respectively.
SARs Remaining Life Currently Base Price Outstanding in Years Exercisable -------------------------------------------------------------------- $17.44 580,000 2 580,000 22.31 419,661 6 239,161 31.26 50,000 7 0 31.29 7,500 7 2,500 32.00 465,000 8 30,000 26.49 95,000 9 15,000 --------------------------------------------------------------------