| For the fiscal year ended December 31, 2000 | Commission File Number | ||
|---|---|---|---|
| 33-31940 | |||
| 33-39345 | |||
| 33-57052 | |||
| 333-02249 |
| Tennessee | 63-0169720 | ||
|---|---|---|---|
| (State or other jurisdiction | (IRS Employer | ||
| incorporation or organization) | Identificiation No. |
| 2801 Highway 280 South | |||
|---|---|---|---|
| Birmingham, Alabama | 35223 | ||
| (Address of principal | (Zip Code) | ||
| executive offices) |
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in the definitive proxy statement or information statements or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Aggregate market value of voting stock held by nonaffiliates of the registrant: None
Number of shares of Common Stock, $1.00 Par Value, outstanding as of March 9, 2001: 5,000,000.
The registrant meets the conditions set forth in General Instruction I(1) (a) and (b) of Form 10-K and is therefore filing this Form with the reduced disclosure format pursuant to General Instruction I(2).
Protective Life Insurance Company (Protective), a stock life insurance company, was founded in 1907. Protective is a wholly-owned subsidiary of Protective Life Corporation (PLC), an insurance holding company whose common stock is traded on the New York Stock Exchange (symbol: PL). Protective provides financial services through the production, distribution, and administration of insurance and investment products. Unless the context otherwise requires “Protective” refers to the consolidated group of Protective Life Insurance Company and its subsidiaries.
Protective offers a competitive selection of individual life insurance products, indemnity and prepaid dental products, credit life and disability insurance products, guaranteed investment contracts, guaranteed funding agreements, and fixed and variable annuities. Protective distributes these products through many channels, primarily independent agents, insurance brokers, stockbrokers, financial institutions, company sales representatives, and automobile dealerships. Protective also seeks to acquire insurance policies from other insurers.
Protective operates seven divisions each having a strategic focus which can be grouped into three general categories: life insurance, specialty insurance products, and retirement savings and investment products. The life insurance category includes the Acquisitions, Individual Life, and West Coast Divisions. The specialty insurance products category includes the Dental Benefits and Financial Institutions Divisions. The retirement savings and investment products category includes the Stable Value Products and Investment Products Divisions. Protective also has an additional business segment which is described herein as Corporate and Other.
The following table shows the percentages of pretax operating income represented by each of the strategic focuses and the Corporate and Other segment.
RETIREMENT
SPECIALTY SAVINGS AND CORPORATE
YEAR ENDED LIFE INSURANCE INVESTMENT AND
DECEMBER 31 INSURANCE PRODUCTS PRODUCTS OTHER
- ----------------------------------------------------------------------------
1996 55.3% 7.9% 38.8% (1.9)%
1997 58.9 16.7 24.6 (0.2)
1998 58.1 15.0 23.1 3.8
1999 61.6 20.6 20.6 (2.8)
2000 62.5 27.5 21.6 (11.6)
Additional information concerning Protective’s divisions may be found in “Management’s Narrative Analysis of the Results of Operations” and Note K to Consolidated Financial Statements included herein.
Protective’s Home Office is located at 2801 Highway 280 South, Birmingham, Alabama. This campus includes the original 142,000 square-foot building which was completed in 1976 and a second contiguous 220,000 square-foot building which was completed in 1985. In addition, parking is provided for approximately 1,200 vehicles. During 2000, Protective began construction of a third contiguous building which will have approximately 315,000 square feet and parking for approximately 1,560 vehicles.
Protective leases administrative and marketing office space in approximately 46 cities, including approximately 143,034 square feet in Birmingham, with most leases being for periods of three to five years. The aggregate annualized rent is approximately $7.8 million.
There are no material pending legal proceedings, other than routine litigation incidental to the business of Protective, to which Protective or any of its subsidiaries is a party or of which any of Protective’s properties is subject. For additional information regarding legal proceedings see Note G to the consolidated financial statements included herein.
Not required in accordance with General Instruction I(2)(c).
Protective is a wholly-owned subsidiary of PLC which also owns all of the preferred stock issued by Protective’s subsidiary, Protective Life and Annuity Insurance Company (PL&A). Therefore, neither Protective’s common stock nor PL&A’s preferred stock is publicly traded.
At December 31, 2000, $1,122.9 million of consolidated share-owner’s equity excluding net unrealized gains and losses represented net assets of Protective that cannot be transferred to PLC in the form of dividends, loans, or advances. Also, distributions, including cash dividends to PLC in excess of approximately $882 million, would be subject to federal income tax at rates then effective.
Insurers are subject to various state statutory and regulatory restrictions on the insurers’ ability to pay dividends. In general, dividends up to specific levels are considered ordinary and may be paid thirty days after written notice to the insurance commissioner of the state of domicile unless such commissioner objects to the dividend prior to the expiration of such period. Dividends in larger amounts are considered extraordinary and are subject to affirmative prior approval by such commissioner. The maximum amount that would qualify as ordinary dividends to PLC by Protective in 2001 is estimated to be $83.6 million. Protective paid no dividends to PLC in 2000 or 1999.
PL&A did not pay any preferred dividends in 2000 or 1999. Protective and PL&A do expect to pay cash dividends in the future, subject to their earnings and financial condition and other relevant factors.
Not required in accordance with General Instruction I(2)(a).
In accordance with General Instruction I(2)(a), Protective includes the following analysis with the reduced disclosure format.
The following table sets forth revenues by source for the periods shown:
YEAR ENDED PERCENTAGE
DECEMBER 31 INCREASE (DECREASE)
---------------------------------------------
2000 1999
---- ----
(in thousands)
Premiums and policy fees............. $ 723,519 $ 599,223 20.7%
Net investment income................ 696,937 623,231 11.8%
Realized investment gains (losses)... (14,599) 4,760 (406.7)%
Other income......................... 51,202 27,102 88.9%
--------- ---------
$1,457,059 $1,254,316
========= =========
In 2000, premiums and policy fees, net of reinsurance (premiums and policy fees) increased $124.3 million or 20.7% over 1999. The Individual Life Division’s premiums and policy fees decreased $18.7 million due to an increased use of reinsurance ceded by the Division. Premiums and policy fees from the West Coast Division increased $2.8 million. The West Coast Division has also increased its use of reinsurance. Premiums and policy fees in the Acquisition Division, are expected to decline with time (due to the lapsing of policies resulting from deaths of insureds or terminations of coverage) unless new acquisitions are made. No acquisitions were completed in this Division in 1999 or 2000 resulting in a decrease of $11.9 million in premiums and policy fees in 2000. In October 2000, PLC transferred ownership of twenty companies (that provide prepaid dental products) to Protective. The operations of these companies are included in Protective’s Dental Benefits Division and resulted in a $29.6 million increase in premiums and policy fees in the Division. Premiums and policy fees related to the Dental Benefits Division’s other businesses increased $20.6 million. In January 2000, the Financial Institutions Division acquired the Lyndon Insurance Group (Lyndon) which resulted in a $97.1 million increase in premium and policy fees. Premiums and policy fees related to the Financial Institutions Division’s other businesses increased $15.4 million. The increase in premiums and policy fees from the Investment Products Division was $5.9 million. Premium and policy fees relating to various health insurance lines in the Corporate and Other segment decreased $16.5 million.
Net investment income for 2000 was $73.7 million or 11.8% higher than for the preceding year primarily due to increases in the average amount of invested assets. Invested assets have increased primarily due to acquisitions, receiving stable value and annuity deposits, and the asset growth that results from the sale of various insurance products. The January 2000 Lyndon acquisition increased net investment income $21.8 million. The percentage earned on average cash and investments was 7.1% in 2000 and 1999.
Protective generally purchases its investments with the intent to hold to maturity by purchasing investments that match future cash flow needs. However, Protective may sell any of its investments to maintain proper matching of assets and liabilities. Accordingly, Protective has classified its fixed maturities and certain other securities as “available for sale.” The sales of investments that have occurred generally result from portfolio management decisions to maintain proper matching of assets and liabilities.
Protective has an allowance for uncollectible amounts on investments. The allowance totaled $21.8 million at December 31, 2000 and $21.1 million at December 31, 1999. Realized investment gains in 2000 were $27.7 million and realized investment losses were $42.3 million, including a $0.7 million increase in the allowance for uncollectible amounts on investments.
Other income consists primarily of revenues from Protective’s direct response business, service contract business, non-insurance subsidiaries and rental of space in its administrative building to PLC. In 2000, revenues from Protective’s direct response business and service contract business increased $7.5 million and $13.3 million, respectively. Income from other sources increased $3.3 million.
The following table sets forth operating income or loss and income or loss before income tax by business segment for the periods shown:
YEAR ENDED DECEMBER 31
(IN THOUSANDS)
2000 1999
---- ----
Operating Income (Loss)(1)
Life Insurance
Individual Life $ 39,439 $ 31,433
West Coast 36,367 26,063
Acquisitions 53,624 64,460
Specialty Insurance Products
Dental 22,059 18,335
Financial Institutions 34,826 22,570
Retirement Savings and
Investment Products
Stable Value Products 31,208 29,465
Investment Products 13,584 11,360
Corporate and Other (23,992) (5,563)
---------------------------------------------------------------------------------------
Total operating income 207,115 198,123
---------------------------------------------------------------------------------------
Realized Investment Gains (Losses)
Stable Value Products (6,556) (549)
Investment Products 410 1,446
Unallocated Realized
Investment Gains (Losses) (8,453) 3,863
Related Amortization of Deferred
Policy Acquisition Costs
Investment Products (410) (1,446)
---------------------------------------------------------------------------------------
Total net (15,009) 3,314
---------------------------------------------------------------------------------------
Income (Loss) Before Income Tax
Life Insurance
Individual Life 39,439 31,433
West Coast 36,367 26,063
Acquisitions 53,624 64,460
Specialty Insurance Products
Dental 22,059 18,335
Financial Institutions 34,826 22,570
Retirement Savings and
Investment Products
Stable Value Products 24,652 28,916
Investment Products 13,584 11,360
Corporate and Other (23,992) (5,563)
Unallocated Realized
Investment Gains (Losses) (8,453) 3,863
---------------------------------------------------------------------------------------
Total income before
income tax $192,106 $201,437
---------------------------------------------------------------------------------------
(1) Income before income tax excluding realized investment gains and losses and related amortization of deferred policy
acquisition costs.
The Individual Life Division’s 2000 pretax income was $39.4 million, $8.0 million above 1999. The Division has grown through sales. The Division’s mortality experience was approximately $0.8 million better than expected in 2000 as compared to being approximately $1.8 million better than expected in 1999. The Division’s 2000 results also include expenses to develop new distribution channels.
In 2000, the West Coast Division had pretax operating income of $36.4 million, $10.3 million above 1999. The Division has grown through sales.
In the ordinary course of business, the Acquisitions Division regularly considers acquisitions of blocks of policies or smaller insurance companies. Policies acquired through the Division are usually administered as “closed” blocks; i.e., no new policies are being marketed. Therefore, earnings from the Acquisitions Division are normally expected to decline over time (due to the lapsing of policies resulting from deaths of insureds of terminations of coverage) unless new acquisitions are made. The Division did not make an acquisition in 1999 or 2000.
The Acquisitions Division’s 2000 pretax operating income was $53.6 million, $10.8 million below 1999. The Division’s mortality experience was approximately $5.8 million better than expected in 2000 as compared to being approximately $8.9 million better than expected in 1999. Additionally, in the fourth quarter of 1999, adjustments were made to the Division’s investment portfolio which had the effect of transferring approximately $10 million of investment income to the Corporate and Other segment during 2000.
The Dental Division’s 2000 pretax income was $22.1 million compared to $18.3 million in 1999. The aforementioned transfer of companies from PLC resulted in a $2.6 million increase in pretax operating income. The remainder of the increase reflects the Division’s growth through sales.
The Financial Institutions Division’s 2000 pretax income increased $12.3 million to $34.8 million. Included in the Division’s 2000 results were $16.9 million from the Lyndon acquisition. Earnings of the Division’s other businesses were lower than expected due to higher than expected claims.
The Stable Value Products Division’s 2000 pretax operating income increased $1.7 million to $31.2 million. The increase was due to higher account balances which was partially offset by lower interest rate spreads. Operating spreads in 2000 were compressed due to higher interest rates and an inverted yield curve. Realized investment losses associated with this Division in 2000 were $6.5 million as compared to realized investment losses of $0.5 million in 1999. As a result, total pretax income was $24.7 million in 2000 and $28.9 million in 1999.
The Investment Products Division’s 2000 pretax operating income was $13.6 million, an increase of $2.2 million. The increase reflects the Division’s growth through sales. The Division had no realized investment gains or losses (net of related amortization of deferred policy acquisition costs) in 1999 or 2000. As a result, total pretax income was $13.6 million in 2000 and $11.4 million in 1999.
The Corporate and Other segment consists of net investment income on unallocated capital, several lines of business which Protective is not actively marketing (mostly health insurance), and other operating expenses not identified with the preceding business segments (including interest on substantially all debt). Pretax operating losses for this segment were $24.0 million in 2000 as compared to pretax operating losses of $5.6 million in 1999. Earnings from health insurance lines decreased $7.0 million. In 2000, higher short-term interest rates and an inverted yield curve reduced investment income and increased interest expense.
The following table sets forth the effective income tax rates for the periods shown:
YEAR ENDED EFFECTIVE INCOME
DECEMBER 31 TAX RATES
-----------------------------------------------------
2000 ............................... 35.4%
1999 ............................... 36.3%
1998 ............................... 35.0%
Management's current estimate of the effective income tax rate for 2001 is between 34% and 35%.
The following table sets forth net income for the periods shown:
NET INCOME
-----------------------------------
YEAR ENDED PERCENTAGE
DECEMBER 31 AMOUNT INCREASE (DECREASE)
-------------- -------------------
(in thousands)
2000.................................. $124,035 (3.3)%
1999.................................. 128,258 9.5
1998.................................. 117,183 20.3
Compared to 1999, net income in 2000 decreased 3.3%, reflecting improved operating earnings in the Individual Life, West Coast, Dental Benefits, Financial Institutions, Investment Products, and Stable Value Products Divisions, which were offset by lower operating earnings in the Acquisitions Division, the Corporate and Other segment and higher realized investment losses.
For additional information regarding recently issued accounting standards see Note A to the consolidated financial statements included herein.
Protective’s investments in debt and equity securities are reported at market value, and investments in mortgage loans are reported at amortized cost. At December 31, 2000, Protective’s fixed maturity investments (bonds and redeemable preferred stocks) had a market value of $7,390.1 million, which is 1.0% below amortized cost (less allowances for uncollectible amounts on investments) of $7,463.7 million. Protective had $2,268.2 million in mortgage loans at December 31, 2000. While Protective’s mortgage loans do not have quoted market values, at December 31, 2000, Protective estimates the market value of its mortgage loans to be $2,385.2 million (using discounted cash flows from the next call date), which is 5.2% above amortized cost. These assets are invested for terms approximately corresponding to anticipated future benefit payments. Thus, market fluctuation are not expected to adversely affect liquidity.
The approximate percentage distribution of Protective’s fixed maturity investment by quality rating at December 31 is as follows:
RATING 2000 1999
- ----------- ---- ----
AAA................................... 37.3% 37.5%
AA.................................... 7.0 6.3
A..................................... 25.2 26.6
BBB................................... 27.4 25.7
BB or less............................ 3.0 3.8
Redeemable preferred stocks........... 0.1 0.1
----- -----
100.0% 100.0%
===== =====
At December 31, 1999, Protective’s fixed maturity investments had a market value of $6,304.6 million, which was 3.7% below amortized cost of $6,546.8 million. Protective estimated the market value of its mortgage loans to be $1,909.0 million at December 31, 1999, which was 1.9% below amortized cost of $1,946.7 million.
The following table sets forth the estimated market values of Protective’s fixed maturity investments and mortgage loans resulting from a hypothetical immediate 1 percentage point increase in interest rates from levels prevailing at December 31, and the percent change in market value the following estimated market values would represent.
Estimated Market Values Resulting From An
Immediate 1 Percentage Point Increase
In Interest Rates
AMOUNT PERCENT
AT DECEMBER 31, 1999 (IN MILLIONS) CHANGE
- ----------------------------------------------------------------------------
Fixed maturities $6,046.1 (4.1)%
Mortgage loans 1,825.0 (4.4)
============================================================================
AT DECEMBER 31, 2000
- ----------------------------------------------------------------------------
Fixed maturities $7,131.4 (3.5)%
Mortgage loans 2,277.9 (4.5)
============================================================================
Estimated market values were derived from the durations of Protective’s fixed maturities and mortgage loans. Duration measures the relationship between changes in market value to changes in interest rates. While these estimated market values generally provide an indication of how sensitive the market values of Protective’s fixed maturities and mortgage loans 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.
In the ordinary course of its commercial mortgage lending operations, Protective will commit to provide a mortgage loan before the property to be mortgaged has been built or acquired. The mortgage loan commitment is a contractual obligation to fund a mortgage loan when called upon by the borrower. The commitment is not recognized in Protective’s financial statements until the commitment is actually funded. The mortgage loan commitment contains terms, including the rate of interest.
At December 31, 2000, Protective had outstanding mortgage loan commitments of $308.4 million, with an estimated fair value of $319.0 million (using discounted cash flows from the first call date). At December 31, 1999, Protective had outstanding commitments of $552.6 million with an estimated fair value of $531.0 million. The following table sets forth the estimated fair value of Protective’s mortgage loan commitments resulting from a hypothetical immediate 1 percentage point increase in interest rate levels prevailing at December 31, and the percent change in fair value the following estimated fair values would represent.
ESTIMATED FAIR VALUES RESULTING FROM AN
IMMEDIATE 1 PERCENTAGE POINT INCREASE
IN INTEREST RATES
AMOUNT PERCENT
AT DECEMBER 31 (IN MILLIONS) CHANGE
--------------------------------------------------------------
1999 $503.4 (5.2)%
2000 305.0 (4.4)
==============================================================
The estimated fair values were derived from the durations of Protective’s outstanding mortgage loan commitments. While these estimated fair values generally provide an indication of how sensitive the fair value of Protective’s outstanding commitments 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.
Many of Protective’s products contain surrender charges and other features that reward persistency and penalize the early withdrawal of funds. Certain stable value and annuity contracts have market-value adjustments that protect Protective against investment losses if interest rates are higher at the time of surrender than at the time of issue.
At December 31, 2000, Protective had $3,177.9 million of stable value account balances with an estimated fair value of $3,251.0 million (using discounted cash flows), and $1,916.9 million of annuity account balances with an estimated fair value of $1,893.7 million (using surrender values).
At December 31, 1999, Protective had $2,680.0 million of stable value account balances with an estimated fair value of $2,649.6 million (using discounted cash flows), and $1,639.2 million of annuity account balances with an estimated fair value of $1,599.0 million (using surrender values).
The following table sets forth the estimated fair values of Protective’s stable value and 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 RESULTING FROM AN
IMMEDIATE 1 PERCENTAGE POINT DECREASE
IN INTEREST RATES
AMOUNT PERCENT
AT DECEMBER 31, 1999 (IN MILLIONS) CHANGE
-----------------------------------------------------------------------------
Stable value account balances $2,692.0 1.6%
Annuity account balances 1,658.2 3.7
=============================================================================
AT DECEMBER 31, 2000
-----------------------------------------------------------------------------
Stable value account balances $3,299.8 1.5%
Annuity account balances 1,975.1 4.3
=============================================================================
Estimated fair values were derived from the durations of Protective's stable value and annuity account balances. While these estimated fair values generally provide an indication of how sensitive the fair values of Protective's stable value and 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 one-fourth of Protective'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.
Combinations of interest rate swap contracts, options, and futures contracts are sometimes used as hedges against changes in interest rates for certain investments, primarily outstanding mortgage loan commitments and certain investment securities. No realized gains or losses were deferred in 2000 or 1999.
Protective uses interest rate swap contracts, swaptions (options to enter into interest rate swap contracts), caps, and floors to convert certain investments and liabilities from a variable rate of interest to a fixed rate of interest, and from a fixed rate to a variable rate of interest. Swap contracts are also used to alter the effective durations of assets and liabilities. Protective uses foreign currency swaps in connection with certain stable value contracts denominated in foreign currencies.
At December 31, 2000, contracts with a notional amount of $2,424.3 million were in a $13.0 million net unrealized loss position. At December 31, 1999, contracts with a notional amount of $1,328.9 million were in a $2.1 million net unrealized gain position.
The following table sets forth the notional amount and net unrealized gains and losses of Protective’s derivative financial instruments at December 31, and the estimated net unrealized gains and losses resulting from a hypothetical immediate plus and minus 1 percentage point change in interest rates from levels prevailing at December 31.
NET UNREALIZED GAIN(LOSS)
-------------------------------------------------------
RESULTING FROM AN
IMMEDIATE +/-1 PERCENTAGE
AT POINT CHANGE
NOTIONAL DECEMBER 31, IN INTEREST RATES
AMOUNT 1999 +1% -1%
(in millions)
- -------------------------------------------------------------------------------------------------------------------
Options
Calls $ 450.0 $ (1.4) $ (1.5) $(1.2)
Fixed to floating
Swaps 280.0 4.0 9.4 (1.6)
Floors 15.0 (0.1) 0.0 (0.1)
Floating to fixed
Swaps 583.9 (0.3) (28.7) 30.5
- -------------------------------------------------------------------------------------------------------------------
$1,328.9 $ 2.2 $(20.8) $27.6
===================================================================================================================
NET UNREALIZED GAIN(LOSS)
-------------------------------------------------------
RESULTING FROM AN
IMMEDIATE +/-1 PERCENTAGE
AT POINT CHANGE
NOTIONAL DECEMBER 31, IN INTEREST RATES
AMOUNT 2000 +1% -1%
(in millions)
- -------------------------------------------------------------------------------------------------------------------
Options
Puts $ 50.0 $ 0.0 $ 0.2 $ 0.0
Futures 100.8 (2.8) 4.0 (9.0)
Fixed to floating
Swaps 689.3 (5.5) (27.2) 16.8
Swaptions 275.0 0.5 0.0 7.4
Caps 200.0 0.0 0.3 0.0
Floors 100.0 (0.3) 0.0 (0.8)
Floating to fixed
Swaps 160.0 (2.5) 4.5 (9.4)
Caps 300.0 0.0 0.5 0.0
Floors 300.0 (1.1) 0.0 (3.1)
- -------------------------------------------------------------------------------------------------------------------
$2,175.1 $(11.7) $(17.7) $ 1.9
===================================================================================================================
Protective is also subject to foreign exchange risk arising from stable value contracts denominated in foreign currencies and related foreign currency swaps. At December 31, 2000, stable value contracts of $249.2 million had a foreign exchange loss of approximately $4.0 million. At December 31, 2000, the related foreign currency swaps had a net unrealized loss of approximately $1.3 million.
The following table sets for the notional amount and net unrealized gains and losses of the funding agreements and related foreign currency swaps at December 31, 2000, and the estimated net unrealized gains and losses resulting from a hypothetical 10% change in quoted foreign currency exchange rates from levels prevailing at December 31, 2000.
NET UNREALIZED GAIN(LOSS)
---------------------------------------------------
RESULTING FROM
AN IMMEDIATE +/-10%
CHANGE IN FOREIGN
CURRENCY EXCHANGE
RATES
NOTIONAL AT
(IN MILLIONS) AMOUNT DECEMBER 31 +10% -10%
- ------------------------ ------------- ------------------ ---------------- ---------------
2000
Stable Value
Contracts $249.2 $(4.0) $(29.3) $21.3
Foreign Currency
Swaps 249.2 (1.3) 23.7 (26.4)
- ------------------------ ------------- ------------------ ---------------- ---------------
$498.4 $(5.3) $ (5.6) $ (5.1)
======================== ============= ================== ================ ===============
Estimated unrealized gains and losses were derived using pricing models specific to derivative financial instruments. While these estimated unrealized gains and losses generally provide an indication of how sensitive Protective’s derivative financial instruments 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.
Report of Independent Accountants.......................................................... Consolidated Statements of Income for the years ended December 31, 2000, 1999, and 1998... Consolidated Balance Sheets as of December 31, 2000 and 1999............................... Consolidated Statements of Share-Owner’s Equity for the years ended December 31, 2000, 1999, and 1998....................................................... Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998. Notes to Consolidated Financial Statements................................................. Financial Statement Schedules: Schedule III — Supplementary Insurance Information................................... Schedule IV — Reinsurance ...........................................................
All other schedules to the consolidated financial statements required by Article 7 of Regulation S-X are not required under the related instructions or are inapplicable and therefore have been omitted.
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Protective Life Insurance Company and Subsidiaries at December 31, 2000 and 1999, and the results of their operations and their 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 consolidated 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.
PricewaterhouseCoopers LLP
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
YEAR ENDED DECEMBER 31
---------------------------------
2000 1999 1998
---- ---- ----
REVENUES
Premiums and policy fees............................................... $1,545,969 $1,137,256 $1,027,340
Reinsurance ceded ..................................................... (822,450) (538,033) (459,215)
--------- --------- ---------
Net of reinsurance ceded............................................. 723,519 599,223 568,125
Net investment income.................................................. 696,937 623,231 603,795
Realized investment gains (losses)..................................... (14,599) 4,760 2,136
Other income........................................................... 51,202 27,102 20,201
--------- --------- ---------
1,457,059 1,254,316 1,194,257
--------- --------- ---------
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance ceded: 2000 - $538,291;
1999 - $344,474; 1998 - $330,494).................................... 924,210 771,527 730,496
Amortization of deferred policy acquisition costs ..................... 149,574 104,913 111,188
Amortization of goodwill............................................... 3,867
Other operating expenses (net of reinsurance ceded: 2000 - $223,498;
1999 - $150,570; 1998 - $166,375).................................... 187,302 176,439 172,228
--------- --------- ---------
1,264,953 1,052,879 1,013,912
--------- --------- ---------
INCOME BEFORE INCOME TAX.................................................. 192,106 201,437 180,345
INCOME TAX EXPENSE
Current.............................................................. 15,491 47,504 48,237
Deferred............................................................. 52,580 25,675 14,925
------- ------- -------
68,071 73,179 63,162
------- ------- -------
NET INCOME................................................................ $ 124,035 $ 128,258 $ 117,183
======= ======= =======
See notes to consolidated financial statements.
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
DECEMBER 31
--------------------------
2000 1999
ASSETS ---- ----
Investments:
Fixed maturities, at market (amortized cost: 2000 - $7,463,700; 1999 - $6,546,798).. $ 7,390,110 $ 6,304,554
Equity securities, at market (cost: 2000 - $44,450; 1999 - $32,092)................. 41,792 30,696
Mortgage loans on real estate....................................................... 2,268,224 1,946,690
Investment real estate, net of accumulated depreciation (2000 - $1,226; 1999 - $1,014) 12,566 15,582
Policy loans........................................................................ 230,527 232,126
Other long-term investments......................................................... 66,646 39,943
Short-term investments.............................................................. 172,699 81,171
---------- ---------
Total investments............................................................... 10,182,564 8,650,762
Cash.................................................................................... 33,517
Accrued investment income............................................................... 121,996 101,120
Accounts and premiums receivable, net of allowance for uncollectible
amounts (2000 - $2,195; 1999 - $2,540).............................................. 72,189 45,852
Reinsurance receivables................................................................. 1,099,574 859,684
Deferred policy acquisition costs....................................................... 1,189,380 1,011,524
Goodwill, net........................................................................... 241,831
Property and equipment, net............................................................. 51,166 49,002
Other assets............................................................................ 120,874 27,712
Receivable from related parties......................................................... 4,768 13,059
Assets related to separate accounts.....................................................
Variable Annuity.................................................................... 1,841,439 1,778,618
Variable Universal Life............................................................. 63,504 40,293
Other............................................................................... 3,746 3,517
---------- ----------
$15,026,548 $12,581,143
LIABILITIES ========== ==========
Policy liabilities and accruals:
Future policy benefits and claims.................................................. $ 5,033,397 $ 4,566,426
Unearned premiums.................................................................. 935,605 507,659
--------- ---------
Total policy liabilities and accruals.............................................. 5,969,002 5,074,085
Stable value investment contract deposits............................................... 3,177,863 2,680,009
Annuity deposits........................................................................ 1,916,894 1,639,231
Other policyholders' funds.............................................................. 125,336 116,815
Other liabilities....................................................................... 324,901 293,862
Accrued income taxes.................................................................... (10,932) (25,833)
Deferred income taxes................................................................... 72,065 (32,335)
Note payable............................................................................ 2,315 2,338
Indebtedness to related parties......................................................... 10,000 14,000
Liabilities related to separate accounts................................................
Variable Annuity................................................................... 1,841,439 1,778,618
Variable Universal Life............................................................ 63,504 40,293
Other.............................................................................. 3,746 3,517
---------- ----------
Total liabilities................................................................ 13,496,133 11,584,600
---------- ----------
COMMITMENTS AND CONTINGENT LIABILITIES — NOTE G
SHARE-OWNER’S EQUITY
Preferred Stock, $1.00 par value, shares
authorized and issued: 2,000, liquidation preference $2,000.......................... 2 2
Common Stock, $1.00 par value, shares
authorized and issued: 5,000,000..................................................... 5,000 5,000
Additional paid-in capital.............................................................. 632,805 327,992
Note receivable from PLC Employee Stock Ownership Plan.................................. (4,841) (5,148)
Retained earnings....................................................................... 948,819 814,777
Accumulated other comprehensive income
Net unrealized gains (losses) on investments
(net of income tax: 2000-$(27,661); 1999-$(78,658))................................... (51,370) (146,080)
--------- ----------
Total share-owner’s equity....................................................... 1,530,415 996,543
---------- ----------
................................................................................... $15,026,548 $12,581,143
========== ==========
See notes to consolidated financial statements
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF SHARE-OWNER'S EQUITY
(Dollars in thousands, except per share amounts)
NOTE
RECEIVABLE NET
ADDITIONAL FROM UNREALIZED TOTAL
PREFERRED COMMON PAID-IN PLC RETAINED GAINS(LOSSES) SHARE-OWNER’S
STOCK STOCK CAPITAL ESOP EARNINGS ON INVESTMENTS EQUITY
--------- ------ -------- -------- -------- -------------- ---------
Balance, December 31, 1997 $ 2 $5,000 $327,992 $(5,378) $629,436 $61,727 $1,018,779
---------
Net income for 1998 117,183 117,183
Decrease in net unrealized
gains on investments (net of income tax - $(2,844)) (5,281) (5,281)
Reclassification adjustment for amounts included
in net income (net of income tax - $(747)) (1,389) (1,389)
-------
Comprehensive income for 1998 110,513
-------
Common dividends ($12 per share) (60,000) (60,000)
Preferred dividends ($50 per share) (100) (100)
Decrease in note receivable from PLC ESOP 179 179
---- ----- ------- ------ ------- ------- ---------
Balance, December 31, 1998 2 5,000 327,992 (5,199) 686,519 55,057 1,069,371
---------
Net income for 1999 128,258 128,258
Decrease in net unrealized
gains on investments (net of income tax - $(106,638)) (198,043) (198,043)
Reclassification adjustment for amounts included
in net income (net of income tax - $(1,666)) (3,094) (3,094)
---------
Comprehensive loss for 1999 (72,879)
---------
Decrease in note receivable from PLC ESOP 51 51
---- ----- ------- ------- ------- --------- ---------
Balance, December 31, 1999 2 5,000 327,992 (5,148) 814,777 (146,080) 996,543
---------
Net income for 2000 124,035 124,035
Decrease in net unrealized
losses on investments (net of income tax - $45,887) 85,221 85,221
Reclassification adjustment for amounts included
in net income (net of income tax - $5,110) 9,489 9,489
---------
Comprehensive income for 2000 218,745
---------
Capital contribution 81,000 81,000
Transfer of subsidiaries from PLC (see Note A) 223,813 10,007 233,820
Decrease in note receivable from PLC ESOP 307 307
---- ------ -------- ------- -------- -------- ---------
Balance, December 31, 2000 $ 2 $5,000 $632,805 $(4,841) $948,819 $(51,370) $1,530,415
==== ====== ======== ======= ======== ======== =========
See notes to consolidated financial statements.
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
DECEMBER 31
--------------------------------------
2000 1999 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..............................................................................$ 124,035 $ 128,258 $ 117,183
Adjustments to reconcile net income to net cash provided by operating activities:
Realized investment (gains) losses.................................................. 14,599 (4,760) (2,136)
Amortization of deferred policy acquisition costs................................... 149,574 104,913 111,188
Amortization of goodwill............................................................ 3,867
Capitalization of deferred policy acquisition costs................................. (338,685) (239,483) (192,838)
Depreciation expense................................................................ 9,581 10,513 7,110
Deferred income taxes............................................................... 55,161 24,234 14,925
Accrued income taxes................................................................ 13,265 (14,841) (11,933)
Interest credited to universal life and investment products......................... 766,004 331,746 352,721
Policy fees assessed on universal life and investment products...................... (197,581) (165,818) (139,689)
Change in accrued investment income and other receivables........................... (160,488) (119,183) (159,362)
Change in policy liabilities and other policyholder funds of
traditional life and health products............................................ 508,454 215,201 322,464
Change in other liabilities......................................................... 1,809 67,552 (19,771)
Other (net)......................................................................... (34,626) (5,526) (22,634)
------- ------- -------
Net cash provided by operating activities.................................................... 914,969 332,806 377,228
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reduction of investments:
Investments available for sale...................................................... 12,828,276 9,973,742 10,445,407
Other............................................................................... 133,814 243,280 198,559
Sale of investments:
Investment available for sale....................................................... 810,716 537,343 1,080,265
Other............................................................................... 5,222 267,892 155,906
Cost of investments acquired:
Investments available for sale...................................................... (14,384,625) (10,625,354)(11,505,098)
Other............................................................................... (463,909) (864,100) (662,350)
Acquisitions and bulk reinsurance assumptions........................................... (141,040) 46,508
Purchase of property and equipment...................................................... (5,085) (18,075) (13,077)
Sale of property and equipment.......................................................... 151
---------- ---------- ---------
Net cash used in investing activities........................................................ (1,216,631) (438,613) (300,388)
---------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under line of credit arrangements and long-term debt......................... 2,197,800 4,351,177 1,975,800
Capital contribution from PLC........................................................... 81,000
Principal payments on line of credit arrangements and long-term debt.................... (2,197,823) (4,351,203) (1,973,437)
Principal payment on surplus note to PLC................................................ (4,000) (4,000) (2,000)
Dividends to share owner................................................................ (60,100)
Investment product deposits and change in universal life deposits....................... 1,811,484 1,300,736 981,124
Investment product withdrawals.......................................................... (1,553,282) (1,190,903) (1,037,424)
--------- --------- ---------
Net cash provided by (used in) financing activities.......................................... 335,179 105,807 (116,037)
--------- --------- ---------
INCREASE(DECREASE) IN CASH................................................................... 33,517 0 (39,197)
CASH AT BEGINNING OF YEAR.................................................................... 0 0 39,197
--------- --------- ---------
CASH AT END OF YEAR..........................................................................$ 33,517 $ 0 $ 0
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year:
Interest on debt....................................................................$ 3,310 $ 5,611 $ 8,338
Income taxes........................................................................$ 25,638 $ 56,192 $ 57,429
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Reduction of principal on note from ESOP................................................$ 307 $ 51 $ 179
Acquisitions, related reinsurance transactions and subsidiary transfer
Assets acquired.....................................................................$ 759,067 $ 12,502 $ 247,894
Liabilities assumed................................................................. (384,207) (12,502) (380,405)
Equity from subsidiary transfer (see Note A)........................................ (233,820) 0 0
--------- ------ -------
Net ....................................................................................$ 141,040 $ 0 $(132,511)
========= ====== =======
See notes to consolidated financial statements.
BASIS OF PRESENTATION
The accompanying consolidated financial statements of Protective Life Insurance Company and subsidiaries (Protective) 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 B.)
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make various estimates that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities, as well as the reported amounts of revenues and expenses. Actual results could differ from these estimates.
ENTITIES INCLUDED
The consolidated financial statements include the accounts, after intercompany eliminations, of Protective Life Insurance Company and its wholly-owned subsidiaries. Protective is a wholly-owned subsidiary of Protective Life Corporation (PLC), an insurance holding company.
On October 1, 2000, PLC transferred its ownership of twenty companies (that market prepaid dental products) to Protective. This transfer was accounted for in a manner similar to that in pooling-of-interests accounting, which resulted in the assets and liabilities of these companies being transferred at amounts equal to PLC’s bases (including approximately $200 million of goodwill). In addition, Protective’s share-owner’s equity was adjusted by an amount equal to the companies’ share-owner’s equity at October 1, 2000. The results of operations of these companies have been included in the accompanying financial statements since the effective date of the transfer.
NATURE OF OPERATIONS
Protective provides financial services through the production, distribution, and administration of insurance and investment products. Protective markets individual life insurance, indemnity and prepaid dental products, credit life and disability insurance, guaranteed investment contracts, guaranteed funding agreements, fixed and variable annuities, and extended service contracts throughout the United States. Protective also maintains a separate division devoted exclusively to the acquisition of insurance policies from other companies.
The operating results of companies in the insurance industry have historically been subject to significant fluctuations due to changing competition, economic conditions, interest rates, investment performance, insurance ratings, claims, and other factors.
RECENTLY ISSUED ACCOUNTING STANDARDS
In 1999, Protective 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,” Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use,” and Statement of Position 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 PLC’s or Protective’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 Protective 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 $8.3 million and a cumulative after-tax increase to other comprehensive income of approximately $4.0 million in the first quarter of fiscal 2001. The adoption will also impact assets and liabilities recorded on the balance sheet. Prospectively, the adoption may introduce volatility into Protective’s reported net income and other comprehensive income depending on future market conditions and Protective’s hedging activities.
In September 2000, the FASB issued SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of SFAS No. 125.” SFAS No. 140 revises the standards of accounting for securitizations and other transfers of financial assets. This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001.
INVESTMENTS
Protective has classified all of its investments in fixed maturities, equity securities, and short-term investments as “available for sale.”
Investments are reported on the following bases less allowances for uncollectible amounts on investments, if applicable:
| • | Fixed maturities (bonds, and redeemable preferred stocks) — at current market value. Where market values are unavailable, Protective 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. |
| • | Equity securities (common and nonredeemable preferred stocks) — at current market value. |
| • | Mortgage loans — at unpaid balances, adjusted for loan origination costs, net of fees, and amortization of premium or discount. |
| • | Investment real estate — at cost, less allowances for depreciation computed on the straight-line method. With respect to real estate acquired through foreclosure, cost is the lesser of the loan balance plus foreclosure costs or appraised value. |
| • | Policy loans — at unpaid balances. |
| • | Other long-term investments — at a variety of methods similar to those listed above, as deemed appropriate for the specific investment. |
| • | Short-term investments — at cost, which approximates current market value. |
Substantially all short-term investments have maturities of three months or less at the time of acquisition and include approximately $0.6 million in bank deposits voluntarily restricted as to withdrawal.
As prescribed by SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” certain investments are recorded at their market values with the resulting unrealized gains and losses reduced by a related adjustment to deferred policy acquisition costs, net of income tax, reported as a component of share-owner’s equity. The market values of fixed maturities increase or decrease as interest rates fall or rise. Therefore, although the adoption of SFAS No. 115 does not affect Protective’s operations, its reported share-owner’s equity will fluctuate significantly as interest rates change.
Protective's balance sheets at December 31, prepared on the basis of reporting investments at amortized cost rather than at market values, are as follows:
2000 1999
---- ----
Total investments.................... $10,258,809 $ 8,894,426
Deferred policy acquisition costs.... 1,192,696 992,518
All other assets..................... 3,654,604 2,918,857
---------- ----------
$15,106,109 $12,805,801
========== ==========
Deferred income taxes................$ 100,256 $ 46,243
All other liabilities................ 13,424,068 11,616,935
---------- ----------
13,524,324 11,663,178
Share-owner’s equity................. 1,581,785 1,142,623
---------- ----------
$15,106,109 $12,805,801
========== ==========
Realized gains and losses on sales of investments are recognized in net income using the specific identification basis.
DERIVATIVE FINANCIAL INSTRUMENTS
Combinations of interest rate swap contracts, options, and futures contracts are sometimes used as hedges against changes in interest rates for certain investments, primarily outstanding mortgage loan commitments, mortgage loans, and mortgage-backed securities, and liabilities arising from interest-sensitive products. Realized gains and losses on certain contracts are deferred and amortized over the life of the hedged asset or liability, and such amortization is recorded in investment income or interest expense. Any unamortized gain or loss is recorded as a realized investment gain or loss upon the early termination of a hedged asset or liability, or when the anticipated transaction is no longer likely to occur. No realized gains or losses were deferred in 2000 and 1999.
Protective accounts for certain interest rate swaps designated as hedges of available-for-sale securities on a mark-to-market basis. The accrual of interest payable or receivable on these interest rate swaps is reported in investment income. Changes in the market values of these interest rate swaps, exclusive of net interest accruals, are reported in other comprehensive income on a net-of-tax basis.
Protective uses interest rate swap contracts, swaptions (options to enter into interest rate swap contracts), caps and floors to convert certain investments from a variable to a fixed rate of interest and from a fixed rate to a variable rate of interest. Swap contracts are also used to alter the effective durations of assets and liabilities. Amounts paid or received related to the initiation of certain interest rate swap contracts, swaptions, caps, and floors are deferred and amortized over the life of the related financial instrument, and subsequent periodic settlements are recorded in investment income or interest expense. Gains or losses on contracts terminated upon the early termination of the related financial instrument are recorded as realized investment gains or losses. Amounts paid and received related to the initiation of interest rate swap contracts, swaptions, caps and floors were $1.3 million and $1.1 million, respectively, in 2000. Amounts paid were $1.4 million and $1.0 million in 1999 and 1998, respectively. No amounts were received in 1999 and 1998.
Protective utilizes foreign currency swaps as hedges of the foreign currency exchange risk associated with its obligations under certain stable value contracts denominated in foreign currencies. Gains and losses are recognized on the currency swaps to the extent of changes in spot exchange rates since inception of the contracts.
At December 31, 2000, contracts with a notional amount of $2,424.3 million were in a $13.0 million net unrealized loss position. At December 31, 1999, contracts with a notional amount of $1,328.9 million were in a $2.1 million net unrealized gain position. Protective recognized realized investment gains related to derivative financial instruments of $4.5 million and $3.8 million in 2000 and 1999, respectively.
Protective's derivative financial instruments are with highly rated counterparties.
CASH
Cash includes all demand deposits reduced by the amount of outstanding checks and drafts. Protective has deposits with certain financial institutions which exceed federally insured limits. Protective has reviewed the credit worthiness of these financial institutions and believes there is minimal risk of a material loss.
PROPERTY AND EQUIPMENT
Property and equipment are reported at cost. Protective primarily uses the straight-line method of depreciation based upon the estimated useful lives of the assets. Major repairs or improvements are capitalized and depreciated over the estimated useful lives of the assets. Other repairs are expensed as incurred. The cost and related accumulated depreciation of property and equipment sold or retired are removed from the accounts, and resulting gains or losses are included in income.
Property and equipment consisted of the following at December 31:
2000 1999
---- ----
Home office building......................... $ 41,184 $ 40,524
Other, principally furniture and equipment... 66,484 54,412
------- ------
107,668 94,936
Accumulated depreciation..................... 56,502 45,934
------- ------
$ 51,166 $ 49,002
======= ======
SEPARATE ACCOUNTS
The assets and liabilities related to separate accounts in which Protective does not bear the investment risk are valued at market and reported separately as assets and liabilities related to separate accounts in the accompanying consolidated financial statements.
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. |
| 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 Protective’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 Protective and claims incurred but not yet reported. Policy claims are charged to expense in the period that the claims are incurred. |
Activity in the liability for unpaid claims is summarized as follows:
2000 1999 1998
---- ---- ----
Balance beginning of year........... $120,575 $ 90,332 $106,121
Less reinsurance................ 47,661 20,019 18,673
------- ------ -------
Net balance beginning of year....... 72,914 70,313 87,448
------- ------ -------
Incurred related to:
Current year........................ 311,633 311,002 288,015
Prior year.......................... (4,489) (5,574) (10,198)
------- ------- -------
Total incurred.................. 307,144 305,428 277,817
------- ------- -------
Paid related to:
Current year........................ 241,566 264,298 236,001
Prior year.......................... 60,972 40,197 58,951
------- ------- -------
Total paid...................... 302,538 304,495 294,952
------- ------- -------
Other changes:
Acquisitions and
reserve transfers............ 6,623 1,668 0
------ ------ ------
Net balance end of year............. 84,143 72,914 70,313
Plus reinsurance................ 25,830 47,661 20,019
------- ------- ------
Balance end of year................. $109,973 $120,575 $ 90,332
======= ======= ======
| • | Universal Life and Investment Products — Universal life and investment products include universal life insurance, guaranteed investment contracts, deferred annuities, and annuities without life contingencies. Revenues for universal life and investment products consist of policy fees that have been assessed against policy account balances for the costs of insurance, policy administration, and surrenders. Benefit reserves for universal life and investment products represent policy account balances before applicable surrender charges plus certain deferred policy initiation fees that are recognized in income over the term of the policies. Policy benefits and claims that are charged to expense include benefit claims incurred in the period in excess of related policy account balances and interest credited to policy account balances. Interest credit rates for universal life and investment products ranged from 3.6% to 9.4% in 2000. |
| Protective’s accounting policies with respect to variable universal life and variable annuities are identical except that policy account balances (excluding account balances that earn a fixed rate) are valued at market and reported as components of assets and liabilities related to separate accounts. |
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 amortized over the premium-payment period of the related policies in proportion to the ratio of annual premium income to the present value of the total anticipated premium income. Credit insurance acquisition costs are being amortized in proportion to earned premium. Acquisition costs for universal life and investment products are amortized over the lives of the policies in relation to the present value of estimated gross profits before amortization. Under SFAS No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments," Protective makes certain assumptions regarding the mortality, persistency, expenses, and interest rates it expects to experience in future periods. These assumptions are to be best estimates and are to be periodically updated whenever actual experience and/or expectations for the future change from that assumed. Additionally, relating to SFAS No. 115, these costs have been adjusted by an amount equal to the amortization that would have been recorded if unrealized gains or losses on investments associated with Protective's universal life and investment products had been realized.
The cost to acquire blocks of insurance representing the present value of future profits from such blocks of insurance is also included in deferred policy acquisition costs. Protective amortizes the present value of future profits over the premium payment period, including accrued interest of up to approximately 8%. The
unamortized present value of future profits for all acquisitions was approximately $343.6 million and $340.6 million at December 31, 2000 and 1999, respectively. During 2000 $47.3 million of present value of future profits was capitalized (relating to acquisitions made during the year) and $44.3 million was amortized. During 1999 $13.3 million of present value of future profits was capitalized, and $43.0 million was amortized.
GOODWILL
Goodwill is being amortized straight-line over periods ranging from 20 to 40 years. Goodwill at December 31, 2000, is as follows:
Goodwill $260,773
Accumulated amortization 18,942
-------
$241,831
=======
Protective periodically evaluates the recoverability of its goodwill by comparing expected future cash flows to the amount of unamortized goodwill. If this evaluation were to indicate the unamortized goodwill is impaired, the goodwill would be reduced to an amount representing the present value of applicable estimated future cash flows.
INCOME TAXES
Protective uses the asset and liability method of accounting for income taxes. Income tax provisions are generally based on income reported for financial statement purposes. Deferred federal income taxes arise from the recognition of temporary differences between the basis of assets and liabilities determined for financial reporting purposes and the basis determined for income tax purposes. Such temporary differences are principally related to the deferral of policy acquisition costs and the provision for future policy benefits and expenses.
RECLASSIFICATIONS
Certain reclassifications have been made in the previously reported financial statements and accompanying notes to make the prior year amounts comparable to those of the current year. Such reclassifications had no effect on previously reported net income, total assets, or share-owner’s equity.
Financial statements prepared in conformity with accounting principals generally accepted in the United States of America differ in some respects from the statutory accounting practices prescribed or permitted by insurance regulatory authorities. The most significant differences are as follows: (a) acquisition costs of obtaining new business are deferred and amortized over the approximate life of the policies rather than charged to operations as incurred; (b) benefit liabilities are computed using a net level method and are based on realistic estimates of expected mortality, interest, and withdrawals as adjusted to provide for possible unfavorable deviation from such assumptions; (c) deferred income taxes are provided for temporary differences between financial and taxable earnings; (d) the Asset Valuation Reserve and Interest Maintenance Reserve are restored to share-owner’s equity; (e) furniture and equipment, agents’ debit balances, and prepaid expenses are reported as assets rather than being charged directly to surplus (referred to as nonadmitted assets); (f) certain items of interest income, such as mortgage and bond discounts, are amortized differently; and (g) bonds are recorded at their market values instead of amortized cost.
The reconciliations of net income and share-owner’s equity prepared in conformity with statutory reporting practices to that reported in the accompanying consolidated financial statements are as follows:
Net Income Share-Owner’s Equity
----------------------------------- -----------------------------------
2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ----
In conformity with statutory reporting
practices:(1)................................... $ 66,694 $ 75,114 $147,077 $ 628,274 $ 567,634 $ 531,956
Additions (deductions) by adjustment:
Deferred policy acquisition costs, net of
amortization.............................. 157,617 120,644 68,155 1,189,380 1,011,524 841,425
Deferred income tax......................... (52,580) (25,675) (14,925) (72,065) 32,335 (51,735)
Asset Valuation Reserve..................... 103,853 41,104 66,922
Interest Maintenance Reserve................ (3,540) (226) (1,355) 9,715 19,328 15,507
Nonadmitted items........................... 97,447 51,350 42,835
Other timing and valuation adjustments...... (43,757) 72,527 (76,214) (204,985) (467,130) (282,480)
Noninsurance affiliates..................... 21,276 20,698 18,171
Consolidation elimination................... (21,675) (134,824) (23,726) (221,204) (259,602) (95,059)
------- ------- ------- --------- ------- ----------
In conformity with generally accepted
accounting principles........................... $124,035 $128,258 $117,183 $1,530,415 $ 996,543 $1,069,371
======= ======= ======= ========= ======= =========
(1) Consolidated
As of December 31, 2000, Protective and its insurance subsidiaries had on deposit with regulatory authorities, fixed maturity and short-term investments with a market value of approximately $83.6 million.
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 Protective 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 Protective.
Major categories of net investment income for the years ended December 31 are summarized as follows:
2000 1999 1998
---- ---- ----
Fixed maturities........................... $531,887 $466,957 $463,416
Equity securities.......................... 2,532 775 905
Mortgage loans............................. 177,917 172,027 158,461
Investment real estate..................... 2,027 1,949 1,224
Policy loans............................... 14,977 15,994 12,346
Other, principally short-term investments.. 15,491 20,244 16,536
------- ------- -------
744,831 677,946 652,888
Investment expenses........................ 47,894 54,715 49,093
------- ------- -------
$696,937 $623,231 $603,795
======= ======= =======
Realized investment gains (losses) for the years ended December 31 are summarized as follows:
2000 1999 1998
---- ---- ----
Fixed maturities.......................... $ (14,896) $ 13,049 $ 4,374
Equity securities......................... 1,685 (3,371) (4,465)
Mortgage loans and other investments...... (1,388) ( 4,918) 2,227
------ ----- -----
$ (14,599) $ 4,760 $ 2,136
====== ===== =====
Protective recognizes permanent impairments through changes to an allowance for uncollectible amounts on investments. The allowance totaled $21.8 million at December 31, 2000 and $21.1 million at December 31, 1999. Additions and reductions to the allowance are included in realized investment gains (losses). Without such additions/reductions, Protective had net realized investment losses of $13.9 million in 2000, net realized investment gains of $1.7 million in 1999, and net realized investment gains of $3.2 million in 1998.
In 2000, gross gains on the sale of investments available for sale (fixed maturities, equity securities and short-term investments) were $21.2 million and gross losses were $34.4 million. In 1999, gross gains were $48.8 million and gross losses were $33.6 million. In 1998, gross gains were $32.3 million and gross losses were $32.5 million.
The amortized cost and estimated market values of Protective’s investments classified as available for sale at December 31 are as follows:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
2000 COST GAINS LOSSES VALUES
- ---- ----------- ---------- ---------- ----------
Fixed maturities:
Bonds:
Mortgage-backed securities...... $2,915,813 $ 49,372 $ 33,173 $2,932,012
United States Government and
authorities................... 95,567 2,662 0 98,229
States, municipalities, and
political subdivision......... 88,222 3,408 0 91,630
Public utilities................ 631,698 7,803 5,591 633,910
Convertibles and bonds with
warrants...................... 69,013 11,277 12,145 68,145
All other corporate bonds....... 3,662,586 49,536 146,732 3,565,390
Redeemable preferred stocks.......... 801 0 7 794
--------- ------- ------- ---------
7,463,700 124,058 197,648 7,390,110
Equity securities....................... 44,450 2,761 5,419 41,792
Short-term investments.................. 172,699 0 0 172,699
--------- ------- ------- ---------
$7,680,849 $126,819 $203,067 $7,604,601
========= ======= ======= =========
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
1999 COST GAINS LOSSES VALUES
- ---- --------- ---------- ---------- ---------
Fixed maturities:
Bonds:
Mortgage-backed securities...... $2,619,918 $ 18,491 $101,150 $2,537,259
United States Government and
authorities................... 154,954 138 1,257 153,835
States, municipalities, and
political subdivisions........ 27,254 7 295 26,966
Public utilities................ 537,834 301 14,690 523,445
Convertibles and bonds with
warrants...................... 693 0 155 538
All other corporate bonds....... 3,204,963 5,938 149,591 3,061,310
Redeemable preferred stocks.......... 1,182 19 0 1,201
--------- ------ ------- ---------
6,546,798 24,894 267,138 6,304,554
Equity securities....................... 32,092 644 2,040 30,696
Short-term investments.................. 81,171 0 0 81,171
--------- ------ ------- ---------
$6,660,061 $ 25,538 $269,178 $6,416,421
========= ====== ======= =========
The amortized cost and estimated market values of fixed maturities at December 31, by expected maturity, are shown as follows. Expected maturities are derived from rates of prepayment that may differ from actual rates of prepayment.
ESTIMATED
AMORTIZED MARKET
COST VALUES
2000 ---------- ----------
----
Due in one year or less................. $ 508,619 $ 505,081
Due after one year through five years... 3,946,183 3,930,126
Due after five years through ten years.. 2,125,817 2,108,270
Due after ten years..................... 883,081 846,633
--------- ---------
$7,463,700 $7,390,110
========= =========
ESTIMATED
AMORTIZED MARKET
COST VALUES
1999 ---------- -----------
----
Due in one year or less................. $ 322,576 $ 322,074
Due after one year through five years... 2,926,510 2,877,029
Due after five years through ten years.. 2,161,638 2,058,897
Due after ten years..................... 1,136,074 1,046,554
--------- ---------
$6,546,798 $6,304,554
========= =========
At December 31, 2000 and 1999, Protective had bonds which were rated less than investment grade of $226.5 million and $243.6 million, respectively, having an amortized cost of $306.0 million and $293.1 million, respectively. At December 31, 2000, approximately $70.1 million of the bonds rated less than investment grade were securities issued in company-sponsored commercial mortgage loan securitizations. Approximately $1,160.5 million of bonds are not publicly traded.
The change in unrealized gains (losses), net of income tax on fixed maturity and equity securities for the years ended December 31 is summarized as follows:
2000 1999 1998
---- ---- ----
Fixed maturities........... $109,625 $(217,901) $(21,705)
Equity securities.......... (820) 973 4,605
At December 31, 2000, all of Protective’s mortgage loans were commercial loans of which 76% were retail, 11% were apartments, 6% were office buildings, and 5% were warehouses, and 2% other. Protective specializes in making mortgage loans on either credit-oriented or credit-anchored commercial properties, most of which are strip shopping centers in smaller towns and cities. No single tenant’s leased space represents more than 5% of mortgage loans. Approximately 75% of the mortgage loans are on properties located in the following states listed in decreasing order of significance: Texas, Tennessee, Georgia, Florida, Alabama, South Carolina, Virginia, North Carolina, Mississippi, Washington, Ohio, and Kentucky.
Many of the mortgage loans have call provisions after 3 to 10 years. Assuming the loans are called at their next call dates, approximately $121.3 million would become due in 2001, $595.5 million in 2002 to 2005, and $282.6 million in 2006 to 2010, and $21.4 million thereafter.
At December 31, 2000, the average mortgage loan was approximately $2.3 million, and the weighted average interest rate was 7.8%. The largest single mortgage loan was $19.0 million.
At December 31, 2000 and 1999, Protective’s problem mortgage loans (over ninety days past due) and foreclosed properties totaled $20.6 million and $22.9 million, respectively. Since Protective’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 Protective’s evaluation of its mortgage loan portfolio, Protective does not expect any material losses on its mortgage loans.
Certain investments with a carrying value of $4.7 million were non-income producing for the twelve months ended December 31, 2000.
Policy loan interest rates generally range from 4.0% to 8.0%.
Protective’s effective income tax rate varied from the maximum federal income tax rate as follows:
2000 1999 1998
---- ---- ----
Statutory federal income tax rate applied to pretax income........ 35.0% 35.0% 35.0%
Dividends received deduction and tax-exempt interest.............. (0.6) (0.1) (0.1)
Low-income housing credit......................................... (0.4) (0.5) (0.5)
Other............................................................. 0.2 0.3 0.1
State income taxes................................................ 1.2 1.6 0.5
---- ---- ----
Effective income tax rate......................................... 35.4% 36.3% 35.0%
==== ==== ====
The provision for federal income tax differs from amounts currently payable due to certain items reported for financial statement purposes in periods which differ from those in which they are reported for income tax purposes.
Details of the deferred income tax provision for the years ended December 31 are as follows:
2000 1999 1998
---- ---- ----
Deferred policy acquisition costs................................. $ 44,815 $ 46,175 $ 60,746
Benefits and other policy liability changes....................... 10,969 (27,158) (41,268)
Temporary differences of investment income........................ (3,333) 6,655 (3,491)
Other items....................................................... 129 3 (1,062)
------ ------ ------
$ 52,580 $ 25,675 $ 14,925
====== ====== ======
The components of Protective's net deferred income tax liability as of December 31 were as follows:
2000 1999
---- ----
Deferred income tax assets:
Policy and policyholder liability reserves.................. $205,815 $ 217,642
Other....................................................... 1,959 2,088
------- -------
207,774 219,730
======= =======
Deferred income tax liabilities:
Deferred policy acquisition costs........................... 302,631 257,816
Unrealized losses on investments............................ (22,792) (70,421)
------- -------
279,839 187,395
------- -------
Net deferred income tax liability $ 72,065 $ (32,335)
======= =======
Under pre-1984 life insurance company income tax laws, a portion of Protective’s gain from operations which was not subject to current income taxation was accumulated for income tax purposes in a memorandum account designated as Policyholders’ Surplus. The aggregate accumulation in this account at December 31, 2000 was approximately $70.5 million. Should the accumulation in the Policyholders’ Surplus account exceed certain stated maximums, or should distributions including cash dividends be made to PLC in excess of approximately $882 million, such excess would be subject to federal income taxes at rates then effective. Deferred income taxes have not been provided on amounts designated as Policyholders’ Surplus. Under current income tax laws, Protective does not anticipate paying income tax on amounts in the Policyholders’ Surplus accounts.
Protective’s income tax returns are included in the consolidated income tax returns of PLC. The allocation of income tax liabilities among affiliates is based upon separate income tax return calculations.
Under revolving line of credit arrangements with several banks, PLC can borrow up to $125 million on an unsecured basis. These lines of credit arrangements contain, among other provisions, requirements for maintaining certain financial ratios, and restrictions on indebtedness incurred by PLC’s subsidiaries including Protective. Additionally, PLC, on a consolidated basis, cannot incur debt in excess of 50% of its total capital. At December 31, 2000, PLC had no borrowings outstanding under these credit arrangements.
Protective has arranged sources of credit to temporarily fund scheduled investment commitments. Protective expects that the rate received on its investments will equal or exceed its borrowing rate. Protective had no such temporary borrowings outstanding at December 31, 2000 and 1999. Also, Protective has a mortgage note on investment real estate amounting to approximately $2.3 million that matures in 2003.
Included in indebtedness to related parties is a surplus debenture issued by Protective to PLC. At December 31, 2000, the balance of the surplus debenture was $10.0 million. The debenture matures in 2003 and has an interest rate of 8.5%.
Protective 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.
Interest expense on debt totaled $3.8 million, $5.1 million, and $8.3 million in 2000, 1999, and 1998, respectively.
In October 1998 Protective coinsured a block of life insurance policies from Lincoln National Corporation. The policies represent the payroll deduction business originally marketed and underwritten by Aetna. In September 1999, Protective recaptured a block of credit life and disability policies which it had previously ceded.
In January 2000, Protective acquired the Lyndon Insurance Group (Lyndon). The assets acquired included $47.3 million of present value of future profits and $41.4 million of goodwill.
These transactions have been accounted for as purchases, and the results of the transactions have been included in the accompanying financial statements since their respective effective dates.
Summarized below are the consolidated results of operations for 1999, on an unaudited pro forma basis, as if the Lyndon acquisition had occurred as of January 1, 1999. The pro forma information is based on Protective’s consolidated results of operations for 1999, and on data provided by Lyndon, after giving effect to certain pro forma adjustments. The pro forma financial information does not purport to be indicative of results of operations that would have occurred had the transaction occurred on the basis assumed above nor are they indicative of results of the future operations of the combined enterprises.
1999
----------
(unaudited)
Total revenues $1,353,850
Net income $ 136,923
On January 19, 2001, Protective coinsured a block of individual life insurance policies with approximately $80 million of annual premium and $725 million of policy liabilities.
Protective leases administrative and marketing office space in approximately 46 cities including Birmingham, with most leases being for periods of three to five years. The aggregate annual rent is approximately $7.8 million.
Under insurance guaranty fund laws, in most states, insurance companies doing business therein can be assessed up to prescribed limits for policyholder losses incurred by insolvent companies. Protective does not believe such assessments will be materially different from amounts already provided for in the financial statements. Most of these laws do provide, however, that an assessment may be excused or deferred if it would threaten an insurer’s own financial strength.
A number of civil jury verdicts have been returned against insurers and other providers of financial services involving the sales practices, alleged agent misconduct, failure to properly supervise representatives, and other matters. Increasingly these lawsuits have resulted in the award of substantial judgments that are disproportionate to the actual damages, including material amounts of punitive damages. In some states, including Alabama, (where Protective maintains its headquarters), juries have substantial discretion in awarding punitive and non-economic compensatory damages which creates the potential for unpredictable material adverse judgments in any given lawsuit. In addition, in some class action and other lawsuits, companies have made material settlement payments. Protective and its subsidiaries, like other financial service companies, in the ordinary course of business, are involved in such litigation or, alternatively in arbitration. Although the outcome of any litigation or arbitration cannot be predicted, Protective believes that at the present time there are no pending or threatened lawsuits that are reasonably likely to have a material adverse effect on the financial position, results of operations, or liquidity of Protective.
At December 31, 2000, approximately $1,122.9 million of consolidated share-owner's equity, excluding net unrealized gains on investments, represented net assets of Protective and its subsidiaries that cannot be transferred to PLC. In addition, Protective and its subsidiaries are subject to various state statutory and regulatory restrictions on their ability to pay dividends to PLC. In general, dividends up to specified levels are considered ordinary and may be paid thirty days after written notice to the insurance commissioner of the state of domicile unless such commissioner objects to the dividend prior to the expiration of such period. Dividends in larger amounts are considered extraordinary and are subject to affirmative prior approval by such commissioner. The maximum amount that would qualify as ordinary dividends to PLC by Protective in 2001 is estimated to be $83.6 million.
PLC owns all of the 2,000 shares of preferred stock issued by Protective's subsidiary, Protective Life and Annuity Insurance Company (PL&A). Prior to November 1998, the stock paid, when and if declared, annual minimum cumulative dividends of $50 per share, and noncumulative participating dividends to the extent PL&A’s statutory earnings for the immediately preceding fiscal year exceeded $1 million. PL&A paid no preferred dividends during 2000 or 1999. Dividends of $0.1 million were paid to PLC in 1998. Effective November 3, 1998, PL&A’s articles of incorporation were amended such that the provision for an annual minimum cumulative dividend was removed.
On August 6, 1990, PLC announced that its Board of Directors approved the formation of an Employee Stock Ownership Plan (ESOP). On December 1, 1990, Protective transferred to the ESOP 520,000 shares of PLC's common stock held by it in exchange for a note. The outstanding balance of the note, $4.8 million at December 31, 2000, is accounted for as a reduction to share-owner's equity. The stock will be used to match employee contributions to PLC's existing 401(k) Plan. The ESOP shares are dividend paying. Dividends on the shares are used to pay the ESOP's note to Protective.
Protective leases furnished office space and computers to affiliates. Lease revenues were $4.0 million in 2000, $3.7 million in 1999, and $3.0 million in 1998. Protective purchases data processing, legal, investment and management services from affiliates. The costs of such services were $76.7 million, $69.2 million, and $56.2 million in 2000, 1999, and 1998, respectively. Commissions paid to affiliated marketing organizations of $12.0 million, $11.4 million, and $8.4 million in 2000, 1999, and 1998, respectively, were included in deferred policy acquisition costs.
Certain corporations with which PLC's directors were affiliated paid Protective premiums and policy fees or other amounts for various types of insurance and investment products. Such premiums, policy fees, and other amounts totaled $50.9 million, $70.3 million and $28.6 million in 2000, 1999, and 1998, respectively. Protective and/or PLC paid commissions, interest on debt and investment products, and fees to these same corporations totaling $28.2 million, $16.7 million and $7.3 million in 2000, 1999, and 1998, respectively.
For a discussion of indebtedness to related parties, see Note E.
Protective operates seven divisions each having a strategic focus which can be grouped into three general categories: life insurance, specialty insurance products, and retirement savings and investment products. Each division has a senior officer of Protective responsible for its operations. A division is generally distinguished by products and/or channels of distribution. A brief description of each division follows.
The Individual Life Division markets level premium term and term-like insurance, universal life, and variable universal life products on a national basis primarily through networks of independent insurance agents.
The West Coast Division sells universal life and level premium term-like insurance products in the life insurance brokerage market and in the "bank owned life insurance" market.
The Acquisitions Division focuses on acquiring, converting, and servicing policies acquired from other companies. The Division's primary focus is on life insurance policies sold to individuals.
The Dental Benefits Division's primary focus is on indemnity and prepaid dental products.
The Financial Institutions Division specializes in marketing credit life and disability insurance products through banks, consumer finance companies and automobile dealers. The Division also offers automobile and recreational marine extended service contracts.
The Stable Value Products Division markets guaranteed investment contracts to 401(k) and other qualified retirement savings plans. The Division also markets fixed and floating rate funding agreements (to the trustees of municipal bond proceeds, institutional investors, bank trust departments, and money market funds) and long-term annuity contracts.
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.
Protective 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 and interest on substantially all debt). This segment also includes earnings from several lines of business which Protective is not actively marketing (mostly health insurance).
Protective uses the same accounting policies and procedures to measure operating segment income and assets as it uses to measure its consolidated 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.
Assets are allocated based on policy liabilities and deferred policy acquisition costs directly attributable to each segment.
There are no significant intersegment transactions.
The following table sets forth total operating segment income and assets for the periods shown. Adjustments represent the inclusion of unallocated realized investment gains (losses), the reclassification and tax effecting of pretax minority interest, and the recognition of income tax expense. There are no asset adjustments.
In the first quarter of 2000, certain health insurance lines were transferred from the Dental Benefits Division to the Corporate and Other segment in order to reflect management's current focus. Prior period segment results have been restated to reflect the change.
LIFE INSURANCE
INDIVIDUAL
OPERATING SEGMENT INCOME LIFE WEST COAST ACQUISITIONS
- ---------------------------------------------------------------------------------------------------------------------------
2000
Premiums and policy fees $ 340,238 $ 147,482 $ 134,099
Reinsurance ceded (266,412) (121,495) (31,102)
- ---------------------------------------------------------------------------------------------------------------------------
Net of reinsurance ceded 73,826 25,987 102,997
Net investment income 60,629 91,688 116,940
Realized investment gains (losses)
Other income (1,379) (4)
- ---------------------------------------------------------------------------------------------------------------------------
Total revenues 133,076 117,675 219,933
- ---------------------------------------------------------------------------------------------------------------------------
Benefits and settlement expenses 70,365 79,065 125,151
Amortization of deferred policy acquisition costs and goodwill 33,767 15,003 17,081
Other operating expenses (10,495) (12,760) 24,077
- ---------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 93,637 81,308 166,309
- ---------------------------------------------------------------------------------------------------------------------------
Income before income tax 39,439 36,367 53,624
Income tax expense
- ---------------------------------------------------------------------------------------------------------------------------
Net income
- ---------------------------------------------------------------------------------------------------------------------------
1999
Premiums and policy fees $ 274,598 $ 87,226 $ 148,620
Reinsurance ceded (182,092) (64,019) (33,754)
- ---------------------------------------------------------------------------------------------------------------------------
Net of reinsurance ceded 92,506 23,207 114,866
Net investment income 59,916 78,128 129,806
Realized investment gains (losses)
Other income (2,250) 1,302 (9)
- ---------------------------------------------------------------------------------------------------------------------------
Total revenues 150,172 102,637 244,663
- ---------------------------------------------------------------------------------------------------------------------------
Benefits and settlement expenses 74,455 73,176 129,581
Amortization of deferred policy acquisition costs 23,434 6,047 19,444
Other operating expenses 20,850 (2,649) 31,178
- ---------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 118,739 76,574 180,203
- ---------------------------------------------------------------------------------------------------------------------------
Income before income tax 31,433 26,063 64,460
Income tax expense
- ---------------------------------------------------------------------------------------------------------------------------
Net income
- ---------------------------------------------------------------------------------------------------------------------------
1998
Premiums and policy fees $ 228,701 $ 75,757 $ 125,329
Reinsurance ceded (102,533) (53,377) (28,594)
- ---------------------------------------------------------------------------------------------------------------------------
Net of reinsurance ceded 126,168 22,380 96,735
Net investment income 55,779 63,492 112,154
Realized investment gains (losses)
Other income 70 6 1,713
- ---------------------------------------------------------------------------------------------------------------------------
Total revenues 182,017 85,878 210,602
- ---------------------------------------------------------------------------------------------------------------------------
Benefits and settlement expenses 106,308 54,617 112,051
Amortization of deferred policy acquisition costs 30,543 4,924 18,894
Other operating expenses 14,983 5,354 26,717
- ---------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 151,834 64,895 157,662
- ---------------------------------------------------------------------------------------------------------------------------
Income before income tax 30,183 20,983 52,940
Income tax expense
- ---------------------------------------------------------------------------------------------------------------------------
Net income
- ---------------------------------------------------------------------------------------------------------------------------
Operating Segment Assets
2000
Investments and other assets $1,237,867 $1,576,577 $1,604,854
Deferred policy acquisition costs and goodwill 354,320 276,518 223,430
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $1,592,187 $1,853,095 $1,828,284
- ---------------------------------------------------------------------------------------------------------------------------
1999
Investments and other assets $1,205,968 $1,343,517 $1,553,954
Deferred policy acquisition costs 379,117 200,605 235,903
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $1,585,085 $1,544,122 $1,789,857
- ---------------------------------------------------------------------------------------------------------------------------
1998
Investments and other assets $1,076,202 $1,149,642 $1,600,123
Deferred policy acquisition costs 301,941 144,455 255,347
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $1,378,143 $1,294,097 $1,855,470
- ---------------------------------------------------------------------------------------------------------------------------
(1) Adjustments represent the inclusion of unallocated realized investment gains (losses) and the recognition
of income tax expense. There are no asset adjustments.
RETIREMENT SAVINGS AND
SPECIALTY INSURANCE PRODUCTS INVESTMENT PRODUCTS
DENTAL FINANCIAL STABLE VALUE INVESTMENT CORPORATE TOTAL
BENEFITS INSTITUTIONS PRODUCTS PRODUCTS AND OTHER ADJUSTMENTS (1) CONSOLIDATED
-------------------------------------------------------------------------------------------------------------------------
$ 294,564 $ 479,397 $ 30,127 $120,062 $ 1,545,969
(78,951) (258,931) (65,559) (822,450)
-------------------------------------------------------------------------------------------------------------------------
215,613 220,466 30,127 54,503 723,519
8,913 46,464 $ 243,133 132,204 (3,034) 696,937
(6,556) 410 $(8,453) (14,599)
15,279 28,352 2,809 6,145 51,202
-------------------------------------------------------------------------------------------------------------------------
239,805 295,282 236,577 165,550 57,614 1,457,059
-------------------------------------------------------------------------------------------------------------------------
151,202 135,494 207,143 109,607 46,183 924,210
7,739 52,646 900 24,156 2,149 153,441
58,805 72,316 3,882 18,203 33,274 187,302
-------------------------------------------------------------------------------------------------------------------------
217,746 260,456 211,925 151,966 81,606 1,264,953
-------------------------------------------------------------------------------------------------------------------------
22,059 34,826 24,652 13,584 (23,992) 192,106
68,071 68,071
-------------------------------------------------------------------------------------------------------------------------
$ 124,035
-------------------------------------------------------------------------------------------------------------------------
$ 217,661 $ 284,891 $ 24,248 $100,012 $ 1,137,256
(52,252) (176,928) (28,988) (538,033)
-------------------------------------------------------------------------------------------------------------------------
165,409 107,963 24,248 71,024 599,223
11,141 24,121 $ 210,208 106,599 3,312 623,231
(549) 1,446 $ 3,863 4,760
7,628 15,831 2,146 2,454 27,102
-------------------------------------------------------------------------------------------------------------------------
184,178 147,915 209,659 134,439 76,790 1,254,316
-------------------------------------------------------------------------------------------------------------------------
119,950 55,899 175,290 88,642 54,534 771,527
8,219 24,718 744 19,820 2,487 104,913
37,674 44,728 4,709 14,617 25,332 176,439
-------------------------------------------------------------------------------------------------------------------------
165,843 125,345 180,743 123,079 82,353 1,052,879
-------------------------------------------------------------------------------------------------------------------------
18,335 22,570 28,916 11,360 (5,563) 201,437
73,179 73,179
-------------------------------------------------------------------------------------------------------------------------
$ 128,258
-------------------------------------------------------------------------------------------------------------------------
$ 218,773 $ 301,230 $ 18,809 $ 58,741 $ 1,027,340
(85,753) (188,958) (459,215)
-------------------------------------------------------------------------------------------------------------------------
133,020 112,272 18,809 58,741 568,125
11,166 25,068 $ 213,136 105,827 17,173 603,795
1,609 1,318 $ (791) 2,136
4,848 10,302 1,799 1,463 20,201
-------------------------------------------------------------------------------------------------------------------------
149,034 147,642 214,745 127,753 77,377 1,194,257
-------------------------------------------------------------------------------------------------------------------------
101,586 52,629 178,745 85,045 39,515 730,496
6,859 28,526 735 17,213 3,494 111,188
31,142 48,837 2,876 14,428 27,891 172,228
-------------------------------------------------------------------------------------------------------------------------
139,587 129,992 182,356 116,686 70,900 1,013,912
-------------------------------------------------------------------------------------------------------------------------
9,447 17,650 32,389 11,067 6,477 180,345
63,162 63,162
-------------------------------------------------------------------------------------------------------------------------
$ 117,183
-------------------------------------------------------------------------------------------------------------------------
$ 192,906 $1,369,915 $3,340,099 $3,844,168 $428,951 $13,595,337
214,770 150,984 2,144 127,334 81,711 1,431,211
-------------------------------------------------------------------------------------------------------------------------
$ 407,676 $1,520,899 $3,342,243 $3,971,502 $510,662 $15,026,548
-------------------------------------------------------------------------------------------------------------------------
$ 197,673 $ 727,857 $2,766,178 $3,355,863 $418,609 $11,569,619
25,819 51,339 1,156 117,577 8 1,011,524
-------------------------------------------------------------------------------------------------------------------------
$ 223,492 $ 779,196 $2,767,334 $3,473,440 $418,617 $12,581,143
-------------------------------------------------------------------------------------------------------------------------
$ 197,337 $ 645,909 $2,869,304 $2,542,536 $700,417 $10,781,470
23,836 39,212 1,448 75,177 9 841,425
-------------------------------------------------------------------------------------------------------------------------
$ 221,173 $ 685,121 $2,870,752 $2,617,713 $700,426 $11,622,895
-------------------------------------------------------------------------------------------------------------------------
PLC has a defined benefit pension plan covering substantially all of its employees. The plan is not separable by affiliates participating in the plan. However, approximately 86% of the participants in the plan are employees of Protective. The benefits are based on years of service and the employee’s highest thirty-six consecutive months of compensation. PLC’s funding policy is to contribute amounts to the plan sufficient to meet the minimum finding requirements of ERISA plus such additional amounts as PLC may determine to be appropriate from time to time. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future.
The actuarial present value of benefit obligations and the funded status of the plan taken as a whole at December 31 are as follows:
2000 1999
---- ----
Projected benefit obligation, beginning of the year....................... $36,530 $36,547
Service cost - benefits earned during the year............................ 3,338 3,270
Interest cost - on projected benefit obligation........................... 3,195 2,779
Actuarial gain (loss)..................................................... 1,968 (5,729)
Plan amendment............................................................ 833 32
Benefits paid............................................................. (326) (369)
------ ------
Projected benefit obligation, end of the year............................. 45,538 36,530
------ ------
Fair value of plan assets beginning of the year........................... 34,420 25,147
Actual return on plan assets.............................................. (148) 2,594
Employer contribution..................................................... 6,876 7,048
Benefits paid............................................................. (326) (369)
------ ------
Fair value of plan assets end of the year................................. 40,822 34,420
------ ------
Plan assets less than the projected benefit obligation.................... (4,716) (2,110)
Unrecognized net actuarial loss from past experience
different from that assumed........................................... 7,766 2,601
Unrecognized prior service cost........................................... 1,226 569
Unrecognized net transition asset......................................... (17)
----- -----
Net pension liability recognized in balance sheet......................... $ 4,276 $ 1,043
===== =====
Net pension cost of the defined benefit pension plan includes the following components for the years ended December 31:
2000 1999 1998
---- ---- ----
Service cost.............................................................. $ 3,338 $ 3,270 $ 2,585
Interest cost............................................................. 3,195 2,779 2,203
Expected return on plan assets............................................ (3,049) (2,348) (1,950)
Amortization of prior service cost........................................ 176 115 112
Amortization of transition asset.......................................... (17) (17) (17)
Recognized net actuarial loss............................................. 494 305
----- ----- -----
Net pension cost.......................................................... $ 3,643 $ 4,293 $ 3,238
===== ===== =====
Protective's share of the net pension cost was approximately $4.1 million, $3.6 million, and $2.6 million, in 2000, 1999, and 1998, respectively.
Assumptions used to determine the benefit obligations as of December 31 were as follows:
2000 1999 1998
---- ---- ----
Weighted average discount rate........................................... 7.50% 8.00% 6.75%
Rates of increase in compensation level.................................. 5.25% 5.75% 4.75%
Expected long-term rate of return on assets............................... 8.50% 8.50% 8.50%
At December 31, 2000, approximately $20.9 million of the assets of the pension plan were in a group annuity contract with Protective and therefore are included in the general assets of Protective. Approximately $19.9 million of the assets of the pension plan are invested in a collective trust managed by Northern Trust Corporation.
Prior to July 1, 1999, upon retirement, the amount of pension plan assets vested in the retiree were used to purchase a single premium annuity from Protective in the retiree’s name. Therefore, amounts presented above as plan assets exclude assets relating to such retirees. Beginning July 1, 1999, retiree obligations are being fulfilled from pension plan assets.
PLC also sponsors an unfunded excess benefits plan, which is a nonqualified plan that provides defined pension benefits in excess of limits imposed by federal income tax law. At December 31, 2000 and 1999, the projected benefit obligation of this plan totaled $14.3 million and $13.1 million, respectively, of which $10.1 million and $8.3 million, respectively, have been recognized in PLC’s financial statements.
Net pension cost of the excess benefits plan includes the following components for the years ended December 31:
2000 1999 1998
---- ---- ----
Service cost............................................................$ 736 $ 695 $ 611
Interest cost........................................................... 1,067 887 722
Amortization of prior service cost...................................... 19 113 112
Amortization of transition asset........................................ 37 37 37
Recognized net actuarial loss........................................... 194 265 173
----- ----- -----
Net pension cost........................................................ $2,053 $1,997 $1,655
===== ===== =====
In addition to pension benefits, PLC provides limited healthcare benefits to eligible retired employees until age 65. The postretirement benefit is provided by an unfunded plan. At December 31, 2000 and 1999, the liability for such benefits was approximately $1.2 million. The expense recorded by PLC was $0.1 million in 2000, 1999 and 1998. PLC’s obligation is not materially affected by a 1% change in the healthcare cost trend assumptions used in the calculation of the obligation.
Life insurance benefits for retirees are provided through the purchase of life insurance policies upon retirement from $10,000 up to a maximum of $75,000. This plan is partially funded at a maximum of $50,000 face amount of insurance.
PLC sponsors a defined contribution retirement plan which covers substantially all employees. Employee contributions are made on a before-tax basis as provided by Section 401(k) of the Internal Revenue Code. PLC established an Employee Stock Ownership Plan (ESOP) to match voluntary employee contributions to PLC’s 401(k) Plan. In 1994, a stock bonus was added to the 401(k) Plan for employees who are not otherwise under a bonus or sales incentive plan. Expense related to the ESOP consists of the cost of the shares allocated to participating employees plus the interest expense on the ESOP’s note payable to Protective less dividends on shares held by the ESOP. At December 31, 2000, PLC had committed up to 143,229 shares to be released to fund employee benefits. The expense recorded by PLC for these employee benefits was less than $0.1 million in 2000, 1999, and 1998.
PLC sponsors a deferred compensation plan for certain directors, officers, agents, and others. Compensation deferred is credited to the participants in cash, PLC Common Stock, or as a combination thereof.
Certain Protective employees participate in PLC’s stock-based incentive plans and receive stock appreciation rights (SARs) from PLC.
Since 1973, PLC has had stock-based incentive plans to motivate management to focus on PLC’s long-range performance through the awarding of stock-based compensation. Under plans approved by share owners in 1997 and 1998, up to 5,000,000 shares may be issued in payment of awards.
The criteria for payment of performance awards is based upon a comparison of PLC’s average return on average equity and total rate of return over a four year award period (earlier upon the death, disability, or retirement of the executive, or in certain circumstances, of a change in control of PLC) to that of a comparison group of publicly held life and multiline insurance companies. If PLC’s results are below the median of the comparison group, no portion of the award is earned. If PLC’s results are at or above the 90th percentile, the award maximum is earned.
In 1998 and 1999, 71,340 and 99,380 performance shares were awarded, respectively, having an estimated fair value on the grant date of $2.3 million and $3.4 million, respectively. In 2000, 3,330 performance shares and 513,618 stock appreciation rights (SARs) were awarded, having a combined estimated fair value on the grant date of $3.7 million. The SARs, if earned, expire after ten years.
A performance share is equivalent in value to one share of PLC Common Stock. With respect to SARs, PLC will pay an amount equal to the difference between the specified base price of PLC’s Common Stock and the market value at the exercise date. Awards are paid in shares of PLC Common Stock. At December 31, 2000, outstanding awards measured at maximum payouts were 398,878 performance shares and 793,236 SARs.
During 1996 and 2000, SARs were granted to certain officers of PLC to provide long-term incentive compensation based solely on the performance of PLC’s Common Stock. The SARs are exercisable after five years (earlier upon the death, disability, or retirement of the officer, or in certain circumstances, of a change in control of PLC) and expire after ten years or upon termination of employment. In 2000, 217,500 SARs were awarded, having an estimated fair value on the grant date of $1.5 million. The number of SARs granted in 1996 and 2000 outstanding at December 31, 2000, was 660,000 and 215,000, respectively.
The 1996 SARs have a base price of $17.4375. The 2000 SARs have a base price of $22.31. The fair value of the 2000 SARs was estimated using a Black-Sholes option pricing model. Assumptions used in the model were as follows: expected volatility of 23.65% (approximately equal to that of the S&P Life Insurance Index), a risk-free interest rate of 6.5%, a dividend rate of 2.15%, and an expected exercise date of March 7, 2007.
The expense recorded by PLC for its stock-based compensation plans was $4.1 million, $4.0 million, and $3.3 million in 2000, 1999, and 1998, respectively.
Protective 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, Protective 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 Protective’s new life insurance and credit insurance sales are being reinsured. Protective reviews the financial condition of its reinsurers and monitors the amount of reinsurance it has with its reinsurers.
Protective has reinsured approximately $126.0 billion, $93.5 billion, and $64.8 billion in face amount of life insurance risks with other insurers representing $496.4 million, $364.7 million, and $294.4 million of premium income for 2000, 1999, and 1998, respectively. Protective has also reinsured accident and health risks representing $262.2 million, $172.8 million, and $164.8 million of premium income for 2000, 1999, and 1998, respectively. In 2000 and 1999, policy and claim reserves relating to insurance ceded of $988.4 million and $739.3 million respectively, are included in reinsurance receivables. Should any of the reinsurers be unable to meet its obligation at the time of the claim, obligation to pay such claim would remain with Protective. At December 31, 2000 and 1999, Protective had paid $33.5 million and $46.8 million, respectively, of ceded benefits which are recoverable from reinsurers. In addition, at December 31, 2000, Protective had receivables of $78.2 million related to insurance assumed.
The carrying amount and estimated fair values of Protective’s financial instruments at December 31 are as follows:
2000 1999
___________________________ ________________________
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUES AMOUNT VALUES
--------- ---------- --------- ----------
Assets (see Notes A and C):
Investments:
Fixed maturities.................... $7,390,110 $7,390,110 $6,304,554 $6,304,554
Equity securities................... 41,792 41,792 30,696 30,696
Mortgage loans on real estate....... 2,268,224 2,385,174 1,946,690 1,909,026
Short-term investments.............. 172,699 172,699 81,171 81,171
Liabilities (see Notes A and E):
Stable value account balances....... 3,177,863 3,250,991 2,680,009 2,649,616
Annuity account balances............ 1,916,894 1,893,749 1,639,231 1,598,993
Notes payable....................... 2,315 2,315 2,338 2,338
Other (see Note A):
Derivative Financial Instruments.... (6,079) (13,011) 5,273 3,564
Except as noted below, fair values were estimated using quoted market prices. Protective estimates the fair value of its mortgage loans using discounted cash flows from the next call date. Protective believes the fair value of its short-term investments and notes payable to banks approximates book value due to either being short-term or having a variable rate of interest. Protective estimates the fair value of its guaranteed investment contracts and annuities using discounted cash flows and surrender values, respectively. Protective believes it is not practicable to determine the fair value of its policy loans since there is no stated maturity, and policy loans are often repaid by reductions to policy benefits.
Protective estimates the fair value of its derivative financial instruments using market quotes or derivative pricing models. The fair value represents the net amount of cash Protective would have received (or paid) had the contracts been terminated on December 31.
SCHEDULE III — SUPPLEMENTARY INSURANCE INFORMATION
PROTECTIVE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(in thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F COL. G COL. H COL. I COL. J
- -----------------------------------------------------------------------------------------------------------------------------------
STABLE VALUE AND
FUTURE ANNUITY AMORTIZATION
DEFERRED POLICY DEPOSITS PREMIUMS BENEFITS OF DEFERRED
POLICY BENEFITS AND OTHER AND NET AND POLICY OTHER
ACQUISITION AND UNEARNED POLICYHOLDERS' POLICY INVESTMENT SETTLEMENT ACQUISITION OPERATING
SEGMENT COSTS CLAIMS PREMIUMS FUNDS FEES INCOME(1) EXPENSES COSTS EXPENSES(1)
------- ---------- --------- ---------- ----------- --------- -------- --------- --------- --------
Year Ended
December 31, 2000:
Life Insurance
Individual Life $ 354,320 $1,222,673 $ 315$ 14,878 $ 73,826 $ 60,629 $ 70,365 $ 33,767 $ (10,495)
West Coast 276,518 1,499,173 0 86,227 25,987 91,688 79,065 15,003 (12,760)
Acquisitions 223,430 1,364,830 484 238,465 102,997 116,940 125,151 17,081 24,077
Specialty Insurance Products
Dental Benefits 11,788 95,665 2,602 63,351 215,613 8,913 151,202 6,386 60,158
Financial Institutions 112,135 294,458 929,943 3,945 220,466 46,464 135,494 50,132 74,830
Retirement Savings and
Investment Products
Stable Value Products 2,144 162,236 0 3,177,863 0 243,133 207,143 900 3,882
Investment Products 127,334 306,021 0 1,633,203 30,127 132,204 109,607 24,156 18,203
Corporate and Other 81,711 88,341 2,261 2,161 54,503 (3,034) 46,183 2,149 33,274
--------- --------- ------- --------- ------- ------- ------- ------- -------
TOTAL $1,189,380 $5,033,397 $935,605 $5,220,093 $723,519 $696,937 $924,210 $149,574 $191,169
========= ========= ======= ========= ======= ======= ======= ======= =======
Year Ended
December 31, 1999:
Life Insurance
Individual Life $ 379,117 $1,210,188$ 338$ 17,159 $ 92,506 $ 59,916 $ 74,455 $ 23,434 $ 20,851
West Coast 200,605 1,279,554 0 74,831 23,208 78,126 73,176 6,047 (2,649)
Acquisitions 235,903 1,374,445 558 260,267 114,866 129,806 129,581 19,444 31,178
Specialty Insurance Products
Dental Benefits 25,819 126,592 2,994 74,204 165,409 11,141 119,950 5,534 40,359
Financial Institutions 51,339 150,888 503,735 9,044 107,962 24,122 55,899 24,718 44,728
Retirement Savings and
Investment Products
Stable Value Products 1,156 167,415 0 2,680,009 0 210,209 175,290 744 4,708
Investment Products 117,577 254,492 0 1,320,453 24,248 106,599 88,642 19,820 14,617
Corporate and Other 8 2,852 34 88 71,024 3,312 54,534 5,172 22,647
--------- --------- ------- --------- ------- ------- ------- ------- --------
TOTAL $1,011,524 $4,566,426 $507,659 $4,436,055 $599,223 $623,231 $771,527 $104,913 $176,439
========= ========= ======= ========= ======= ======= ======= ======= =======
Year Ended
December 31, 1998:
Life Insurance
Individual Life $ 301,941 $1,054,253 $ 355 $ 10,802 $126,168 $ 55,779 $106,308 $ 30,543 $ 14,983
West Coast 144,455 1,006,280 0 77,254 22,380 63,492 54,617 4,924 5,354
Acquisitions 255,347 1,383,759 553 233,846 96,735 112,154 112,051 18,894 26,717
Specialty Insurance Products
Dental Benefits 23,836 111,916 3,341 78,224 133,020 11,166 101,586 4,171 33,830
Financial Institutions 39,212 215,451 385,006 105,434 112,272 25,068 52,629 28,526 48,837
Retirement Savings and
Investment Products
Stable Value Contracts 1,448 172,674 0 2,691,697 0 213,136 178,745 735 2,876
Investment Products 75,177 194,726 0 1,233,528 18,809 105,827 85,045 17,213 14,428
Corporate and Other 9 944 39 88 58,741 17,173 39,515 6,182 25,203
------- --------- ------- --------- ------- ------- ------- ------- -------
TOTAL $ 841,425 $4,140,003 $389,294 $4,430,873 $568,125 $603,795 $730,496 $111,188 $172,228
======= ========= ======= ========= ======= ======= ======= ======= =======
(1) Allocations of Net Investment Income and Other Operating Expenses are based on a number of assumptions and estimates and results
would change if different methods were applied.
SCHEDULE IV — REINSURANCE
PROTECTIVE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F
- ------------------------------------------------------------------------------------------------------------------------------------
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
------------ ------------- ------------ ----------- ---------
Year Ended December 31, 2000:
Life insurance in force........................... $153,371,754 $128,374,583 $17,050,342 $42,047,513 40.6%
=========== =========== ========== ========== ====
Premiums and policy fees:
Life insurance.................................... $691,153 $ 496,715 $ 112,669 $ 307,107 36.7%
Accident and health insurance..................... 545,240 261,940 24,393 307,693 7.9%
Property and liability insurance.................. 159,346 63,795 13,168 108,719 12.1%
--------- ------- ------- -------
TOTAL......................................... $ 1,395,739 $ 822,450 $ 150,230 $ 723,519
========= ======= ======= =======
Year Ended December 31, 1999:
Life insurance in force........................... $112,726,959 $ 92,566,755 $17,089,627 $37,249,831 45.9%
=========== ========== ========== ==========
Premiums and policy fees:
Life insurance.................................... $ 540,430 $ 364,680 $ 131,855 $ 307,605 42.9%
Accident and health insurance..................... 403,491 172,852 27,266 257,905 10.6%
Property and liability insurance.................. 34,104 501 110 33,713 0.3%
------- ------- ------- -------
TOTAL......................................... $ 978,025 $ 538,033 $ 159,231 $ 599,223
======= ======= ======= =======
Year Ended December 31, 1998:
Life insurance in force........................... $ 91,980,657 $ 64,846,246 $18,010,434 $45,144,845 39.9%
========== ========== ========== ========== ====
Premiums and policy fees:
Life insurance.................................... $ 537,002 $ 294,363 $ 87,965 $ 330,604 26.6%
Accident and health insurance..................... 361,705 164,852 14,279 211,132 6.8%
Property and liability insurance.................. 26,389 26,389 0.0%
------- ------- ------- -------
TOTAL $ 925,096 $ 459,215 $ 102,244 $ 568,125
======= ======= ======= ========
1. Financial Statements (Item 8)
2. Financial Statement Schedules (see index annexed)
3. Exhibits:
The exhibits listed in the Exhibit Index on page 44 of this Form 10-K are filed herewith or are incorporated herein by reference. No management contract or compensatory plan or arrangement is required to be filed as an exhibit to this form. The Registrant will furnish a copy of any of the exhibits listed upon the payment of $5.00 per exhibit to cover the cost of the Registrant in furnishing the exhibit.
(b) Reports on Form 8-K:None
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Birmingham, State of Alabama on March 27, 2001.
| PROTECTIVE LIFE INSURNACE COMPANY | |
|---|---|
| BY/s/John D. Johns | |
| President |
Dated: March 27, 2001
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE Title DATE
(i) Principal Executive Officer
/S/JOHN D. JOHNS President and Director March 27, 2001
----------------------
John D. Johns
(ii) Principal Accounting Officer
/S/JERRY W. DEFOOR Vice President and Controller, March 27, 2001
----------------------- and Chief Accounting Officer
Jerry W. DeFoor
(iii) Board of Directors:
* Director March 27, 2001
-----------------------
Richard J. Bielen
* Director March 27, 2001
-----------------------
R. Stephen Briggs
* Director March 27, 2001
-----------------------
Carolyn King
* Director March 27, 2001
----------------------
Deborah J. Long
* Director March 27, 2001
----------------------
Jim E. Massengale
* Director March 27, 2001
----------------------
Drayton Nabers, Jr.
* Director March 27, 2001
----------------------
Steven A. Schultz
* Director March 27, 2001
----------------------
Wayne E. Stuenkel
* Director March 27, 2001
----------------------
A. S. Williams III
* Director March 27, 2001
----------------------
T. Davis Keyes
* Director March 27, 2001
----------------------
Chris T. Calos
| *BY/s/JERRY W. DEFOOR | |
| Jerry W. DeFoor | |
| Attorney-in-fact |
ITEM
NUMBER DOCUMENT
- ------ --------
**** 2 — Stock Purchase Agreement
* 3(a) — Articles of Incorporation
* 3(b) — By-laws
** 4(a) — Group Modified Guaranteed Annuity Contract
*** 4(b) — Individual Certificate
** 4(c) — Tax-Sheltered Annuity Endorsement
** 4(d) — Qualified Retirement Plan Endorsement
** 4(e) — Individual Retirement Annuity Endorsement
** 4(f) — Section 457 Deferred Compensation Plan Endorsement
* 4(g) — Qualified Plan Endorsement
** 4(h) — Application for Individual Certificate
** 4(i) — Adoption Agreement for Participation in Group Modified Guaranteed
Annuity
*** 4(j) — Individual Modified Guaranteed Annuity Contract
** 4(k) — Application for Individual Modified Guaranteed Annuity Contract
** 4(l) — Tax-Sheltered Annuity Endorsement
** 4(m) — Individual Retirement Annuity Endorsement
** 4(n) — Section 457 Deferred Compensation Plan Endorsement
** 4(o) — Qualified Retirement Plan Endorsement
**** 4(p) — Endorsement — Group Policy
**** 4(q) — Endorsement — Certificate
**** 4(r) — Endorsement — Individual Contract
**** 4(s) — Endorsement (Annuity Deposits) — Group Policy
**** 4(t) — Endorsement (Annuity Deposits) — Certificate
**** 4(u) — Endorsement (Annuity Deposits) — Individual Contracts
***** 4(v) — Endorsement — Individual
***** 4(w) — Endorsement — Group Contract/Certificate
****** 4(x) — Endorsement (96) — Individual
****** 4(y) — Endorsement (96) — Group Contract
****** 4(z) — Endorsement (96) — Group Certificate
****** 4(aa) — Individual Modified Guaranteed Annuity Contract (96)
******* 4(bb) — Settlement Endorsement
******** 4(cc) — Cancellation Endorsement
* 10(a) — Bond Purchase Agreement
* 10(b) — Escrow Agreement
24 — Power of Attorney
99 — Safe Harbor for Forward-Looking Statements
* Previously filed or incorporated by reference in Form S-1 Registration Statement,
Registration No. 33-31940.
** Previously filed or incorporated by reference in Amendment No. 1 to Form S-1
Registration Statement, Registration No. 33-31940.
*** Previously filed or incorporated by reference from Amendment No. 2 to Form S-1
Registration Statement, Registration No. 33-31940.
**** Previously filed or incorporated by reference from Amendment No. 2 to Form S-1 Registration Statement, Registration
No. 33-57052.
***** Previously filed or incorporated by reference from Amendment No. 3 to Form S-1
Registration Statement, Registration No. 33-57052.
****** Previously filed or incorporated by reference from S-1 Registration Statement,
Registration No. 333-02249.
******* Previously filed or incorporated by reference from Amendment No. 1 to Form S-1
Registration Statement, Registration No. 333-02249.
******** Previously filed or incorporated by reference in Form S-1 Registration Statement,
Registration No. 333-32784.