| For the fiscal year ended December 31, 2002 | 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, 2002: 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 Life 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, 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 several business segments each having a strategic focus which can be grouped into three general categories: life insurance, retirement savings and investment products, and specialty insurance products. Protective’s operating segments are Life Marketing, Acquisitions, Stable Value Contracts, Annuities, and Credit Products. 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 from continuing operations represented by each of the strategic focuses and the Corporate and Other segment.
RETIREMENT
SPECIALTY SAVINGS AND INVESTMENT CORPORATE
YEAR ENDED DECEMBER 31 LIFE INSURANCE PRODUCTS AND
INSURANCE PRODUCTS OTHER
- --------------------------------------------------------------------------------------------------------------------
1997 63.5% 9.5% 26.5% 0.5%
1998 61.2 10.4 24.3 4.1
1999 66.5 12.3 22.3 (1.1)
2000 68.2 18.4 23.6 (10.2)
2001 72.3 16.0 21.7 (10.0)
Additional information concerning Protective’s business segments 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. The third building is expected to be completed during 2002. Protective has financed the construction under an operating lease arrangement.
Protective leases administrative and marketing office space in approximately 25 cities, including approximately 88,151 square feet in Birmingham, with most leases being for periods of three to ten years. The aggregate annualized rent is approximately $8.5 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, 2001, $1,053.6 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 $972 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 2002 is estimated to be $99.0 million. Protective paid no dividends to PLC in 2001 or 2000.
PL&A paid $1.0 million of preferred dividends in 2001. PL&A did not pay any preferred dividends in 2000. Protective and PL&A 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.
In the conduct of business, Protective makes certain assumptions regarding the mortality, persistency, expenses and interest rates, (or other factors appropriate to the type of business) it expects to experience in future periods. Similar assumptions are also used to estimate the amounts of deferred policy acquisition costs, policy liabilities and accruals, and various other items. Protective’s actual experience, as well as changes in estimates, are components of Protective’s statements of income.
The following table sets forth revenues by source for the periods shown:
YEAR ENDED PERCENTAGE
DECEMBER 31 INCREASE (DECREASE)
----------------------------- --------------------
2001 2000
---- ----
(in thousands)
Premiums and policy fees...................... $ 618,668 $ 489,835 26.3%
Net investment income......................... 839,103 692,081 21.2%
Realized investment gains (losses) ........... (7,841) (14,599) 46.3%
Other income.................................. 38,578 35,194 9.6%
--------- ---------
$1,488,508 $1,202,511
========= =========
In 2001, premiums and policy fees, net of reinsurance (premiums and policy fees) increased $128.8 million or 26.3% over 2000. The Life Marketing segment’s premiums and policy fees increased $21.2 million due to increased sales. Premiums and policy fees in the Acquisition segment, 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. In January 2001, Protective coinsured a block of individual life policies from Standard Insurance Company resulting in an increase of $68.9 million in premiums and policy fees. In October 2001, Protective purchased two companies from a subsidiary of Irish Life & Permanent plc: Inter-State Assurance Company and First Variable Life Insurance Company. These transactions increased premiums and policy fees by $17.9 million over 2000. Premiums and policy fees from older acquired blocks declined $7.2 million in 2001 as compared to 2000. Premiums and policy fees related to the Credit Products segment increased $29.6 million. The decrease in premiums and policy fees from the Annuities segment was $2.0 million. Premium and policy fees relating to various health insurance lines in the Corporate and Other segment increased $0.6 million.
Net investment income for 2001 was $147.0 million or 21.2% 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 2001 coinsurance agreement and the October 2001 acquisitions resulted in an increase in investment income of $66.4 million. The percentage earned on average cash and investments was 7.0% in 2001 and 7.1% in 2000.
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.
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 2001, revenues from Protective’s direct response business and service contract business increased $2.0 million and $0.5 million, respectively. Income from other sources increased $0.9 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)
2001 2000
---- ----
Operating Income (Loss)(1)
Life Insurance
Life Marketing $ 92,016 $ 75,806
Acquisitions 69,251 53,624
Retirement Savings and
Investment Products
Stable Value Contracts 33,150 31,208
Annuities 15,093 13,584
Specialty Insurance Products
Credit Products 35,731 34,826
Corporate and Other (22,446) (19,417)
- ---------------------------------------------------------------------------------
Total operating income 222,795 189,631
- ---------------------------------------------------------------------------------
Realized Investment Gains (Losses)
Stable Value Contracts 7,218 (6,556)
Annuities 1,139 410
Unallocated (16,198) (8,453)
Related Amortization of Deferred
Policy Acquisition Costs
Annuities (996) (410)
- ---------------------------------------------------------------------------------
Total realized investment gains
(losses), net (8,837) (15,009)
- --------------------------------------------------------------------------------
Income (Loss) Before Income Tax
Life Insurance
Life Marketing 92,016 75,806
Acquisitions 69,251 53,624
Retirement Savings and
Investment Products
Stable Value Contracts 40,368 24,652
Annuities 15,236 13,584
Specialty Insurance Products
Credit Products 35,731 34,826
Corporate and Other (22,446) (19,417)
Unallocated Realized
Investment Gains (Losses) (16,198) (8,453)
- ---------------------------------------------------------------------------------
Total income from continuing operations
before income tax $213,958 $174,622
- ---------------------------------------------------------------------------------
(1) Income from continuing operations before income tax excluding realized investment gains and losses and related
amortization of deferred policy acquisition costs.
The Life Marketing segment’s 2001 pretax income was $92.0 million, $16.2 million above 2000. The segment has grown through sales. The segment’s results include expenses to develop new distribution channels.
In the ordinary course of business, the Acquisitions segment regularly considers acquisitions of blocks of policies or smaller insurance companies. Policies acquired through the segment are usually administered as “closed” blocks; i.e., no new policies are being marketed. Therefore, earnings from the Acquisitions segment are normally expected to decline over time (due to the lapsing of policies resulting from deaths of insureds or terminations of coverage) unless new acquisitions are made.
The Acquisitions segment’s 2001 pretax operating income was $69.3 million, $15.6 million above 2000. The 2001 coinsurance of a block of life insurance policies and the October 2001 acquisition of two small life insurance companies resulted in a $15.9 million increase in earnings. Earnings on older acquired blocks declined $0.3 million.
The Stable Value Contracts segment’s 2001 pretax operating income increased $2.0 million to $33.2 million. The increase was due to higher account balances which was partially offset by lower interest rate spreads. Operating spreads in 2001 were compressed due to lower investment income. Realized investment gains associated with this segment in 2001 were $7.2 million as compared to realized investment losses of $6.5 million in 2000. As a result, total pretax income was $40.4 million in 2001 and $24.7 million in 2000.
The Annuities segment’s 2001 pretax operating income was $15.1 million, an increase of $1.5 million. The increase reflects the segment’s growth through sales. The 2001 results include a tax benefit of approximately $3.0 million related to the segment’s variable annuities which was partially offset by an increase in reserves related to minimum death benefit guarantees. The segment’s future results may also be negatively affected by the slowing economy. Volatile equity markets could negatively affect sales of variable annuities and the fees the segment assesses on variable annuity contracts. Lower interest rates could negatively affect sales of fixed annuities. The segment had no realized investment gains or losses (net of related amortization of deferred policy acquisition costs) in 2000 and $0.1 million of gains in 2001. As a result, total pretax income was $15.2 million in 2001 and $13.6 million in 2000.
The Credit Products segment’s 2001 pretax income increased $1.0 million to $35.7 million. Incurred credit insurance claims were higher, but were offset by a change in estimate with respect to reserves. The segment’s 2001 results include income of approximately $2.0 million from the sale of a small insurance subsidiary’s charter. The segment’s future results may be negatively affected by the slowing economy. Lower consumer lending and fewer automobile purchases could negatively affect the segment’s sales. Also, the level of claims typically increases in a slowing economy.
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 $22.4 million in 2001 as compared to pretax operating losses of $19.4 million in 2000.
The following table sets forth the effective income tax rates for the periods shown:
YEAR ENDED EFFECTIVE INCOME DECEMBER 31 TAX RATES ---------------------------------- ------------------- 2001........................... 32.9% 2000........................... 39.0% 1999........................... 39.2%
Management’s current estimate of the effective income tax rate for 2002 is between 33% and 34%.
On December 31, 2001, Protective completed the sale to Fortis, Inc. of substantially all of its Dental Benefits Division (Dental Division) and discontinued certain other remaining Dental Division related operations, primarily other health insurance lines. In 2000, income from discontinued operations, net of income tax, was $10.9 million. In 2001, the loss from discontinued operations was $10.7 million (primarily due to the non-performance of reinsurers) and the loss from sale of discontinued operations was $17.8 million, both net of income tax.
On January 1, 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities". The adoption of SFAS No. 133 resulted in a cumulative after-tax charge to net income of approximately $8.3 million. The adoption of SFAS No. 133 also resulted in a cumulative after-tax increase to other comprehensive income of approximately $4.0 million.
The following table sets forth net income from continuing operations before the cumulative effect of change in accounting principle for the periods shown:
NET INCOME
---------------------------------------
YEAR ENDED PERCENTAGE
DECEMBER 31 AMOUNT INCREASE (DECREASE)
- ------------------------------------------------------------------------------
(IN THOUSANDS)
2001.............................. $143,501 34.7%
2000.............................. 106,551 (6.1)
1999.............................. 113,434 9.5
Compared to 2000, net income from continuing operations before cumulative effect of change in accounting principle in 2001 increased 34.7%, reflecting improved operating earnings in the Life Marketing, Acquisitions, Stable Value Contracts, Annuities, and Credit Products segments and lower realized investment losses, which were offset by lower operating earnings in the Corporate and Other segment.
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, 2001, Protective’s fixed maturity investments (bonds and redeemable preferred stocks) had a market value of $9,812.1 million, which is 1.0% above amortized cost of $9,719.1 million. Protective had $2,512.8 million in mortgage loans at December 31, 2001. While Protective’s mortgage loans do not have quoted market values, at December 31, 2001, Protective estimates the market value of its mortgage loans to be $2,671.1 million (using discounted cash flows from the next call date), which is 6.3% above amortized cost. These assets are invested for terms approximately corresponding to anticipated future benefit payments. Thus, market fluctuations are not expected to adversely affect liquidity.
The approximate percentage distribution of Protective’s fixed maturity investments by quality rating at December 31 is as follows:
RATING 2001 2000
- ------ ---- ----
AAA.............................. 38.4% 37.3%
AA............................... 6.3 7.0
A................................ 24.3 25.2
BBB 26.7 27.4
BB or less....................... 4.2 3.0
Redeemable preferred stocks...... 0.1 0.1
----- -----
100.0% 100.0%
===== =====
At December 31, 2000, Protective’s fixed maturity investments had a market value of $7,390.1 million, which was 1.0% below amortized cost of $7,463.7 million. Protective estimated the market value of its mortgage loans to be $2,385.2 million at December 31, 2000, which was 5.2% above amortized cost of $2,268.2 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.
AMOUNT PERCENT
AT DECEMBER 31, 2000 (IN MILLIONS) CHANGE
- -----------------------------------------------------------------------------------------------
Fixed maturities $7,131.4 (3.5)%
Mortgage loans 2,277.9 (4.5)
===============================================================================================
At December 31, 2001
- -----------------------------------------------------------------------------------------------
Fixed maturities $9,370.6 (4.5)%
Mortgage loans 2,550.9 (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.
For several years, Protective has offered a type of commercial mortgage loan under which Protective will permit a slightly higher loan-to-value ratio in exchange for a participating interest in the cash flows from the underlying real estate. As of December 31, 2001, approximately $548.4 million of Protective’s mortgage loans have this participation feature.
Policy loans at December 31, 2001, were $521.8 million, an increase of $291.3 million from December 31, 2000. The January 2001 coinsurance arrangement and the October 2001 acquisitions resulted in an increase in policy loans of $238.6 million. Policy loan rates are generally in the 4.5% to 8.0% range. Such rates at least equal the assumed interest rates used for future policy benefits.
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 which may be less than prevailing interest rates.
At December 31, 2001, Protective had outstanding commitments of $406.3 million with an estimated fair value of $429.3 million (using discounted cash flows from the first call date). At December 31, 2000, Protective had outstanding mortgage loan commitments of $308.4 million, with an estimated fair value of $319.0 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.
AMOUNT PERCENT
AT DECEMBER 31 (IN MILLIONS) CHANGE
- -----------------------------------------------------------------------------
2000 $305.0 (4.4)%
2001 410.8 (4.3)
=============================================================================
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, 2001, Protective had policy liabilities and accruals of $7,876.3 million. Protective’s life insurance products have a weighted average minimum credited interest rate of approximately 4.5%.
At December 31, 2001, Protective had $3,716.5 million of stable value account balances with an estimated fair value of $3,822.0 million (using discounted cash flows), and $3,248.2 million of annuity account balances with an estimated fair value of $3,166.1 million (using surrender values).
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).
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.
AMOUNT PERCENT
AT DECEMBER 31, 2000 (IN MILLIONS) CHANGE
- --------------------------------------------------------------------------------
Stable value account balances $3,299.8 1.5%
Annuity account balances 1,975.1 4.3
================================================================================
At December 31, 2001
- --------------------------------------------------------------------------------
Stable value account balances $3,887.0 1.7%
Annuity account balances 3,308.6 4.5
================================================================================
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 20% 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.
Protective utilizes a risk management strategy that incorporates the use of derivative financial instruments, primarily to reduce its exposure to interest rate risk as well as currency exchange risk.
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 mortgage-backed securities. Interest rate swap contracts generally involve the exchange of fixed and variable rate interest payments between two parties, based on a common notional principal amount and maturity date. Interest rate futures generally involve exchange traded contracts to buy or sell treasury bonds and notes in the future at specified prices. Interest rate options represent contracts that allow the holder of the option to receive cash or purchase, sell or enter into a financial instrument at a specified price within a specified period of time.
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, primarily the European euro and the British pound.
Derivative instruments expose Protective to credit and market risk. Protective minimizes its credit risk by entering into transactions with highly rated counterparties. Protective manages the market risk associated with interest rate and foreign exchange contracts by establishing and monitoring limits as to the types and degrees of risk that may be undertaken. Protective monitors its use of derivatives in connection with its overall asset/liability management programs and procedures. Protective’s asset/liability committee is responsible for implementing various hedging strategies that are developed through its analysis of data from financial simulation models and other internal and industry sources. The resulting hedging strategies are then incorporated into Protective’s overall interest rate and currency exchange risk management strategies.
At December 31, 2001, contracts with a notional amount of $4,485.1 were in a $1.6 million net loss position. At December 31, 2000, contracts with a notional amount of $2,424.3 million were in a $13.0 million net loss position.
The following table sets forth the notional amount and fair value of Protective’s derivative financial instruments at December 31, and the estimated gains and losses resulting from a hypothetical immediate plus and minus 1 percentage point change in interest rates from levels prevailing at December 31.
GAIN(LOSS)
RESULTING FROM AN
IMMEDIATE +/-1 PERCENTAGE
FAIR VALUE POINT CHANGE
NOTIONAL AT IN INTEREST RATES
AMOUNT DECEMBER 31 +1% -1%
(in millions)
- ---------------------------------------------------------------------------------------------------------
2000
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
=========================================================================================================
2001
Options
Puts $ 775.0 $ 0.1 $ 1.3 $ 0.0
Calls 1,400.0 0.3 0.0 5.4
Futures 100.0 1.1 7.0 (6.4)
Fixed to floating
Swaps 799.3 20.8 (2.0) 33.5
Caps 175.0 0.0 0.0 0.0
Floating to fixed
Swaps 360.0 (12.7) (5.5) (19.5)
Caps 300.0 0.0 0.0 0.0
Floors 300.0 (2.0) (2.7) (1.1)
- ---------------------------------------------------------------------------------------------------------
$4,209.3 $ 7.6 $(1.9) $11.9
=========================================================================================================
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, 2001, stable value contracts of $275.8 million had a foreign exchange gain of approximately $7.2 million and the related foreign currency swaps had a net loss of approximately $9.3 million. 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 forth the notional amount and fair value of the funding agreements and related foreign currency swaps at December 31, and the estimated gains and losses resulting from a hypothetical 10% change in quoted foreign currency exchange rates from levels prevailing at December 31.
GAIN (LOSS)
RESULTING FROM
AN IMMEDIATE +/-10%
CHANGE IN FOREIGN
CURRENCY EXCHANGE
RATES
---------------------------------
FAIR VALUE
NOTIONAL AT +10% -10%
(IN MILLIONS) AMOUNT DECEMBER 31
- ------------------------------------------------------------------------------------------
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)
==========================================================================================
- ------------------------------------------------------------------------------------------
2001
Stable Value
Contracts $275.8 $ 7.2 $(19.6) $34.1
Foreign Currency
Swaps 275.8 (9.3) 19.2 (37.8)
- ------------------------------------------------------------------------------------------
$551.6 $(2.1) $ (0.4) $ (3.7)
==========================================================================================
Estimated gains and losses were derived using pricing models specific to derivative financial instruments. While these estimated gains and losses generally provide an indication of how sensitive Protective's derivative financial instruments are to changes in interest rates and foreign currency exchange rates, they do not represent management's view of future market changes, and actual market results may differ from these estimates.
The table below sets forth future maturities of debt and stable value contracts.
(in thousands) 2002 2003-2004 2005-2006 After 2006 - ------------------------------------------------------------------------------------------ Stable Value Contracts $971,536 $1,696,120 $979,460 $69,414 Note Payable 2,291 Securities sold under repurchase agreements 117,000 - ------------------------------------------------------------------------------------------
Report of Independent Accountants
Consolidated Statements of Income for the years ended December 31, 2001, 2000, and 1999
Consolidated Balance Sheets as of December 31, 2001 and 2000
Consolidated Statements of Share-Owner's Equity for the years ended
December 31, 2001, 2000, and 1999
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999
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.
To the Directors and Share Owner
Protective Life Insurance Company
Birmingham, Alabama
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, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, 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.
As discussed in Note A of the Notes to the Consolidated Financial Statements, effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities”.
PricewaterhouseCoopers LLP
Birmingham, Alabama
March 1, 2002
YEAR ENDED DECEMBER 31
-------------------------------------------
2001 2000 1999
---- ---- ----
REVENUES
Premiums and policy fees................................................ $1,389,819 $1,175,943 $ 861,021
Reinsurance ceded....................................................... (771,151) (686,108) (462,297)
---------- ---------- ---------
Net of reinsurance ceded.............................................. 618,668 489,835 398,724
Net investment income................................................... 839,103 692,081 617,829
Realized investment gains (losses):
Derivative financial instruments..................................... (1,718) 2,157 3,425
All other investments................................................ (6,123) (16,756) 1,335
Other income............................................................ 38,578 35,194 22,599
----------- ----------- -----------
1,488,508 1,202,511 1,043,912
----------- ----------- -----------
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance ceded: 2001 -
$609,996; 2000 - $538,291; 1999 - $344,474)........................... 972,624 760,778 629,656
Amortization of deferred policy acquisition costs ..................... 147,058 143,180 96,689
Amortization of goodwill............................................... 2,827 2,514
Other operating expenses (net of reinsurance ceded: 2001 - $167,243;
2000 - $223,498; 1999 - $150,570).................................... 152,041 121,417 130,954
----------- ----------- -----------
1,274,550 1,027,889 857,299
----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX....................... 213,958 174,622 186,613
INCOME TAX EXPENSE
Current................................................................. 118,421 12,180 43,945
Deferred................................................................ (47,964) 49,298 24,046
----------- ----------- -----------
70,457 61,478 67,991
----------- ----------- -----------
Net income from continuing operations before cumulative effect of change in
accounting principle....................................................... 143,501 113,144 118,622
Income (loss) from discontinued operations, net of income tax ............. (10,748) 10,891 9,636
Loss from sale of discontinued operations, net of income tax .............. (17,754)
----------- ----------- -----------
Net income before cumulative effect of change in accounting principle...... 114,999 124,035 128,258
Cumulative effect of change in accounting principle, net of income tax..... (8,341)
----------- ----------- -----------
NET INCOME................................................................. $ 106,658 $ 124,035 $ 128,258
=========== =========== ===========
See notes to consolidated financial statements.
DECEMBER 31
---------------------------------
2001 2000
---- ----
ASSETS
Investments:
Fixed maturities, at market (amortized cost: 2001 - $9,719,057; 2000 - $7,463,700).. $ 9,812,091 $7,390,110
Equity securities, at market (cost: 2001 - $62,051; 2000 - $44,450)................. 60,493 41,792
Mortgage loans on real estate....................................................... 2,512,844 2,268,224
Investment real estate, net of accumulated depreciation (2001 - $1,452; 2000 - $1,226) 24,173 12,566
Policy loans........................................................................ 521,840 230,527
Other long-term investments......................................................... 100,686 66,646
Short-term investments.............................................................. 228,396 172,699
------------ ------------
Total investments............................................................... 13,260,523 10,182,564
Cash.................................................................................... 107,166 33,517
Accrued investment income............................................................... 158,841 121,996
Accounts and premiums receivable, net of allowance for uncollectible
amounts (2001 - $3,025; 2000 - $2,195).............................................. 55,809 72,189
Reinsurance receivables................................................................. 2,173,987 1,099,574
Deferred policy acquisition costs....................................................... 1,532,683 1,189,380
Goodwill, net........................................................................... 35,992 241,831
Property and equipment, net............................................................. 46,337 51,166
Other assets............................................................................ 219,355 120,874
Receivable from related parties......................................................... 4,768
Assets related to separate accounts:
Variable Annuity.................................................................... 1,910,651 1,841,439
Variable Universal Life............................................................. 77,162 63,504
Other............................................................................... 3,997 3,746
------------ ------------
$19,582,503 $15,026,548
============ ============
LIABILITIES
Policy liabilities and accruals:
Future policy benefits and claims.................................................. $ 6,974,685 $ 5,033,397
Unearned premiums.................................................................. 901,653 935,605
------------ ------------
Total policy liabilities and accruals.............................................. 7,876,338 5,969,002
Stable value contract deposits.......................................................... 3,716,530 3,177,863
Annuity deposits........................................................................ 3,248,218 1,916,894
Other policyholders' funds.............................................................. 132,124 125,336
Other liabilities....................................................................... 410,621 324,901
Accrued income taxes.................................................................... 125,835 (10,932)
Deferred income taxes................................................................... 72,403 72,065
Note payable............................................................................ 2,291 2,315
Indebtedness to related parties......................................................... 6,000 10,000
Securities sold under repurchase agreements............................................. 117,000
Liabilities related to separate accounts:
Variable Annuity................................................................... 1,910,651 1,841,439
Variable Universal Life............................................................ 77,162 63,504
Other.............................................................................. 3,997 3,746
------------ ------------
Total liabilities................................................................ 17,699,170 13,496,133
============ ============
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.............................................................. 785,419 632,805
Note receivable from PLC Employee Stock Ownership Plan.................................. (4,499) (4,841)
Retained earnings....................................................................... 1,044,243 948,819
Accumulated other comprehensive income
Net unrealized gains (losses) on investments
(net of income tax: 2001 - $28,629; 2000-$(27,661))................................... 53,168 (51,370)
------------ ------------
Total share-owner's equity....................................................... 1,883,333 1,530,415
------------ ------------
$19,582,503 $15,026,548
============ ============
See notes to consolidated financial statements
NET
NOTE UNREALIZED
RECEIVABLE GAINS
ADDITIONAL FROM (LOSSES) TOTAL
PREFERRED COMMON PAID-IN PLC RETAINED ON SHARE-OWNER'S
STOCK STOCK CAPITAL ESOP EARNINGS INVESTMENTS EQUITY
--------- ------ ---------- ---------- -------- ----------- ------------
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
Change in net unrealized gains/losses 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
Change in net unrealized gains/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
-----------
Net income for 2001 106,658 106,658
Change in net unrealized gains/losses on
investments (net of income tax - $52,019) 96,607 96,607
Reclassification adjustment for amounts included
in net income (net of income tax - $2,143) 3,980 3,980
Transition adjustment on derivative financial
instruments (net of income tax - $2,127) 3,951 3,951
-----------
Comprehensive income for 2001 211,196
-----------
Capital contribution 134,000 134,000
Common dividend - transfer of subsidiary to PLC
(see note H) (2,052) (2,052)
Preferred dividend (1,000) (1,000)
Transfer of subsidiaries from PLC (see Note A) 18,614 (8,182) 10,432
Decrease in note receivable from PLC ESOP 342 342
--------- -------- --------- -------- ---------- -------- -----------
Balance, December 31, 2001 $2 $5,000 $785,419 $(4,499) $1,044,243 $ 53,168 $1,883,333
========= ======== ========= ======== ========== ======== ===========
See notes to consolidated financial statements.
DECEMBER 31
---------------------------------------------------
2001 2000 1999
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................................................................. $ 106,658 $ 124,035 $ 128,258
Adjustments to reconcile net income to net cash provided by operating activities:
Realized investment (gains) losses................................................. 7,841 14,599 (4,760)
Amortization of deferred policy acquisition costs.................................. 154,383 149,574 104,913
Amortization of goodwill........................................................... 8,328 3,867
Capitalization of deferred policy acquisition costs................................ (317,626) (338,685) (239,483)
Loss from sale of discontinued operations.......................................... 17,754
Depreciation expense............................................................... 11,651 9,581 10,513
Deferred income taxes.............................................................. (40,970) 55,161 24,234
Accrued income taxes............................................................... 139,017 13,265 (14,841)
Interest credited to universal life and investment products........................ 944,098 766,004 331,746
Policy fees assessed on universal life and investment products..................... (222,415) (197,581) (165,818)
Change in accrued investment income and other receivables.......................... (241,230) (160,488) (119,183)
Change in policy liabilities and other policyholder funds of traditional life and
health products.................................................................... 443,023 508,454 215,201
Change in other liabilities........................................................ 138,190 1,809 67,552
Other (net)........................................................................ 8,764 (34,626) (5,526)
------------ ------------ ------------
Net cash provided by operating activities................................................... 1,157,466 914,969 332,806
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reduction of investments:
Investments available for sale..................................................... 3,062,262 12,828,276 9,973,742
Other.............................................................................. 283,181 133,814 243,280
Sale of investments:
Investments available for sale..................................................... 8,943,123 810,716 537,343
Other.............................................................................. 0 5,222 267,892
Cost of investments acquired:
Investments available for sale..................................................... (13,647,757) (14,384,625) (10,625,354)
Corporate owned life insurance..................................................... (100,000)
Other.............................................................................. (378,520) (463,909) (864,100)
Acquisitions and bulk reinsurance assumptions.......................................... (118,557) (141,040) 46,508
Purchase of property and equipment..................................................... (10,099) (5,085) (18,075)
Sale of discontinued operations, net of cash transferred............................... 216,031
Sale of property and equipment......................................................... 70 151
------------ ------------- -------------
Net cash used in investing activities....................................................... (1,750,266) (1,216,631) (438,613)
------------ ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under line of credit arrangements and long-term debt........................ 2,574,954 2,197,800 4,351,177
Capital contribution from PLC.......................................................... 134,000 81,000
Principal payments on line of credit arrangements and long-term debt................... (2,457,979) (2,197,823) (4,351,203)
Principal payment on surplus note to PLC............................................... (4,000) (4,000) (4,000)
Dividends to share owner............................................................... (1,000)
Investment product deposits and change in universal life deposits...................... 1,735,653 1,811,484 1,300,736
Investment product withdrawals......................................................... (1,315,179) (1,553,282) (1,190,903)
------------ ----------- -----------
Net cash provided by financing activities................................................... 666,449 335,179 105,807
------------ ----------- -----------
INCREASE IN CASH............................................................................ 73,649 33,517 0
CASH AT BEGINNING OF YEAR................................................................... 33,517 0 0
------------ ------------- -----------
CASH AT END OF YEAR......................................................................... $ 107,166 $ 33,517 $ 0
============ ============= ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year:
Interest on debt................................................................... $ 1,390 $ 3,310 $ 5,611
Income taxes....................................................................... $ 27,395 $ 25,638 $ 56,192
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Reduction of principal on note from ESOP............................................... $ 342 $ 307 $ 51
Acquisitions, related reinsurance transactions and subsidiary transfer
Assets acquired.................................................................... $ 2,549,484 $ 759,067 $ 12,502
Liabilities assumed................................................................ (2,430,927) (384,207) (12,502)
Equity from subsidiary transfers (see Note A)...................................... (10,432) (233,820) 0
------------ ------------- -----------
Net................................................................................ $ 108,125 $ 141,040 $0
============ ============= ===========
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.
On May 1, 2001, PLC transferred its ownership of another five companies (that market prepaid dental products) to Protective. This transfer was also 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. Protective’s share-owner’s equity was also adjusted by an amount equal to the companies’ share-owner’s equity at May 1, 2001.
The results of operations of these companies have been included in the accompanying financial statements since the effective date of the transfer.
On December 31, 2001, Protective sold substantially all of the companies transferred from PLC as part of the sale of the Dental Benefits Division. For more information see the discussion under the heading “Discontinued Operations” included in Note A herein.
NATURE OF OPERATIONS
Protective provides financial services through the production, distribution, and administration of insurance and investment products. Protective markets individual life insurance, 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 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, persistency, and other factors.
RECENTLY ISSUED ACCOUNTING STANDARDS
On January 1, 2001, Protective adopted Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities”. SFAS No. 133, as amended by SFAS Nos. 137 and 138, requires Protective to record all derivative financial instruments, at fair value on the balance sheet. Changes in fair value of a derivative instrument are reported in net income or other comprehensive income, depending on the designated use of the derivative instrument. The adoption of SFAS No. 133 resulted in a cumulative charge to net income, net of income tax, of $8.3 million and a cumulative after-tax increase to other comprehensive income of $4.0 million on January 1, 2001. The charge to net income and increase to other comprehensive income primarily resulted from the recognition of derivative instruments embedded in Protective’s corporate bond portfolio. In addition, the charge to net income includes the recognition of the ineffectiveness on existing hedging relationships including the difference in spot and forward exchange rates related to foreign currency swaps used as an economic hedge of foreign-currency-denominated stable value contracts. Prospectively, the adoption of SFAS No. 133 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 Financial Accounting Standards Board (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 for 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. The adoption of this accounting standard did not have a material effect on Protective’s financial position or results of operations.
In June 2001, the FASB issued SFAS Nos. 141, “Business Combinations”, and 142, “Goodwill and Other Intangible Assets”. SFAS No. 141 requires that business combinations initiated after June 30, 2001, be accounted for using the purchase method. SFAS No. 142 revises the standards for accounting for acquired goodwill and other intangible assets. The standard replaces the requirement to amortize goodwill with one that calls for an annual impairment test, among other provisions. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001, and effective for any goodwill or intangible asset acquired after June 30, 2001. Protective expects the adoption of SFAS No. 142 to result in the elimination of up to $2.8 million of goodwill amortization in 2002.
In August 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations”. SFAS No. 143 requires that companies record the fair value of a liability for an asset retirement obligation in the period in which the liability is incurred. The Statement is effective for fiscal years beginning after June 15, 2002. Protective does not expect the adoption of SFAS No. 143 to have a material effect on Protective’s financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. SFAS No. 144 requires that the same accounting model be used for long-lived assets to be disposed of by sales, whether previously held and used or newly acquired, expands the use of discontinued operations accounting to include more types of transactions and changes the timing of when discontinued operations accounting is applied. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. Protective does not expect the adoption of SFAS No. 144 to have a material effect on Protective’s financial position or results of operations.
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 application 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:
2001 2000
---- ----
Total investments....................................... $13,157,623 $10,258,809
Deferred policy acquisition costs....................... 1,553,786 1,192,696
All other assets........................................ 4,789,297 3,654,604
------------ ------------
$19,500,706 $15,106,109
============ ============
Deferred income taxes................................... $ 43,774 $ 100,256
All other liabilities................................... 17,626,767 13,424,068
------------ ------------
17,670,541 13,524,324
Share-owner's equity.................................... 1,830,165 1,581,785
------------ ------------
$19,500,706 $15,106,109
============ ============
Realized gains and losses on sales of investments are recognized in net income using the specific identification basis.
DERIVATIVE FINANCIAL INSTRUMENTS
Protective utilizes a risk management strategy that incorporates the use of derivative instruments, primarily to reduce its exposure to interest rate risk as well as currency exchange risk.
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 mortgage-backed securities. Interest rate swap contracts generally involve the exchange of fixed and variable rate interest payments between two parties, based on a common notional principal amount and maturity date. Interest rate futures generally involved exchange traded contracts to buy or sell treasury bonds and notes in the future at specified prices. Interest rate options represent contracts that allow the holder of the option to receive cash or purchase, sell or enter into a financial instrument at a specified price within a specified period of time. Protective uses foreign currency swaps to reduce its exposure to currency exchange risk on certain stable value contracts denominated in foreign currencies, primarily the European euro and the British pound.
Derivative instruments expose Protective to credit and market risk. Protective minimizes its credit risk by entering into transactions with highly rated counterparties. Protective manages the market risk associated with interest rate and foreign exchange contracts by establishing and monitoring limits as to the types and degrees of risk that may be undertaken.
Protective monitors its use of derivatives in connection with its overall asset/liability management programs and procedures. Protective's asset/liability committee is responsible for implementing various hedging strategies that are developed through its analysis of data from financial simulation models and other internal and industry sources. The resulting hedging strategies are then incorporated into Protective's overall interest rate and currency exchange risk management strategies.
All derivatives are recognized on the balance sheet (other long-term investments or other liabilities) at their fair value (primarily estimates from independent pricing services). On the date the derivative contract is entered into, Protective designates the derivative as (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment ("fair value" hedge), (2) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability ("cash flow" hedge), or (3) as a derivative either held for investment purposes or held as a natural hedging instrument designed to act as an economic hedge against the changes in value or cash flows of a hedged item ("other" derivative). Changes in the fair value of a derivative that is highly effective as - and that is designated and qualifies as - - a fair-value hedge, along with the loss or gain on the hedged asset or liability that is attributable to the hedged risk (including losses or gains on firm commitments), are recorded in current-period earnings. Changes in the fair value of a derivative that is highly effective as - and that is designated and qualified as -a cash-flow hedge are recorded in other comprehensive income, until earnings are affected by the variability of cash flows. Changes in the fair value of other derivatives are recognized in current earnings and reported in Realized Investment Gains (Losses) -Derivative Financial Instruments in Protective’s consolidated statements of income.
Protective formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as fair-value or cash-flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. Protective also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, Protective discontinues hedge accounting prospectively, as discussed below.
Protective discontinues hedge accounting prospectively when (1) it is determined that the derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item (including firm commitments or forecasted transactions); (2) the derivative expires or is sold, terminated, or exercised; (3) the derivative is dedesignated as a hedge instrument, because it is unlikely that a forecasted transaction will occur; (4) because a hedged firm commitment no longer meets the definition of a firm commitment; or (5) management determines that designation of the derivative as a hedge instrument is no longer appropriate.
When hedge accounting is discontinued because it is determined that the derivative no longer qualifies as an effective fair-value hedge, the derivative will continue to be carried on the balance sheet at its fair value, and the hedged asset or liability will no longer be adjusted for changes in fair value. When hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, the derivative will continue to be carried on the balance sheet at its fair value, and any asset or liability that was recorded pursuant to recognition of the firm commitment will be removed from the balance sheet and recognized as a gain or loss in current-period earnings. When hedge accounting is discontinued because it is probable that a forecasted transaction will not occur, the derivative will continue to be carried on the balance sheet at its fair value, and gains and losses that were accumulated in other comprehensive income will remain therein until such time as they are reclassified to earnings as originally forecasted to occur. In all situations in which hedge accounting is discontinued, the derivative will be carried at its fair value on the balance sheet, with changes in its fair value recognized in current-period earnings.
Fair-Value Hedges. Protective has designated, as a fair value hedge, callable interest rate swaps used to modify the interest characteristics of certain stable value contracts. In assessing hedge effectiveness, Protective excludes the embedded call option's time value component from each derivative's total gain or loss. In 2001, total measured ineffectiveness for the fair value hedging relationships was insignificant while the excluded time value component resulted in a pre-tax gain of $1.3 million. Both the measured ineffectiveness and the excluded time value component are reported in Realized Investment Gains (Losses) - Derivative Financial Instruments in Protective's consolidated statements of income.
Cash-Flow Hedges. Protective has not designated any hedging relationships as a cash flow hedge.
Other Derivatives. Protective uses certain interest rate swaps, caps, floors, swaptions, options and futures contracts as economic hedges against the changes in value or cash flows of outstanding mortgage loan commitments and certain owned investments. In 2001, Protective recognized total pre-tax losses of $1.2 million representing the change in fair value of these derivative instruments.
On its foreign currency swaps, Protective recognized a $8.2 million pre-tax loss in 2001 while recognizing a $11.2 million foreign exchange pre-tax gain on the related foreign-currency-denominated stable value contracts. The net gain primarily results from the difference in the forward and spot exchange rates used to revalue the currency swaps and the stable value contracts, respectively. This net gain is reflected in Realized Investment Gains (Losses) - Derivative Financial Instruments in Protective's consolidated statements of income.
Protective has entered into asset swap arrangements to effectively sell the equity options embedded in owned convertible bonds in exchange for an interest rate swap that converts the remaining host bond to a variable rate instrument. In 2001, Protective recognized a $12.2 million pre-tax gain for the change in the asset swaps’ fair value and recognized a $16.9 million pre-tax loss to separately record the embedded equity options at fair value.
At December 31, 2001, contracts with a notional amount of $4,485.1 million were in a $1.6 million net loss position. At December 31, 2000, contracts with a notional amount of $2,424.3 million were in a $13.0 million net loss position. Protective recognized $2.2 million in realized investment gains related to derivative financial instruments in 2000.
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.
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 (equal to the rate used to compute liabilities for future policy benefits; currently 3.0% to 9.4%) 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 $523.4 million and $343.6 million at December 31, 2001 and 2000, respectively. During 2001, $221.9 million of present value of future profits was capitalized (relating to acquisitions made during the year) and $42.1 million was amortized. During 2000, $47.3 million of present value of future profits was capitalized, and $44.3 million was amortized.
GOODWILL
Goodwill is being amortized straight-line over periods ranging from 20 to 40 years. Goodwill at December 31, is as follows:
2001 2000
---- ----
Goodwill................... $41,363 $260,773
Accumulated amortization... 5,371 18,942
------- --------
$35,992 $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. A substantial portion of goodwill was disposed of in connection with the 2001 sale of Protective’s Dental Benefits Division.
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:
2001 2000
---- ----
Home office building.................................... $ 42,980 $ 41,184
Other, principally furniture and equipment.............. 67,128 66,484
---------- ----------
110,108 107,668
Accumulated depreciation................................ 63,771 56,502
---------- ----------
$ 46,337 $ 51,166
========== ==========
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.
STABLE VALUE CONTRACTS ACCOUNT BALANCES
Protective markets guaranteed investment contracts to 401 (k) and other qualified retirement savings plans, and fixed and floating rate funding agreements to the trustees of municipal bond proceeds, institutional investors, bank trust departments, and money market funds. Protective also sells funding agreements to special purpose entities that in turn issue notes or certificates in smaller, transferable denominations. In a structured program, Protective issues funding agreements to a special purpose trust or entity formed solely to purchase the funding agreements and simultaneously issue certificates or notes having terms substantially identical to the underlying funding agreements. Stable value contract account balances include guaranteed investment contracts and funding agreements issued by Protective, and the obligations of consolidated special purpose trusts or entities formed to purchase funding agreements issued by Protective. At December 31, 2001 and 2000 Protective had $1.7 billion and $1.0 billion of stable value contract account balances marketed through structured programs.
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:
2001 2000 1999
---- ---- ----
Balance beginning of year...................................... $109,973 $120,575 $ 90,332
Less reinsurance....................................... 25,830 47,661 20,019
--------- --------- ---------
Net balance beginning of year.............................. 84,143 72,914 70,313
--------- --------- ---------
Incurred related to:
Current year............................................... 383,371 311,633 311,002
Prior year................................................. (1,080) (4,489) (5,574)
--------- --------- ---------
Total incurred......................................... 382,291 307,144 305,428
--------- --------- ---------
Paid related to:
Current year............................................... 312,748 241,566 264,298
Prior year................................................. 81,220 60,972 40,197
--------- --------- ---------
Total paid............................................. 393,968 302,538 304,495
--------- --------- ---------
Other changes:
Acquisitions and
reserve transfers................................... (6,166) 6,623 1,668
--------- --------- ---------
Net balance end of year.................................... 66,300 84,143 72,914
Plus reinsurance....................................... 33,723 25,830 47,661
--------- --------- ---------
Balance end of year............................................ $100,023 $109,973 $120,575
========= ========= =========
| • | 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 3.0% to 9.4% in 2001. |
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.
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.
DISCONTINUED OPERATIONS
On December 31, 2001, Protective completed the sale to Fortis, Inc. of substantially all of its Dental Benefits Division (Dental Division), and discontinued other remaining Dental Division related operations, primarily other health insurance lines.
The operating results and charges related to the sale of the Dental Division at December 31 are as follows:
2001 2000 1999
- -----------------------------------------------------------------------------------------------
Total revenues $346,315 $254,547 $210,405
- -----------------------------------------------------------------------------------------------
Income (loss) before
income taxes from
discontinued operations $ (13,983) $ 17,484 $ 14,824
Income tax (expense)
Benefit 3,235 (6,593) (5,188)
- ----------------------------------------------------------------------------------------------
Income (loss) from
discontinued operations $ (10,748) $ 10,891 $ 9,636
- ----------------------------------------------------------------------------------------------
Gain from sale of
discontinued operations
before income tax $ 27,221
Income tax expense
related to sale (44,975)
- ----------------------------------------------------------------------------------------------
Loss from sale of
discontinued operations $ (17,754)
- ----------------------------------------------------------------------------------------------
Remaining assets and liabilities at December 31, 2001 related to the business sold to Fortis, Inc. consist of reinsurance receivables and policy liabilities and accruals of approximately $51.2 million. Assets and liabilities related to the other discontinued lines of business of approximately $11.1 million and $14.3 million, respectively, remain at December 31, 2001.
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-owners’ equity.
Financial statements prepared in conformity with accounting principles 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 National Association of Insurance Commissioners (NAIC) has adopted the Codification of Statutory Accounting Principles (Codification). Codification changed statutory accounting rules in several areas and was effective January 1, 2001. The adoption of Codification did not have a material effect on Protective’s statutory capital.
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
----------------------------------------- ---------------------------------------
2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ----
In conformity with statutory reporting
practices:(1).............................. $163,181 $ 66,694 $ 75,114 $775,138 $ 628,274 $ 567,634
Additions (deductions) by adjustment:
Deferred policy acquisition costs, net of
amortization......................... 163,243 157,617 120,644 1,532,683 1,189,380 1,011,524
Deferred income tax.................... 47,964 (52,580) (25,675) (74,083) (72,065) 32,335
Asset Valuation Reserve................ 108,062 103,853 41,104
Interest Maintenance Reserve........... (10,444) (3,540) (226) 16,959 9,715 19,328
Nonadmitted items...................... 139,500 97,447 51,350
Other timing and valuation adjustments. (33,456) (43,757) 72,527 (334,198) (204,985) (467,130)
Discontinued operations................ (193,688)
Noninsurance affiliates................ 19,022 21,276 20,698
Consolidation elimination.............. (49,164) (21,675) (134,824) (280,728) (221,204) (259,602)
In conformity with generally accepted --------- --------- ---------- ----------- ----------- ----------
accounting principles...................... $106,658 $124,035 $ 128,258 $1,883,333 $1,530,415 $ 996,543
========= ========= ========== =========== =========== ==========
(1) Consolidated
As of December 31, 2001, Protective and its insurance subsidiaries had on deposit with regulatory authorities, fixed maturity and short-term investments with a market value of approximately $81.9 million.
Major categories of net investment income for the years ended December 31 are summarized as follows:
2001 2000 1999
---- ---- ----
Fixed maturities.................................... $609,578 $529,990 $462,295
Equity securities................................... 2,247 2,532 775
Mortgage loans...................................... 208,830 177,917 172,027
Investment real estate.............................. 2,094 2,027 1,949
Policy loans........................................ 31,763 14,977 15,994
Other, principally short-term investments........... 36,695 12,532 19,504
--------- ---------- ----------
891,207 739,975 672,544
Investment expenses................................. 52,104 47,894 54,715
--------- ---------- ----------
$839,103 $692,081 $617,829
========= ========== ==========
Realized investment gains (losses) for all other investments for the years ended December 31 are summarized as follows:
2001 2000 1999
---- ---- ----
Fixed maturities.................................... $ (4,693) $ (14,787) $ 8,327
Equity securities................................... 2,462 1,685 (3,371)
Mortgage loans and other investments................ (3,892) (3,654) (3,621)
--------- ---------- ---------
$ (6,123) $ (16,756) $ 1,335
========= ========== =========
In 2001, gross gains on the sale of investments available for sale (fixed maturities, equity securities and short-term investments) were $62.5 million and gross losses were $68.1 million. In 2000, gross gains were $8.7 million and gross losses were $28.4 million. In 1999, gross gains were $44.1 million and gross losses were $32.3 million. During 2001, Protective recorded other than temporary impairments in its investments of $12.6 million.
Realized investment gains (losses) for derivative financial instruments for the years ended December 31 are summarized as follows:
2001 2000 1999
- -------------------------------------------------------------------------------
Derivative financial
instruments $(1,718) $2,157 $3,425
- -------------------------------------------------------------------------------
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
COST GAINS LOSSES VALUES
2001 ------------ ----------- ----------- ------------
- ----
Fixed maturities:
Bonds:
Mortgage-backed securities........... $ 3,709,118 $ 84,965 $ 33,759 $ 3,760,324
United States Government and
authorities........................ 98,967 4,088 0 103,055
States, municipalities, and
political subdivision.............. 94,022 4,009 0 98,031
Public utilities..................... 807,773 19,763 4,860 822,676
Convertibles and bonds with
warrants........................... 96,951 7,423 6,184 98,190
All other corporate bonds............ 4,910,614 117,092 99,500 4,928,206
Redeemable preferred stocks............... 1,612 0 3 1,609
------------ ---------- --------- -------------
9,719,057 237,340 144,306 9,812,091
Equity securities......................... 62,051 3,565 5,123 60,493
Short-term investments.................... 228,396 0 0 228,396
------------ ---------- --------- -------------
$10,009,504 $240,905 $149,429 $10,100,980
============ ========== ========= =============
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUES
2000 ----------- ------------ ----------- ---------
- ----
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
=========== ========== ========= ===========
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
2001 ------------ ------------
- ----
Due in one year or less.......................... $ 896,159 $ 899,666
Due after one year through five years............ 3,253,264 3,318,537
Due after five years through ten years........... 2,199,562 2,228,012
Due after ten years 3,370,072 3,365,876
----------- -----------
$9,719,057 $9,812,091
=========== ===========
At December 31, 2001 and 2000, Protective had bonds which were rated less than investment grade of $421.3 million and $226.5 million, respectively, having an amortized cost of $499.9 million and $306.0 million, respectively. At December 31, 2001, approximately $63.3 million of the bonds rated less than investment grade were securities issued in company-sponsored commercial mortgage loan securitizations. Approximately $1,762.2 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:
2001 2000 1999
---- ---- ----
Fixed maturities..... $108,307 $109,625 $(217,901)
Equity securities.... 715 (820) 973
At December 31, 2001, all of Protective’s mortgage loans were commercial loans of which 75% were retail, 10% were apartments, 7% were office buildings, and 7% were warehouses, and 1% 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 3.5% of mortgage loans. Approximately 76% of the mortgage loans are on properties located in the following states listed in decreasing order of significance: Texas, Tennessee, Georgia, Alabama, North Carolina, South Carolina, Florida, Virginia, California, Mississippi, Washington, Kentucky, and Ohio.
Many of the mortgage loans have call provisions after 3 to 10 years. Assuming the loans are called at their next call dates, approximately $153.4 million would become due in 2002, $560.4 million in 2003 to 2006, and $392.5 million in 2007 to 2011, and $46.7 million thereafter.
At December 31, 2001, the average mortgage loan was approximately $2.1 million, and the weighted average interest rate was 7.6%. The largest single mortgage loan was $18.8 million.
For several years Protective has offered a type of commercial mortgage loan under which Protective will permit a slightly higher loan-to-value ratio in exchange for a participating interest in the cash flows from the underlying real estate. As of December 31, 2001 and 2000, approximately $548.4 million and $572.2 million respectively, of Protective’s mortgage loans have this participation feature.
At December 31, 2001 and 2000, Protective’s problem mortgage loans (over ninety days past due) and foreclosed properties totaled $29.6 million and $20.6 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 $62.5 million were non-income producing for the twelve months ended December 31, 2001.
Policy loan interest rates generally range from 4.0% to 8.0%.
On December 31, 2001, Protective Life Insurance Company had $117.0 million of securities sold under repurchase agreements with an interest rate of 2.0%. The agreement to repurchase liability is recorded as securities sold under repurchase agreements.
Protective’s effective income tax rate varied from the maximum federal income tax rate as follows:
2001 2000 1999
---- ---- ----
Statutory federal income tax rate applied to pretax income.................. 35.0% 35.0% 35.0%
Dividends received deduction and tax-exempt interest........................ (1.7) (0.6) (0.1)
Low-income housing credit................................................... (0.5) (0.4) (0.5)
Other....................................................................... (0.1) 0.0 0.4
State income taxes.......................................................... 0.2 1.2 1.6
----- ----- -----
Effective income tax rate................................................... 32.9% 35.2% 36.4%
===== ===== =====
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:
2001 2000 1999
---- ---- ----
Deferred policy acquisition costs..................................... $ 81,015 $41,533 $44,546
Benefits and other policy liability changes........................... (127,189) 10,969 (27,158)
Temporary differences of investment income............................ 7,145 (3,333) 6,655
Other items........................................................... (8,935) 129 3
--------- -------- ---------
$(47,964) $49,298 $24,046
========= ======== =========
The components of Protective's net deferred income tax liability as of December 31 were as follows:
2001 2000
---- ----
Deferred income tax assets:
Policy and policyholder liability reserves............................ $334,876 $ 205,815
Other................................................................. 10,893 1,959
-------- --------
345,769 207,774
Deferred income tax liabilities: -------- --------
Deferred policy acquisition costs..................................... 379,072 302,631
Unrealized gains (losses) on investments.............................. 39,100 (22,792)
-------- --------
418,172 279,839
-------- --------
Net deferred income tax liability $ 72,403 $ 72,065
======== ========
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, 2001 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 $972 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 $200 million on an unsecured basis. No compensating balances are required to maintain the line of credit. 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 40% of its total capital. At December 31, 2001, PLC had no borrowings outstanding under these credit arrangements.
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, 2001, the balance of the surplus debenture was $6.0 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 $1.8 million, $3.8 million, and $5.1 million in 2001, 2000 and 1999, respectively.
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.
In January 2001, Protective coinsured a block of individual life policies from Standard Insurance Company.
In October 2001, Protective completed the acquisition of the stock of Inter-State Assurance Company (Inter-State) and First Variable Life Insurance Company (First Variable) from ILona Financial Group, Inc., a subsidiary of Irish Life & Permanent plc of Dublin, Ireland. The purchase price was approximately $250 million. The assets acquired included $132.7 million of present value of future profits.
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 2001 and 2000, on an unaudited pro forma basis, as if the Inter-State and First Variable acquisitions had occurred as of January 1, 2000. The pro forma information is based on Protective’s consolidated results of operations for 2001 and 2000, and on data provided by the acquired companies, 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.
(unaudited) 2001 2000 - ----------------------------------------------------------------------- Total revenues $1,557,827 $1,294,937 Net income 115,433 135,735
Protective leases administrative and marketing office space in approximately 25 cities including Birmingham, with most leases being for periods of three to five years. The aggregate annual rent is approximately $8.5 million.
Protective has financed the construction of a third building contiguous to its existing home office complex under an operating lease arrangement. Approximately $38 million of construction costs had been incurred at December 31, 2001. Protective has an option to purchase the building from the lessor at the end of the lease term.
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 sales practices, alleged agent misconduct, failure to properly supervise representatives, relationships with agents or persons with whom the insurer does business, and other matters. Increasingly these lawsuits have resulted in the award of substantial judgments that are disproportionate to the actual damages, including material amounts of punitive and non-economic compensatory damages. In some states, juries, judges and arbitrators have substantial discretion in awarding punitive and non-economic compensatory damages which creates the potential for unpredictable material adverse judgments or awards in any given lawsuit or arbitration. Arbitration awards are subject to very little appellate review. In addition, in some class action and other lawsuits, companies have made material settlement payments. Protective, like other financial service companies, in the ordinary course of business, is involved in such litigation or, alternatively, in arbitration. Although the outcome of any such litigation or arbitration cannot be predicted 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, 2001, approximately $1,053.6 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 the form of dividends, loans, or advances. 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 2002 is estimated to be $99.0 million.
On October 1, 2001, Protective transferred its ownership interest in a small subsidiary to PLC. This transfer was recorded as a common dividend at an amount equal to Protective's basis in the subsidiary, which approximated fair value.
PLC owns all of the 2,000 shares of preferred stock issued by Protective's subsidiary, Protective Life and Annuity Insurance Company (PL&A). The stock pays, when and if declared, noncumulative participating dividends to the extent PL&A's statutory earnings for the immediately preceding fiscal year exceeded $1.0 million. In 2001, PL&A paid a $1.0 million preferred dividend to PLC. PL&A paid no preferred dividends during 2000 or 1999.
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, $4.5 million at December 31, 2001, 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 2001, $4.0 million in 2000, and $3.7 million in 1999. Protective purchases data processing, legal, investment and management services from affiliates. The costs of such services were $82.6 million, $76.7 million, and $69.2 million in 2001, 2000, and 1999, respectively. Commissions paid to affiliated marketing organizations of $10.0 million, $12.0 million, and $11.4 million in 2001, 2000, and 1999, 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 $19.6 million, $50.9 million and $70.3 million in 2001, 2000, and 1999, respectively. Protective and/or PLC paid commissions, interest on debt and investment products, and fees to these same corporations totaling $5.9 million, $28.2 million and $16.7 million in 2001, 2000, and 1999, respectively.
For a discussion of indebtedness to related parties, see Note E.
Protective operates business segments each having a strategic focus which can be grouped into three general categories: life insurance, retirement savings and investment products and specialty insurance products. An operating segment is generally distinguished by products and/or channels of distribution. A brief description of each division follows.
Life Insurance
The Life Marketing segment 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 and brokers, and in the "bank owned life insurance" market.
The Acquisitions segment focuses on acquiring, converting, and servicing policies acquired from other companies. The segment's primary focus is on life insurance policies sold to individuals.
Retirement Savings and Investment Products
The Stable Value Contracts segment markets guaranteed investment contracts to 401(k) and other qualified retirement savings plans. The segment also markets fixed and floating rate funding agreements to the trustees of municipal bond proceeds, institutional investors, bank trust departments, and money market funds.
The Annuities segment 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 Life Marketing segment's sales force.
Specialty Insurance Products
The Credit Products segment markets credit life and disability insurance products through banks, consumer finance companies, and automobile dealers, and markets vehicle and recreational marine extended service contracts.
Corporate and Other
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 segments above (including net investment income on unallocated capital and interest on substantially all debt). This segment also includes earning from several lines of business which Protective is not actively marketing (mostly cancer insurance and group annuities).
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 recognition of income tax expense, income from discontinued operations, and cumulative effect of change in accounting principle. Asset adjustments represent the inclusion of assets related to discontinued operations.
In December 2001, Protective sold substantially all of its Dental Division and discontinued other Dental related operations. Additionally, other adjustments were made to combine its life insurance marketing operations into a single segment, and to reclassify certain smaller businesses. Prior period segment results have been restated to reflect these changes.
LIFE INSURANCE
----------------------------------
LIFE
OPERATING SEGMENT INCOME MARKETING ACQUISITIONS
- ----------------------------------------------------------------------------------------------------------
2001
Gross premiums and policy fees $ 542,407 $ 243,914
Reinsurance ceded (421,411) (61,482)
- ----------------------------------------------------------------------------------------------------------
Net premium and policy fees 120,996 182,432
Net investment income 178,866 187,535
Realized investment gains (losses) - -
Other income 1,134 345
- ----------------------------------------------------------------------------------------------------------
Total revenues 300,996 370,312
- ----------------------------------------------------------------------------------------------------------
Benefits and settlement expenses 190,538 238,877
Amortization of deferred policy acquisition costs and goodwill 41,399 20,500
Other operating expenses (22,957) 41,684
- ----------------------------------------------------------------------------------------------------------
Total benefits and expenses 208,980 301,061
- ----------------------------------------------------------------------------------------------------------
Income from continuing operations before income tax 92,016 69,251
Income tax expense
Discontinued operations, net of income tax
Change in accounting principle, net of income tax
- ----------------------------------------------------------------------------------------------------------
Net income
- ----------------------------------------------------------------------------------------------------------
2000
Gross premiums and policy fees $ 487,720 $ 134,099
Reinsurance ceded (387,907) (31,102)
- ----------------------------------------------------------------------------------------------------------
Net premium and policy fees 99,813 102,997
Net investment income 152,317 116,940
Realized investment gains (losses) - -
Other income (1,379) (4)
- ----------------------------------------------------------------------------------------------------------
Total revenues 250,751 219,933
- ----------------------------------------------------------------------------------------------------------
Benefits and settlement expenses 149,430 125,151
Amortization of deferred policy acquisition costs and goodwill 48,770 17,081
Other operating expenses (23,255) 24,077
- ----------------------------------------------------------------------------------------------------------
Total benefits and expenses 174,945 166,309
- ----------------------------------------------------------------------------------------------------------
Income from continuing operations before income tax 75,806 53,624
Income tax expense
Discontinued operations, net of income tax
Change in accounting principle, net of income tax
- ----------------------------------------------------------------------------------------------------------
Net income
- ----------------------------------------------------------------------------------------------------------
1999
Gross premiums and policy fees $ 361,824 $ 148,620
Reinsurance ceded (246,111) (33,754)
- ----------------------------------------------------------------------------------------------------------
Net premium and policy fees 115,713 114,866
Net investment income 138,044 129,806
Realized investment gains (losses) - -
Other income (948) (9)
- ----------------------------------------------------------------------------------------------------------
Total revenues 252,809 244,663
- ----------------------------------------------------------------------------------------------------------
Benefits and settlement expenses 147,631 129,581
Amortization of deferred policy acquisition costs and goodwill 29,481 19,444
Other operating expenses 18,201 31,178
- ----------------------------------------------------------------------------------------------------------
Total benefits and expenses 195,313 180,203
- ----------------------------------------------------------------------------------------------------------
Income from continuing operations before income tax 57,496 64,460
Income tax expense
Discontinued operations, net of income tax
Change in accounting principle, net of income tax
- ----------------------------------------------------------------------------------------------------------
Net income
- ----------------------------------------------------------------------------------------------------------
Operating Segment Assets
2001
Investments and other assets $3,431,441 $4,091,672
Deferred policy acquisition costs and goodwill 829,021 418,268
- ----------------------------------------------------------------------------------------------------------
Total assets $4,260,462 $4,509,940
- ----------------------------------------------------------------------------------------------------------
2000
Investments and other assets $2,834,956 $1,602,352
Deferred policy acquisition costs and goodwill 710,468 222,620
- ----------------------------------------------------------------------------------------------------------
Total assets $3,545,424 $1,824,972
- ----------------------------------------------------------------------------------------------------------
(1)Adjustments to net income represent the inclusion of unallocated realized investment gains (losses) and the
recognition of income tax expense, income from discontinued operations, and cumulative effect of change in
accounting principle. Asset adjustments represent the inclusion of assets related to discontinued operations.
SPECIALTY
RETIREMENT SAVINGS AND INSURANCE PRODUCTS
INVESTMENT PRODUCTS
----------------------------------------------------------------------------------------------------------
STABLE VALUE CREDIT CORPORATE TOTAL
CONTRACTS ANNUITIES PRODUCTS AND OTHER ADJUSTMENTS (1) CONSOLIDATED
----------------------------------------------------------------------------------------------------------
- $ 28,145 $ 524,281 $ 51,072 - $ 1,389,819
- (274,220) (14,038) - (771,151)
-
----------------------------------------------------------------------------------------------------------
- 28,145 250,061 37,034 - 618,668
$ 261,079 167,809 48,617 (4,803) - 839,103
7,218 1,139 - - $ (16,198) (7,841)
- 3,441 31,907 1,751 - 38,578
----------------------------------------------------------------------------------------------------------
268,297 200,534 330,585 33,982 (16,198) 1,488,508
----------------------------------------------------------------------------------------------------------
222,306 137,204 154,893 28,806 - 972,624
1,662 24,021 60,508 1,795 - 149,885
3,961 24,073 79,453 25,827 - 152,041
----------------------------------------------------------------------------------------------------------
227,929 185,298 294,854 56,428 - 1,274,550
----------------------------------------------------------------------------------------------------------
40,368 15,236 35,731 (22,446) (16,198) 213,958
70,457 70,457
(28,502) (28,502)
(8,341) (8,341)
----------------------------------------------------------------------------------------------------------
$ 106,658
----------------------------------------------------------------------------------------------------------
- $ 30,127 $ 479,397 $ 44,600 - $ 1,175,943
- - (258,931) (8,168) - (686,108)
----------------------------------------------------------------------------------------------------------
- 30,127 220,466 36,432 - 489,835
$ 243,133 132,204 46,464 1,023 - 692,081
(6,556) 410 - - $ (8,453) (14,599)
- 2,809 28,352 5,416 - 35,194
----------------------------------------------------------------------------------------------------------
236,577 165,550 295,282 42,871 (8,453) 1,202,511
----------------------------------------------------------------------------------------------------------
207,143 109,607 135,494 33,953 - 760,778
900 24,156 52,646 2,141 - 145,694
3,882 18,203 72,316 26,194 - 121,417
----------------------------------------------------------------------------------------------------------
211,925 151,966 260,456 62,288 - 1,027,889
----------------------------------------------------------------------------------------------------------
24,652 13,584 34,826 (19,417) (8,453) 174,622
61,478 61,478
10,891 10,891
- -
----------------------------------------------------------------------------------------------------------
$ 124,035
----------------------------------------------------------------------------------------------------------
- $ 24,248 $ 284,891 $ 41,438 - $ 861,021
- - (176,928) (5,504) - (462,297)
----------------------------------------------------------------------------------------------------------
- 24,248 107,963 35,934 - 398,724
$ 210,208 106,599 24,121 9,051 - 617,829
(549) 1,446 - - $ 3,863 4,760
- 2,146 15,831 5,579 - 22,599
----------------------------------------------------------------------------------------------------------
209,659 134,439 147,915 50,564 3,863 1,043,912
----------------------------------------------------------------------------------------------------------
175,290 88,642 55,899 32,613 - 629,656
744 19,820 24,718 2,482 - 96,689
4,709 14,617 44,728 17,521 - 130,954
----------------------------------------------------------------------------------------------------------
180,743 123,079 125,345 52,616 - 857,299
----------------------------------------------------------------------------------------------------------
28,916 11,360 22,570 (2,052) 3,863 186,613
67,991 67,991
9,636 9,636
- -
----------------------------------------------------------------------------------------------------------
$ 128,258
----------------------------------------------------------------------------------------------------------
$3,872,637 $4,501,667 $1,050,546 $955,984 $109,881 $18,013,828
6,374 128,488 177,874 8,650 1,568,675
----------------------------------------------------------------------------------------------------------
$3,879,011 $4,630,155 $1,228,420 $964,634 $109,881 $19,582,503
----------------------------------------------------------------------------------------------------------
$3,340,099 $3,844,169 $1,220,733 $552,178 $200,850 $13,595,337
2,144 120,219 150,984 10,006 214,770 1,431,211
----------------------------------------------------------------------------------------------------------
$3,342,243 $3,964,388 $1,371,717 $562,184 $415,620 $15,026,548
----------------------------------------------------------------------------------------------------------
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 funding 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:
2001 2000
---- ----
Projected benefit obligation, beginning of the year..................... $45,538 $36,530
Service cost - benefits earned during the year.......................... 3,739 3,338
Interest cost - on projected benefit obligation......................... 3,531 3,195
Actuarial gain (loss)................................................... (357) 1,968
Plan amendment.......................................................... 1,162 833
Divestiture............................................................. (2,165)
Benefits paid........................................................... (579) (326)
-------- --------
Projected benefit obligation, end of the year........................... 50,869 45,538
-------- --------
Fair value of plan assets beginning of the year......................... 40,822 34,420
Actual return on plan assets............................................ (1,440) (148)
Employer contribution................................................... 5,221 6,876
Benefits paid........................................................... (579) (326)
-------- --------
Fair value of plan assets end of the year............................... 44,024 40,822
-------- --------
Plan assets less than the projected benefit obligation.................. (6,845) (4,716)
Unrecognized net actuarial loss from past experience different from that
assumed................................................................ 10,213 7,766
Unrecognized prior service cost......................................... 2,026 1,226
-------- ---------
Net pension asset recognized in balance sheet........................... $ 5,394 $ 4,276
======== =========
Net pension cost of the defined benefit pension plan includes the following components for the years ended December 31:
2001 2000 1999
---- ---- ----
Service cost............................... $ 3,739 $ 3,338 $ 3,270
Interest cost.............................. 3,531 3,195 2,779
Expected return on plan assets............. (3,669) (3,049) (2,348)
Amortization of prior service cost......... 176 176 115
Amortization of transition asset........... (17) (17)
Amortization of losses..................... 141
Recognized net actuarial loss.............. 494
Cost of divestiture........................ 186
------- ------- -------
Net pension cost........................... $ 4,104 $ 3,643 $ 4,293
======= ======= =======
Protective's share of the net pension cost was approximately $5.4 million, $4.1 million, and $3.6 million, in 2001, 2000, and 1999, respectively.
Assumptions used to determine the benefit obligations as of December 31 were as follows:
2001 2000 1999
---- ---- ----
Weighted average discount rate................... 7.25% 7.50% 8.00%
Rates of increase in compensation level.......... 5.00 5.25 5.75
Expected long-term rate of return on assets...... 8.50 8.50 8.50
At December 31, 2001 approximately $7.2 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 $36.8 million of the assets of the pension plan are invested in a collective trust managed by Northern Trust Corporation.
Prior to July 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 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, 2001 and 2000, the projected benefit obligation of this plan totaled $15.9 million and $14.4 million, respectively, of which $13.8 million and $10.5 million, respectively, have been recognized in PLC’s financial statements.
Net pension costs of the excess benefits plan includes the following components for the years ended December 31:
2001 2000 1999
---- ---- ----
Service cost............................................. $ 686 $ 736 $ 695
Interest cost............................................ 1,121 1,067 887
Amortization of prior service cost....................... 19 19 113
Amortization of transition asset......................... 37 37 37
Recognized net actuarial loss............................ 233 194 265
Cost of divestiture and special termination benefits..... 1,807
------ ------ ------
Net pension cost....................................... $3,903 $2,053 $1,997
====== ====== ======
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, 2001 and 2000, the liability for such benefits was approximately $1.2 million. The expense recorded by PLC was $0.1 million in 2001, 2000 and 1999. 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, 2001, PLC had committed approximately 166,861 shares to be released to fund employee benefits. The expense recorded by PLC for these employee benefits was less than $0.1 million in 2001, 2000, and 1999.
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 1999, 99,380 performance shares were awarded, having an estimated fair value on the grant date of $3.4 million. 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. In 2001, 153,490 performance shares and 40,000 SARs were awarded, having a combined estimated fair value on the grant date of $4.9 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, 2002, outstanding awards measured at maximum payouts were 423,362 performance shares and 853,236 SARs.
During 1996, 2000, and 2001, 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. In 2001, 62,500 SARs were awarded, having an estimated fair value on the grant date of $0.6 million. The number of SARs granted in 1996, 2000, and 2001, outstanding at December 31, 2001, was 660,000, 215,000, and 62,500, respectively.
The 1996 SARs have a base price of $17.4375. The 2000 SARs have a base price of $22.31. The 2001 SARs have a base price of $31.26 and $31.29. The fair value of the 2001 SARs was estimated using a Black-Scholes option pricing model. Assumptions used in the model were as follows: expected volatility of 26.4% (approximately equal to that of the S&P Life Insurance Index), a risk-free interest rate of 4.7%, a dividend rate of 1.9%, and an expected exercise date of 2007.
The expense recorded by PLC for its stock-based compensation plans was $5.6 million, $4.1 million, and $4.0 million in 2001, 2000, and 1999, 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 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 $169.5 billion, $126.0 billion and $93.5 billion in face amount of life insurance risks with other insurers representing $565.1 million, $496.4 million, and $364.7 million of premium income for 2001, 2000, and 1999, respectively. Protective has also reinsured accident and health risks representing $122.7 million, $125.8 million, and $97.1 million of premium income for 2001, 2000, and 1999, respectively. In 2001 and 2000, policy and claim reserves relating to insurance ceded of $2,059.0 million and $988.4 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, 2001 and 2000, Protective had paid $46.4 million and $33.5 million, respectively, of ceded benefits which are recoverable from reinsurers. In addition, at December 31, 2001, Protective had receivables of $69.3 million related to insurance assumed. Included in these receivables are $51.2 million related to the sale of Protective's Dental Division, and $783.9 million related to fixed annuities that were ceded in conjunction with the October 2001 acquisition of two small insurers.
The carrying amount and estimated fair values of Protective’s financial instruments at December 31 are as follows:
2001 2000
----------------------------- -----------------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUES AMOUNT VALUES
---------- ----------- ---------- ------------
Assets (see Notes A and C):
Investments:
Fixed maturities......................... $9,812,091 $9,812,091 $7,390,110 $7,390,110
Equity securities........................ 60,493 60,493 41,792 41,792
Mortgage loans on real estate............ 2,512,844 2,671,074 2,268,224 2,385,174
Short-term investments................... 228,396 228,396 172,699 172,699
Liabilities (see Notes A and E):
Stable value account balances............ 3,716,530 3,821,955 3,177,863 3,250,991
Annuity account balances................. 3,248,218 3,166,052 1,916,894 1,893,749
Notes payable............................ 2,291 2,291 2,315 2,315
Other (see Note A):
Derivative Financial Instruments......... (1,634) (1,634) (6,079) (13,011)
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
------ ------ ------ ------ ------ ------ ------- ------ ------ ------
GIC, ANNUITY AMORTIZATION
DEFERRED DEPOSITS AND OF DEFERRED
POLICY FUTURE POLICY OTHER NET PREMIUMS NET BENEFITS AND POLICY OTHER
ACQUISITION BENEFITS AND UNEARNED POLICYHOLDERS' AND POLICY INVESTMENT SETTLEMENT ACQUISITIONS OPERATING
SEGMENT COSTS CLAIMS PREMIUMS FUNDS FEES INCOME(1) EXPENSES COSTS EXPENSES(1)
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Year Ended
December 31, 2001:
Life Marketing $ 829,021 $3,326,841 $ 303 $ 86,937 $120,996 $178,866 $190,538 $ 41,399 $ (22,957)
Acquisitions 418,268 3,046,401 434 876,221 182,432 187,535 238,877 20,500 41,684
Stable Value Contracts 6,374 - - 3,872,637 0 261,079 222,306 1,662 3,961
Annuities 128,488 281,074 - 2,232,779 28,145 167,809 137,204 24,021 24,073
Credit Products 141,882 211,713 898,340 3,856 250,061 48,617 154,893 57,681 82,280
Corporate and Other 8,650 16,572 2,242 247 37,034 (4,803) 28,806 1,795 25,827
Adjustments(2) 0 92,084 334 24,195 0 0 0 0 0
---------- ---------- -------- ---------- -------- -------- -------- -------- --------
TOTAL $1,532,683 $6,974,685 $901,653 $7,096,872 $618,668 $839,103 $972,624 $147,058 $154,868
========== ========== ======== ========== ======== ======== ======== ======== ========
Year Ended
December 31, 2000:
Life Marketing $ 710,468 $2,753,191 $ 334 $ 102,305 $ 99,813 $152,317 $149,430 $ 48,771 $ (23,255)
Acquisitions 222,620 1,364,830 484 238,465 102,997 116,940 125,151 17,081 24,077
Stable Value Contracts 2,144 162,236 - 3,177,863 - 243,133 207,143 900 3,882
Annuities 120,219 306,021 - 1,633,203 30,127 132,204 109,607 24,156 18,203
Credit Products 112,135 293,253 929,943 3,901 220,466 46,464 135,494 50,132 74,830
Corporate and Other 10,006 40,588 2,242 129 36,432 1,024 33,953 2,140 26,196
Adjustments(2) 11,788 113,278 2,602 64,227 0 0 0 0 0
---------- ---------- -------- ---------- -------- -------- -------- -------- --------
TOTAL $1,189,380 $5,033,397 $935,605 $5,220,093 $489,835 $692,082 $760,778 $143,180 $123,933
========== ========== ======== ========== ======== ======== ======== ======== ========
Year Ended
December 31, 1999:
Life Marketing $115,713 $138,044 $147,631 $ 29,481 $ 18,201
Acquisitions 114,866 129,806 129,581 19,444 31,178
Stable Value Contracts - 210,208 175,290 744 4,709
Annuities 24,248 106,599 88,642 19,820 14,617
Credit Products 107,963 24,121 55,899 24,718 44,728
Corporate and Other 35,934 9,051 32,613 2,482 17,521
Adjustments 0 0 0 0 0
-------- -------- -------- --------- --------
TOTAL $398,724 $617,829 $629,656 $ 96,689 $130,954
======== ======== ======== ========= ========
(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.
(2) Asset adjustments represent the inclusion of assets related to discontinued operations.
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, 2001:
Life insurance in force........................... $191,105,511 $171,449,182 $23,152,614 $42,808,143 54.1%
============ ============ =========== =========== =====
Premiums and policy fees:
Life insurance.................................... $ 774,294 $ 565,130 $ 198,832 $ 407,996 48.7%
Accident and health insurance..................... 181,508 122,747 58,761 0.0%
Property and liability insurance.................. 158,890 83,274 76,295 151,911 50.2%
------------ ------------ ----------- -----------
TOTAL........................................... $ 1,114,692 $ 771,151 $ 275,127 $ 618,668
============ ============ =========== ===========
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.................................... $ 670,113 $ 493,793 $ 112,668 $ 288,988 39.0%
Accident and health insurance..................... 203,475 128,520 17,164 92,119 18.6%
Property and liability insurance.................. 159,354 63,795 13,169 108,728 12.1%
------------ ------------ ----------- -----------
TOTAL......................................... $ 1,032,942 $ 686,108 $ 143,001 $ 489,835
============ ============ =========== ===========
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.................................... $ 530,728 $ 368,139 $ 130,368 $ 292,957 44.5%
Accident and health insurance..................... 153,812 93,657 11,893 72,048 16.5%
Property and liability insurance.................. 34,109 501 111 33,719 0.3%
------------ ------------ ----------- -----------
TOTAL......................................... $ 718,649 $ 462,297 $ 142,372 $ 398,724
============ ============ =========== ===========
None
Not required in accordance with General Instruction I(2)(c).
Not required in accordance with General Instruction I(2)(c).
Not required in accordance with General Instruction I(2)(c).
Not required in accordance with General Instruction I(2)(c).
(a) The following documents are filed as part of this report:
1. Financial Statements (Item 8)
2. Financial Statement Schedules (see index annexed)
3. Exhibits:
The exhibits listed in the Exhibit Index on page 46 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 April 1, 2002.
| PROTECTIVE LIFE INSURANCE COMPANY | |
|---|---|
| BY/s/John D. Johns | |
| President |
Dated: April 1, 2002
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, this report has been signed 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 Chief Executive Officer April 1, 2002
---------------------- (Principal Executive Officer) and Director
John D. Johns
(ii) Principal Financial Officer
/S/ALLEN W. RITCHIE Executive Vice President, April 1, 2002
----------------------- and Chief Financial Officer and Director
Allen W. Ritchie
(iii) Principal Accounting Officer
/S/JERRY W. DEFOOR Vice President and Controller, April 1, 2002
----------------------- and Chief Accounting Officer
Jerry W. DeFoor
(iv) Board of Directors:
* Director April 1, 2002
-----------------------
Richard J. Bielen
* Director April 1, 2002
-----------------------
R. Stephen Briggs
* Director April 1, 2002
-----------------------
J. William Hamer, Jr.
* Director April 1, 2002
----------------------
T. Davis Keyes
* Director April 1, 2002
----------------------
Carolyn King
* Director April 1, 2002
----------------------
Deborah J. Long
* Director April 1, 2002
----------------------
Jim E. Massengale
* Director April 1, 2002
----------------------
Steven A. Schultz
* Director April 1, 2002
----------------------
Wayne E. Stuenkel
| *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
* 10(c) - Excess Benefit Plan amended and restated as of July 1, 2001.
* 10(d) - Form of Indemnity Agreement for Directors filed as Exhibit 19.1 to the
Company's Form 10-Q Quarterly Report filed August 14, 1986.
10(e) - Stock and Asset Purchase Agreement By and Among Protective Life
Corporation, Protective Life Insurance Company, Fortis, Inc. and Dental
Care Holdings, Inc. dated July 9, 2001.
10(f) - Indemnity Reinsurance Agreement By and Between Protective Life
Insurance Company and Fortis Benefits Insurance Company dated
December 31, 2001.
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.