| DELAWARE | 95-2492236 | ||
|---|---|---|---|
| (State or other jurisdiction | (IRS Employer | ||
| incorporation or organization) | Identificiation No. |
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 [ ]
Number of shares of Common Stock, $.50 par value, outstanding as of August 9, 2002: 68,662,207 shares.
Part I. Financial Information:
Item 1. Financial Statements:
Report of Independent Accountants........................................
Consolidated Condensed Statements of Income for the Three and
Six Months ended June 30, 2002 and 2001 (unaudited)..................
Consolidated Condensed Balance Sheets as of June 30, 2002
(unaudited) and December 31, 2001....................................
Consolidated Condensed Statements of Cash Flows for the
Six Months ended June 30, 2002 and 2001 (unaudited)..................
Notes to Consolidated Condensed Financial Statements (unaudited).........
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........
Part II. Other Information:
Item 4. Submission of Matters to a Vote of Security Holders.................
Item 6. Exhibits and Reports on Form 8-K....................................
Signature.......................................................................
To the Directors and Share Owners
Protective Life Corporation
We have reviewed the accompanying consolidated condensed balance sheet of Protective Life Corporation and its subsidiaries as of June 30, 2002, and the related consolidated condensed statements of income for each of the three-month and six-month periods ended June 30, 2002 and 2001, and the consolidated condensed statements of cash flows for the six-month periods ended June 30, 2002 and 2001. These financial statements are the responsibility of the Company’s management.
We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated condensed interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We previously audited in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 2001, and the related consolidated statements of income, share-owners’ equity, and cash flows for the year then ended (not presented herein), and in our report dated March 1, 2002, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated condensed balance sheet as of December 31, 2001, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Birmingham, Alabama
August 14, 2002
PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
----------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
REVENUES
Premiums and policy fees $395,937 $324,597 $763,296 $636,142
Reinsurance ceded (211,138) (176,689) (394,505) (320,405)
--------- --------- --------- ---------
Premiums and policy fees, net of reinsurance ceded 184,799 147,908 368,791 315,737
Net investment income 251,690 212,970 496,695 419,475
Realized investment gains (losses):
Derivative financial instruments 13,897 (6,697) 9,581 877
All other investments (79) (823) 634 694
Other income 29,033 29,020 54,837 57,432
--------- --------- --------- ---------
479,340 382,378 930,538 794,215
--------- --------- --------- ---------
BENEFITS AND EXPENSES
Benefits and settlement expenses
(net of reinsurance ceded:
three months: 2002 - $180,959; 2001 - $98,131
six months: 2002 - $330,144; 2001 - $200,569) 294,650 241,040 568,581 493,723
Amortization of deferred policy acquisition costs 40,398 29,442 88,337 57,103
Amortization of goodwill 0 874 0 1,731
Other operating expenses (net of reinsurance ceded:
three months: 2002 - $42,655; 2001 - $52,042
six months: 2002 - $76,229; 2001 - $81,993) 62,810 62,269 129,853 129,308
--------- --------- --------- ---------
397,858 333,625 786,771 681,865
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAX 81,482 48,753 143,767 112,350
Income tax expense 27,052 15,751 47,731 37,672
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS
BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 54,430 33,002 96,036 74,678
Loss from discontinued operations, net of income tax 0 (5,855) 0 (1,891)
NET INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 54,430 27,147 96,036 72,787
Cumulative effect of change in accounting principle 0 0 0 (7,593)
--------- --------- --------- ---------
NET INCOME $ 54,430 $ 27,147 $ 96,036 $ 65,194
========== ========= ========= =========
NET INCOME FROM CONTINUING OPERATIONS
BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE PER SHARE - BASIC $ .77 $ .47 $ 1.37 $ 1.08
========== ========= ========= =========
NET INCOME PER SHARE - BASIC $ .77 $ .39 $ 1.37 $ .95
========== ========= ========= =========
NET INCOME FROM CONTINUING OPERATIONS
BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE PER SHARE - DILUTED $ .77 $ .46 $ 1.36 $ 1.07
========== ========= ========= =========
NET INCOME PER SHARE - DILUTED $ .77 $ .38 $ 1.36 $ .94
========== ========= ========= =========
DIVIDENDS PAID PER SHARE $ .15 $ .14 $ .29 $ .27
========== ========= ========= =========
Average shares outstanding - basic 69,893,332 69,978,779 69,893,392 68,907,614
Average shares outstanding - diluted 70,486,576 70,507,398 70,435,362 69,417,448
See notes to consolidated condensed financial statements
PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
JUNE 30 DECEMBER 31
2002 2001
--------------- --------------
(UNAUDITED)
ASSETS
Investments:
Fixed maturities, at market $11,049,478 $ 9,838,091
Equity securities, at market 72,908 76,774
Mortgage loans on real estate 2,600,613 2,512,844
Investment in real estate, net 24,485 26,349
Policy loans 551,988 521,841
Other long-term investments 150,842 104,624
Short-term investments 257,526 237,155
------------ ------------
Total investments 14,707,840 13,317,678
Cash 43,775 126,558
Accrued investment income 168,408 159,866
Accounts and premiums receivable, net 100,596 64,410
Reinsurance receivables 2,199,043 2,174,769
Deferred policy acquisition costs 1,646,154 1,532,683
Goodwill, net 47,312 48,162
Property and equipment, net 45,397 51,307
Other assets 248,832 251,581
Assets related to separate accounts
Variable annuity 1,691,789 1,873,195
Variable universal life 113,570 114,618
Other 4,158 3,997
------------ ------------
$21,016,874 $19,718,824
============ ============
LIABILITIES
Policy liabilities and accruals $ 8,587,489 $ 7,876,166
Stable value contract account balances 4,078,763 3,716,530
Annuity account balances 3,603,722 3,248,217
Other policyholders' funds 144,503 131,040
Securities sold under repurchase agreements 0 117,000
Other liabilities 516,749 498,579
Accrued income taxes (6,490) 60,897
Deferred income taxes 192,384 127,230
Debt 386,688 376,211
Guaranteed Preferred Beneficial Interests
8.25% Trust Originated Preferred Securities 75,000 75,000
7.5% Trust Originated Preferred Securities 100,000 100,000
Liabilities related to separate accounts
Variable annuity 1,691,789 1,873,195
Variable universal life 113,570 114,618
Other 4,158 3,997
------------ ------------
19,488,325 18,318,680
------------ ------------
COMMITMENTS AND CONTINGENT LIABILITIES - NOTE B
SHARE-OWNERS' EQUITY
Preferred Stock, $1.00 par value,
Shares authorized: 3,600,000; Issued: None
Junior Participating Cumulative Preferred Stock, $1.00 par value
Shares authorized: 400,000; Issued: None
Common Stock, $.50 par value, Shares authorized: 160,000,000
Shares issued: 2002 - 73,251,960; 2001 - 73,251,960 36,626 36,626
Additional paid-in capital 405,711 405,420
Treasury stock, at cost (2002 - 4,594,377 shares; 2001 - 4,696,788 shares) (16,278) (15,895)
Stock held in trust (2002 - 60,574 shares; 2001 - 55,785 shares) (1,679) (1,535)
Unallocated stock in Employee Stock Ownership Plan
(2002 - 838,401 shares; 2001 - 1,001,401 shares) (2,777) (3,317)
Retained earnings 1,000,645 924,517
Accumulated other comprehensive income:
Net unrealized gains on investments (net of income
tax: 2002 - $57,239; 2001 - $29,254) 106,301 54,328
------------ ------------
1,528,549 1,400,144
------------ ------------
$21,016,874 $19,718,824
============ ============
See notes to consolidated condensed financial statements
PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30
----------------------------------
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 96,036 $ 65,194
Adjustments to reconcile net income to net cash provided by
operating activities:
Realized investment (gains) losses (10,215) (1,572)
Amortization of deferred policy acquisition costs 88,337 68,399
Capitalization of deferred policy acquisition costs (189,977) (126,277)
Depreciation expense 5,769 6,150
Deferred income tax 37,169 (15,100)
Accrued income tax (67,387) 53,462
Amortization of goodwill 0 4,467
Interest credited to universal life and investment products 560,416 421,869
Policy fees assessed on universal life and investment products (122,447) (101,607)
Change in accrued investment income and other receivables (60,080) (15,539)
Change in policy liabilities and other policyholders' funds
of traditional life and health products 56,997 13,896
Change in other liabilities 19,267 81,400
Other (net) 6,080 (16,758)
------------ -----------
Net cash provided by operating activities 419,965 437,984
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reductions of investments
Investments available for sale 4,479,352 9,651,623
Other 148,678 142,429
Sale of investments
Investments available for sale 4,392,898 949,765
Other 4,218 1,363
Cost of investments acquired
Investments available for sale (9,764,550) (11,496,081)
Corporate owned life insurance (100,000)
Other (216,729) (170,818)
Acquisitions and bulk reinsurance assumptions 130,515 132,284
Sales (Purchase) of property and equipment (3,564) (7,638)
Sale of property and equipment 48 0
------------ ------------
Net cash used in investing activities (829,134) (897,073)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings under line of credit arrangements and debt 2,015,272 627,600
Principal payments on line of credit arrangements and debt (2,121,795) (454,578)
Dividends to share owners (19,908) (17,992)
Sale (Purchase) of common stock held in trust (828) 82
Investment product deposits and changes in universal life deposits 1,040,707 929,479
Investment product withdrawals (587,062) (604,223)
------------ ------------
Net cash provided by financing activities 326,386 480,368
------------ ------------
(DECREASE)/INCREASE IN CASH (82,783) 21,279
CASH AT BEGINNING OF PERIOD 126,558 55,494
------------ ------------
CASH AT END OF PERIOD $ 43,775 $ 76,773
============ ============
See notes to consolidated condensed financial statements
The accompanying unaudited consolidated condensed financial statements of Protective Life Corporation and subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair statement have been included. Operating results for the six month period ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. The year-end consolidated condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2001.
The Company’s certificate of incorporation provides indemnification for persons serving as officers and directors of the Company. In addition, agreements with the Company’s directors require the Company, upon certain “change-in-control” contingencies, to obtain a $20 million letter of credit to secure the Company’s indemnification obligations. The letter of credit would provide security for the Company’s obligations up to an aggregate amount of $20 million (after taking into account amounts paid by the Company and amounts paid under the Company’s directors and officers or other insurance policies).
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. The Company does not currently 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 other persons with whom the insurer does business, and other matters. Increasingly these lawsuits have resulted in the award of substantial judgments that are disproportionate to the actual damages, including material amounts of punitive and non-economic compensatory damages. In some states, juries, judges, and arbitrators have substantial discretion in awarding punitive and non-economic compensatory damages, which creates the potential for unpredictable material adverse judgments or awards in any given lawsuit or arbitration. Arbitration awards are subject to very little appellate review. In addition, in some class action and other lawsuits, companies have made material settlement payments. The Company, like other financial services companies, in the ordinary course of business, is involved in such litigation or, alternatively, arbitration. Although the outcome of any such litigation or arbitration cannot be predicted, the Company believes that at the present time there are no pending or threatened lawsuits that are reasonably likely to have a material adverse effect on the financial position, results of operations, or liquidity of the Company.
The Company operates several business segments each having a strategic focus which can be grouped into three general product 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 segment follows:
| 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. |
| 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 segment also sells funding agreements to special purpose entities that in turn issue notes or certificates in smaller, transferable denominations. |
| 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. |
| 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. |
| The Company 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 earnings from several lines of business which the Company is not actively marketing (mostly cancer insurance and group annuities), various investment-related transactions, and the operations of several small subsidiaries. |
The Company 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, adjusted to exclude any pretax minority interest in income of consolidated subsidiaries. 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 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. The reduction in the goodwill balance in the Credit Products segment relates to the sale of a small subsidiary in the first quarter of 2002.
In December 2001, the Company sold substantially all of its Dental Division and discontinued other Dental Division related operations (See Note L “Discontinued Operations”). Additionally, other adjustments were made to combine its life marketing operations into a single segment, and to reclassify certain smaller businesses. Prior period segment results have been restated to reflect these changes.
OPERATING SEGMENT INCOME FOR THE
SIX MONTHS ENDED JUNE 30, 2002
--------------------------------------------------------------------------
RETIREMENT SAVINGS AND
LIFE INSURANCE INVESTMENT PRODUCTS
LIFE STABLE VALUE
MARKETING ACQUISITIONS CONTRACTS ANNUITIES
--------- ------------ ------------ ----------
Premiums and policy fees $309,293 $156,171 $ 13,449
Reinsurance ceded (223,143) (35,892)
--------- --------- ---------
Net of reinsurance ceded 86,150 120,279 13,449
Net investment income 101,773 117,511 $121,533 105,465
Realized investment gains (losses) 256 3,238
Other income 29,250 1,073 4,894
--------- --------- --------- ---------
Total revenues 217,173 238,863 121,789 127,046
--------- --------- --------- ---------
Benefits and settlement expenses 123,891 156,176 98,911 87,448
Amortization of deferred policy
acquisition costs 28,297 16,706 1,160 13,677
Other operating expenses 16,618 22,443 1,947 14,025
--------- --------- --------- ---------
Total benefits and expenses 168,806 195,325 102,018 115,150
--------- --------- --------- ---------
Income from continuing operations
before income tax 48,367 43,538 19,771 11,896
SPECIALTY INSURANCE
PRODUCTS
CORPORATE
CREDIT AND TOTAL
PRODUCTS OTHER ADJUSTMENTS CONSOLIDATED
--------- -------- ----------- ------------
Premiums and policy fees $255,768 $28,615 $763,296
Reinsurance ceded (125,087) (10,383) (394,505)
--------- -------- ---------
Net of reinsurance ceded 130,681 18,232 368,791
Net investment income 22,327 28,086 496,695
Realized investment gains (losses) $ 6,721 10,215
Other income 18,782 838 54,837
--------- -------- -------- ---------
Total revenues 171,790 47,156 6,721 930,538
--------- -------- -------- ---------
Benefits and settlement expenses 85,061 17,094 568,581
Amortization of deferred policy
acquisition costs 27,687 810 88,337
Other operating expenses 48,313 26,507 129,853
--------- -------- ---------
Total benefits and expenses 161,061 44,411 786,771
--------- -------- ---------
Income from continuing operations
before income tax 10,729 2,745 143,767
Income tax expense 47,731 47,731
---------
Net income $ 96,036
=========
OPERATING SEGMENT INCOME FOR THE
THREE MONTHS ENDED JUNE 30, 2002
--------------------------------------------------------------------------
RETIREMENT SAVINGS AND
LIFE INSURANCE INVESTMENT PRODUCTS
LIFE STABLE VALUE
MARKETING ACQUISITIONS CONTRACTS ANNUITIES
--------- ------------ ------------ ---------
Premiums and policy fees $159,871 $ 74,807 $ 6,840
Reinsurance ceded (123,128) (17,889)
--------- --------- --------
Net of reinsurance ceded 36,743 56,918 6,840
Net investment income 51,379 58,801 $62,026 53,512
Realized investment gains (losses) (265) 2,856
Other income 14,807 524 2,432
--------- --------- -------- --------
Total revenues 102,929 116,243 61,761 65,640
--------- --------- -------- --------
Benefits and settlement expenses 60,760 76,932 50,082 45,061
Amortization of deferred policy
acquisition costs 12,106 7,797 595 6,683
Other operating expenses 3,208 11,411 1,062 7,024
--------- --------- -------- --------
Total benefits and expenses 76,074 96,140 51,739 58,768
--------- --------- -------- --------
Income from continuing operations
before income tax 26,855 20,103 10,022 6,872
SPECIALTY INSURANCE
PRODUCTS
CORPORATE
CREDIT AND TOTAL
PRODUCTS OTHER ADJUSTMENTS CONSOLIDATED
-------- -------- ----------- ------------
Premiums and policy fees $138,658 $15,761 $395,937
Reinsurance ceded (63,355) (6,766) (211,138)
--------- -------- ---------
Net of reinsurance ceded 75,303 8,995 184,799
Net investment income 11,013 14,959 251,690
Realized investment gains (losses) $11,227 13,818
Other income 10,466 804 29,033
--------- -------- -------- ---------
Total revenues 96,782 24,758 11,227 479,340
--------- -------- -------- ---------
Benefits and settlement expenses 52,726 9,089 294,650
Amortization of deferred policy
acquisition costs 12,848 369 40,398
Other operating expenses 28,585 11,520 62,810
--------- -------- ---------
Total benefits and expenses 94,159 20,978 397,858
--------- -------- ---------
Income from continuing operations
before income tax 2,623 3,780 81,482
Income tax expense 27,052 27,052
----------
Net income $ 54,430
==========
OPERATING SEGMENT INCOME FOR THE
SIX MONTHS ENDED JUNE 30, 2001
---------------------------------------------------------------------------
RETIREMENT SAVINGS AND
LIFE INSURANCE INVESTMENT PRODUCTS
LIFE STABLE VALUE
MARKETING ACQUISITIONS CONTRACTS ANNUITIES
--------- ------------ ------------- ---------
Premiums and policy fees $246,635 $102,355 $14,472
Reinsurance ceded (159,955) (20,348)
--------- --------- --------
Net of reinsurance ceded 86,680 82,007 14,472
Net investment income 84,427 85,564 $129,744 77,919
Realized investment gains (losses) 2,695 24
Other income 31,261 (52) 5,453
--------- --------- --------- --------
Total revenues 202,368 167,519 132,439 97,868
--------- --------- --------- --------
Benefits and settlement expenses 116,319 113,371 110,500 63,536
Amortization of deferred policy
acquisition costs 14,488 7,342 608 11,318
Amortization of goodwill 189
Other operating expenses 29,465 15,211 1,981 14,658
--------- --------- --------- --------
Total benefits and expenses 160,461 135,924 113,089 89,512
--------- --------- --------- --------
Income from continuing operations
before income tax 41,907 31,595 19,350 8,356
SPECIALTY INSURANCE
PRODUCTS
CORPORATE
CREDIT AND TOTAL
PRODUCTS OTHER ADJUSTMENTS CONSOLIDATED
-------- ---------- ----------- ------------
Premiums and policy fees $248,277 $24,403 $636,142
Reinsurance ceded (134,237) (5,865) (320,405)
--------- -------- ---------
Net of reinsurance ceded 114,040 18,538 315,737
Net investment income 23,737 18,084 419,475
Realized investment gains (losses) $(1,148) 1,571
Other income 19,646 1,124 57,432
--------- -------- -------- ---------
Total revenues 157,423 37,746 (1,148) 794,215
--------- -------- -------- ---------
Benefits and settlement expenses 73,604 16,393 493,723
Amortization of deferred policy
acquisition costs 22,501 846 57,103
Amortization of goodwill 1,537 5 1,731
Other operating expenses 42,569 25,424 129,308
--------- -------- ---------
Total benefits and expenses 140,211 42,668 681,865
--------- -------- ---------
Income from continuing operations
before income tax 17,212 (4,922) 112,350
Income tax expense 37,672 37,672
Loss from discontinued operations, net of
income tax (1,891) (1,891)
Cumulative effect of change in accounting
principle, net of income tax (7,593) (7,593)
----------
Net income $ 65,194
==========
OPERATING SEGMENT INCOME FOR THE
THREE MONTHS ENDED JUNE 30, 2001
----------------------------------------------------------------------------
RETIREMENT SAVINGS AND
LIFE INSURANCE INVESTMENT PRODUCTS
LIFE STABLE VALUE
MARKETING ACQUISITIONS CONTRACTS ANNUITIES
--------- ------------ ------------ ---------
Premiums and policy fees $128,737 $51,410 $ 7,127
Reinsurance ceded (92,764) (12,302)
-------- -------- ---------
Net of reinsurance ceded 35,973 39,108 7,127
Net investment income 43,514 44,692 $64,489 40,406
Realized investment gains (losses) 251 (145)
Other income 15,764 (52) 2,736
-------- -------- -------- ---------
Total revenues 95,251 83,748 64,740 50,124
Benefits and settlement expenses 54,124 55,339 55,036 32,492
Amortization of deferred policy
acquisition costs 6,994 2,776 363 5,430
Amortization of goodwill 104
Other operating expenses 10,376 8,889 986 7,424
-------- -------- -------- --------
Total benefits and expenses 71,598 67,004 56,385 45,346
-------- -------- -------- --------
Income from continuing operations
before income tax 23,653 16,744 8,355 4,778
SPECIALTY INSURANCE
PRODUCTS
CORPORATE
CREDIT AND TOTAL
PRODUCTS OTHER ADJUSTMENTS CONSOLIDATED
-------- ------- ----------- ------------
Premiums and policy fees $124,816 $12,507 $324,597
Reinsurance ceded (68,391) (3,232) (176,689)
--------- -------- ---------
Net of reinsurance ceded 56,425 9,275 147,908
Net investment income 11,733 8,136 212,970
Realized investment gains (losses) $(7,626) (7,520)
Other income 9,902 670 29,020
--------- -------- -------- ---------
Total revenues 78,060 18,081 (7,626) 382,378
--------- -------- -------- ---------
Benefits and settlement expenses 34,846 9,203 241,040
Amortization of deferred policy
acquisition costs 13,544 335 29,442
Amortization of goodwill 768 2 874
Other operating expenses 20,078 14,516 62,269
--------- -------- ---------
Total benefits and expenses 69,236 24,056 333,625
--------- -------- ---------
Income from continuing operations
before income tax 8,824 (5,975) 48,753
Income tax expense 15,751 15,751
Loss from discontinued operations, net of
income tax (5,855) (5,855)
----------
Net income $ 27,147
==========
OPERATING SEGMENT ASSETS
JUNE 30, 2002
------------------------------------------------------------------------------
RETIREMENT SAVINGS AND
LIFE INSURANCE INVESTMENT PRODUCTS
LIFE STABLE VALUE
MARKETING ACQUISITIONS CONTRACTS ANNUITIES
----------- ------------ ----------- -----------
Investments and other assets $3,712,328 $4,530,570 $4,028,679 $4,900,170
Deferred policy acquisition costs 941,399 406,271 6,014 138,036
Goodwill 10,354
----------- ----------- ----------- -----------
Total assets $4,664,081 $4,936,841 $4,034,693 $5,038,206
=========== =========== =========== ===========
SPECIALTY INSURANCE
PRODUCTS
CORPORATE
CREDIT AND TOTAL
PRODUCTS OTHER ADJUSTMENTS CONSOLIDATED
---------- ---------- ----------- ------------
Investments and other assets $1,024,814 $1,005,935 $120,912 $19,323,408
Deferred policy acquisition costs 146,301 8,133 1,646,154
Goodwill 36,527 431 47,312
----------- ----------- -------- ------------
Total assets $1,207,642 $1,014,499 $120,912 $21,016,874
=========== =========== ======== ============
OPERATING SEGMENT ASSETS
DECEMBER 31, 2001
-----------------------------------------------------------------------------
RETIREMENT SAVINGS AND
LIFE INSURANCE INVESTMENT PRODUCTS
LIFE STABLE VALUE
MARKETING ACQUISITIONS CONTRACTS ANNUITIES
--------- ------------ ------------- ----------
Investments and other assets $3,433,099 $4,087,470 $3,872,636 $4,507,289
Deferred policy acquisition costs 829,021 418,268 6,375 128,488
Goodwill 10,354
----------- ----------- ----------- -----------
Total assets $4,272,474 $4,505,738 $3,879,011 $4,635,777
=========== =========== =========== ===========
SPECIALTY INSURANCE
PRODUCTS
CORPORATE
CREDIT AND TOTAL
PRODUCTS OTHER ADJUSTMENTS CONSOLIDATED
---------- ---------- ----------- ------------
Investments and other assets $1,060,967 $1,063,373 $113,145 $18,137,979
Deferred policy acquisition costs 142,229 8,302 1,532,683
Goodwill 37,377 431 48,162
----------- ----------- --------- ------------
Total assets $1,240,573 $1,072,106 $113,145 $19,718,824
=========== =========== ========= ============
Financial statements prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) differ in some respects from the statutory accounting practices prescribed or permitted by insurance regulatory authorities. In accordance with statutory reporting practices, at June 30, 2002, and for the six months then ended, the Company’s insurance subsidiaries had combined share-owners’ equity of $722.8 million and a net loss of $49.5 million. The net loss was primarily due to the expensing of a reinsurance-ceding commission to acquire, through coinsurance, a block of policies from Conseco Variable Insurance Company and the policy acquisition costs related to current period sales.
As prescribed by Statement of Financial Accounting Standards (“SFAS”) No. 115 certain investments are recorded at their market values with the resulting net unrealized gains and losses reduced by a related adjustment to deferred policy acquisition costs, net of income tax, recorded as a component of share-owners’ 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 the Company’s operations, reported share-owners’ equity will fluctuate significantly as interest rates change.
The Company’s balance sheets at June 30, 2002 and December 31, 2001, prepared on the basis of reporting investments at amortized cost rather than at market values are as follows:
JUNE 30 DECEMBER 31
------- -----------
Total investments $14,510,228 $13,212,993
Deferred policy acquisition costs 1,680,226 1,553,786
All other assets 4,662,880 4,868,463
------------ ------------
$20,853,334 $19,635,242
============ ============
Deferred income taxes $ 135,145 $ 97,976
All other liabilities 19,295,941 18,191,450
------------ ------------
19,431,086 18,289,426
Share-owners' equity 1,422,248 1,345,816
------------ ------------
$20,853,334 $19,635,242
============ ============
Net income per share - basic is net income divided by the average number of shares of Common Stock outstanding including shares that are issuable under various deferred compensation plans.
Net income per share – diluted is adjusted net income divided by the average number of shares outstanding including all dilutive, potentially issuable shares that are issuable under various stock-based compensation plans and stock purchase contracts.
A reconciliation of net income and adjusted net income, and basic and diluted average shares outstanding for the three month and six month periods ended June 30, 2002 and 2001 is summarized as follows:
RECONCILIATION OF NET INCOME AND
AVERAGE SHARES OUTSTANDING
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------------- -----------------------------
2002 2001 2002 2001
Net income $54,430 $27,147 $96,036 $65,194
Dividends on FELINE PRIDES (1)
------- ------- ------- -------
Adjusted net income $54,430 $27,147 $96,036 $65,194
======= ======= ======= =======
Average shares issued and outstanding 68,656,651 68,548,575 68,647,437 67,511,066
Stock held in trust (60,574) (44,893) (58,193) (42,661)
Issuable under various deferred compensation plans 1,297,255 1,475,097 1,304,148 1,439,209
---------- ---------- ---------- ----------
Average shares outstanding - basic 69,893,332 69,978,779 69,893,392 68,907,614
Stock held in trust 60,574 44,893 58,193 42,661
Stock appreciation rights 285,287 289,134 256,663 230,554
Issuable under various other stock-based compensation plans 247,383 194,592 227,114 236,619
FELINE PRIDES stock purchase contracts (1)
---------- ---------- ---------- ----------
Average shares outstanding - diluted 70,486,576 70,507,398 70,435,362 69,417,448
========== ========== ========== ==========
(1) 995,949 shares excluded because the effect is anti-dilutive
In June 2001, the Financial Accounting Standards Board ("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 Company adopted SFAS No. 142 in the first quarter of 2002. The Company has performed an impairment test and determined that its goodwill was not impaired at January 1, or June 30, 2002.
The following table illustrates adjusted income from continuing operations before cumulative effect of change in accounting principle and basic and diluted earnings per-share as if these pronouncements were adopted as of January 1, 2001:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------- -----------------------
2002 2001 2002 2001
---- ---- ---- ----
Adjusted net income:
Income from continuing operations
before cumulative effect of change
in accounting principle $54,430 $33,002 $96,036 $74,678
Add back amortization of goodwill,
net of tax 568 1,125
------- ------- ------- -------
Adjusted income from continuing
operations before cumulative effect
of change in accounting principle $54,430 $33,570 $96,036 $75,803
======= ======= ======= =======
Basic earnings per share from continuing
operations before cumulative effect of
change in accounting principle $.77 $.47 $1.37 $1.08
Add back amortization of goodwill .01 .02
---- ---- ----- -----
Adjusted $.77 $.48 $1.37 $1.10
==== ==== ===== =====
Diluted earnings per-share from continuing
operations before cumulative effect of
change in accounting principle $.77 $.46 $1.36 $1.07
Add back amortization of goodwill .01 .02
---- ---- ----- -----
Adjusted $.77 $.47 $1.36 $1.09
==== ==== ===== =====
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. The Company does not expect the adoption of SFAS No. 143 to have a material effect on the Company’s financial position or results of operations.
In August 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 sale, 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 operation accounting is applied. The Company adopted SFAS No. 144 on January 1, 2002, and the adoption did not have a material effect on the Company’s financial position or results of operations.
The Company has designated, as a fair value hedge, callable interest rate swaps used to modify the interest characteristics of certain callable Medium-Term Notes and stable value contracts. In assessing hedge effectiveness, the Company excludes the embedded call option’s time value component from each derivative’s total gain or loss. For the three months and six months ended June 30, 2002, total measured ineffectiveness for the fair value hedging relationships and the excluded time value component was insignificant. Both the measured ineffectiveness and the excluded time value component are reported in Realized Investment Gains (Losses) – Derivative Financial Instruments in the Company’s consolidated condensed statements of income.
The Company has not designated any hedging relationships as a cash flow hedge.
The Company 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 as well as certain debt and preferred security obligations of the Company. For the three and six months ended June 30, 2002, the Company recognized total pretax gains of $15.2 million and $14.9 million, respectively, which represents the change in fair value of these derivative instruments.
On its foreign currency swaps, the Company recognized a $53.7 million pretax gain for the first six months of fiscal 2002 and a $63.0 million pretax gain for the quarter while recognizing a $56.8 million foreign exchange pretax loss on the related foreign-currency-denominated stable value contracts for the six month period and a $64.2 million pretax loss for the quarter. The net change 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 change is reflected in Realized Investment Gains (Losses) – Derivative Financial Instruments in the Company’s consolidated condensed statements of income.
The Company 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. For the six months ended June 30, 2002, the Company recognized a $5.9 million pretax gain for the change in the asset swaps’ fair value and recognized a $7.2 million pretax loss to separately record the embedded equity options at fair value. For the quarter, the Company recognized a $2.1 million pretax gain for the change in the asset swaps’ fair value and recognized a $2.7 million pretax loss to separately record embedded equity options at fair value.
The Company has also entered into a total return swap in connection with a portfolio of investment securities managed by the Company for an unrelated party. The Company recognized a $1.0 million pretax loss for the first six months of 2002 for the change in the total return swap’s fair value and a $0.4 million pretax gain for the quarter.
The following table sets forth the Company’s comprehensive income for the periods presented below:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------- ---------------------------
2002 2001 2002 2001
Net income $ 54,430 $27,147 $ 96,036 $ 65,194
Change in net unrealized gains/losses
on investments (net of income tax:
three months: 2002 - $70,887; 2001 - $(20,244)
six months: 2002 - $28,207; 2001 - $25,029) 131,647 (37,596) 52,385 46,483
Reclassification adjustment for amounts
included in net income (net of income tax:
three months: 2002 - $28; 2001 - $288
six months: 2002 - $(222); 2001 - $(242)) 51 535 (412) (452)
Transition adjustment on derivative financial
instruments (net of income tax:
six months: 2001 - $2,127) 0 0 0 3,951
--------- -------- --------- ---------
Comprehensive income $186,128 $(9,914) $148,009 $115,176
========= ======== ========= =========
The following table sets forth supplemental cash flow information for the period presented below:
SIX MONTHS ENDED
JUNE 30
-----------------------------
2002 2001
---- ----
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Redemption of FELINE PRIDES $ 114,997
Acquisition and related reinsurance transactions:
Assets acquired, net of cash $ 358,897 662,918
Liabilities assumed (489,412) (795,202)
---------- ----------
Net $(130,515) $(132,284)
========== ==========
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.
On December 31, 2001, the Company 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. The results of the operations of the Dental Division have been included herein as discontinued operations.
In October 2001, the Company completed the acquisition of Inter-State Assurance Company and First Variable Life Insurance Company. The transactions have been accounted for as purchases, and the results of the transactions have been included in the accompanying financial statements since their effective date.
Summarized below are the consolidated results of operations for the periods presented below, on an unaudited pro forma basis, as if the acquisitions had occurred as of January 1, 2001. 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.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2001
-------------------- -----------------
(UNAUDITED) (UNAUDITED)
Total revenues $405,484 $840,427
Net income 30,072 71,044
Net income per share-basic .43 1.03
Net income per share-diluted .43 1.02
On June 28, 2002, the Company completed its acquisition through coinsurance of a block of traditional life and interest-sensitive life insurance policies from Conseco Variable Insurance Company. In the transaction, the Company received approximately $470 million of statutory reserves and paid a ceding commission of approximately $49.5 million.
Protective Life Corporation is a holding company whose subsidiaries provide financial services through the production, distribution, and administration of insurance and investment products. Founded in 1907, Protective Life Insurance Company is the Company’s principal operating subsidiary.
Unless the context otherwise requires, the “Company” refers to the consolidated group of Protective Life Corporation and its subsidiaries.
The Company operates several business segments each having a strategic focus which can be grouped into three general product categories: life insurance, retirement savings and investment products, and specialty insurance products. The Company’s operating segments are Life Marketing, Acquisitions, Stable Value Contracts, Annuities, and Credit Products. The Company also has an additional business segment referred to as Corporate and Other.
This report includes “forward-looking statements” which express expectations of future events and/or results. All statements based on future expectations rather than on historical facts are forward-looking statements that involve a number of risks and uncertainties, and the Company cannot give assurance that such statements will prove to be correct. Please refer to Exhibit 99 herein for more information about factors which could affect future results.
In the conduct of its business, the Company makes certain assumptions regarding the mortality, persistency, claims, expenses and interest rates, or other factors appropriate to the type of business, it expects to experience in future periods, which are also used to estimate the amounts of deferred policy acquisition costs, policy liabilities and accruals, and various other components of the Company’s balance sheet. The Company’s actual experience, as well as changes in estimates, are used to prepare the Company’s statements of income. The calculations the Company uses to estimate various components of its balance sheet and statement of income are necessarily complex and involve large amounts of data. Assumptions and estimates involve judgment and by their nature are imprecise and subject to changes and revision over time. Accordingly, the Company's results may be affected, positively or negatively, from time to time, by actual results differing from assumptions, by changes in estimates, and by changes arising from implementing more sophisticated administrative systems and procedures that are capable of calculating more precise estimates.
The following discussion and analysis primarily relates to the six months ended June 30, 2002, as it compares to the same period last year. Unless otherwise noted, the general factors discussed also apply to the quarter ended June 30, 2002, as it compares to the same quarter last year. Where needed for a more complete understanding of the Company’s operating results, information related to the quarters ended June 30, 2002, and June 30, 2001, has been provided.
The Company’s results may fluctuate from period to period due to fluctuations in mortality, persistency, claims, expenses, interest rates, and other factors. Therefore, it is management’s opinion that quarterly operating results for an insurance company are not necessarily indicative of results to be achieved in future periods, and that a review of operating results over a longer period is necessary to assess an insurance company’s performance.
The following table sets forth for the periods shown the amount of premiums and policy fees, net of reinsurance (“premiums and policy fees”):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------------- --------------------------
2002 2001 2002 2001
---- ---- ---- ----
(IN THOUSANDS)
Premiums and Policy Fees $184,799 $147,908 $368,791 $315,737
Premiums and policy fees increased $53.1 million or 16.8% in the first six months of 2002 as compared to the first six months of 2001. Premiums and policy fees in the Life Marketing segment decreased $0.5 million in the first six months of 2002 as compared to the same period in 2001 due to a higher amount of reinsurance ceded. Premiums and policy fees in the Acquisitions segment are expected to decline with time (due to the lapsing of policies resulting from death of insureds or terminations of coverage) unless new acquisitions are made. In October 2001, the Company acquired 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. This acquisition resulted in a $33.6 million increase in premium and policy fees. Premiums and policy fees from a January 2001 acquisition increased $6.1 million. Premiums and policy fees from older acquired blocks decreased $1.4 million in the first six months of 2002 as compared to the same period last year. The decrease in premiums and policy fees from the Annuities Segment was $1.0 million. Premiums and policy fees related to the Credit Products segment increased $16.6 million in the first six months of 2002 as compared to the first six months of 2001 due to a lower amount of reinsurance ceded. Premiums and policy fees relating to various health insurance lines in the Corporate and Other segment were unchanged.
The following table sets forth for the periods shown the amount of net investment income:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------- --------------------------
2002 2001 2002 2001
---- ---- ---- ----
(IN THOUSANDS)
Net Investment Income $251,690 $212,970 $496,695 $419,475
Net investment income in the first six months of 2002 was $77.2 million or 18.4% higher than the corresponding period of the preceding year primarily due to an increase in the average amount of invested assets. The October 2001 acquisitions resulted in an increase in investment income of $21.7 million.
The Company generally purchases its investments with the intent to hold to maturity by purchasing investments that match future cash-flow needs. The sales of investments that have occurred have resulted principally from portfolio management decisions to maintain approximate matching of assets and liabilities. Accordingly, the Company has classified all of its investments in fixed maturities, equity securities, and short-term investments as “available for sale”.
The following table sets forth realized investment gains (losses) for the periods shown:
REALIZED INVESTMENT THREE MONTHS ENDED SIX MONTHS ENDED
GAINS/(LOSSES) JUNE 30 JUNE 30
---------------------------------- ----------------------- ------------------
2002 2001 2002 2001
---- ---- ---- ----
(IN THOUSANDS)
Derivative Financial Instruments $13,897 $(6,697) $9,581 $877
All Other Investments (79) (823) 634 694
Realized investment gains related to derivative financial instruments were $9.6 million for the first six months of 2002 compared to gains of $0.9 million in the same period of 2001. The change is largely due to the general decline in interest rates. Realized investment gains related to all other investments were $0.6 million for the first six months of 2002 compared to a gain of $0.7 million for the corresponding period of 2001.
The following table sets forth other income for the periods shown:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------- ---------------------
2002 2001 2002 2001
---- ---- ---- ----
(IN THOUSANDS)
Other Income $29,033 $29,020 $54,837 $57,432
Other income consists primarily of investment advisory fees from variable insurance products, and revenues from unaffiliated parties relating to the Company's broker-dealer subsidiary, direct response businesses, service contract businesses, and the Company's other non-insurance subsidiaries. Other income in the first six months of 2002 was $2.6 million lower than the corresponding period of 2001. In the first six months of 2002, revenues from the Company's broker-dealer subsidiary increased $1.7 million as compared to the same period in 2001. Revenues from the Company's direct response business decreased $4.2 million, while revenues from the service contract businesses decreased $1.1 million over the same period. Other income from all other sources increased $1.0 million in the first six months of 2002 as compared to the first six months of 2001.
The following table sets forth operating income or loss and income or loss before income tax by business segment for the periods shown:
OPERATING INCOME (LOSS) AND INCOME (LOSS) BEFORE INCOME TAX
(IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
----------------------- ------------------------
2002 2001 2002 2001
---- ---- ---- ----
Operating Income (Loss) (1)
Life Insurance
Life Marketing $26,855 $23,653 $ 48,367 $ 41,907
Acquisitions 20,103 16,744 43,538 31,595
Retirement Savings and Investment Products
Stable Value Contracts 10,287 8,104 19,515 16,655
Annuities 4,968 4,778 9,977 8,356
Specialty Insurance Products
Credit Products 2,623 8,824 10,729 17,212
Corporate and Other 3,780 (5,975) 2,745 (4,922)
-------- -------- --------- ---------
Total operating income 68,616 56,128 134,871 110,803
-------- -------- --------- ---------
Realized Investment Gains (Losses)
Stable Value Contracts (265) 251 256 2,695
Annuities 2,856 (145) 3,238 24
Unallocated Realized Investment Gains (Losses) 11,227 (7,626) 6,721 (1,148)
Related Amortization of Deferred Policy
Acquisition Costs
Annuities (952) 145 (1,319) (24)
-------- -------- --------- --------
Total, net 12,866 (7,375) 8,896 1,547
-------- -------- --------- --------
Income (Loss) Before Income Tax
Life Insurance
Life Marketing 26,855 23,653 48,367 41,907
Acquisitions 20,103 16,744 43,538 31,595
Retirement Savings and Investment Products
Stable Value Contracts 10,022 8,355 19,771 19,350
Annuities 6,872 4,778 11,896 8,356
Specialty Insurance Products
Credit Products 2,623 8,824 10,729 17,212
Corporate and Other 3,780 (5,975) 2,745 (4,922)
Unallocated Realized Investment Gains (Losses) 11,227 (7,626) 6,721 (1,148)
-------- -------- --------- ---------
Total income before income tax $81,482 $48,753 $143,767 $112,350
======== ======== ========= =========
(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 pretax operating income was $48.4 million in the first six months of 2002 compared to $41.9 million in the same period of 2001. The increase is primarily attributable to growth through sales. In addition, the segment had a favorable expense variance during the current quarter compared to an unfavorable variance during the same quarter of 2001, which was partially offset by less favorable mortality.
During the second quarter of 2002, the Company discovered that the rates payable for reinsurance with respect to certain universal life policies in its Life Marketing segment were incorrectly entered into the Company’s reinsurance administrative systems in 1991. As a result, the Company has overpaid the reinsurance premiums related to such policies over a period of ten years beginning in 1992. After an internal review, the Company notified the reinsurance companies receiving the overpayments and is seeking return of the amounts overpaid. The Company believes that it is entitled to return of the amounts overpaid. However, the ultimate amount and timing of such recoveries cannot currently be determined, and as a result, no receivable was recorded with respect to such amounts as of June 30, 2002. While no assurance can be given as to the amount or timing of any such recovery, if all amounts the Company believes are due are recovered, the Company would receive reimbursements of approximately $62 million, after the payment of income taxes.
The Company believes that the amounts ultimately recovered will be largely offset by amortization of deferred policy acquisition costs, and that recoveries, net of amortization and income taxes, will be recorded in the periods in which the amounts are determinable. While the Company believes that no prior period was materially misstated and that no operating trends were materially affected as a result, the recovery of such amounts could cause the Company to restate past financial results to increase previously reported net income by amounts that are immaterial in each prior period for which earnings are restated. The Company is unable to determine the proper method of accounting for any such recoveries until the amounts and the timing of the recoveries can be determined.
While the Company believes it is entitled to return of the amounts overpaid, should a significant portion not be recovered, the Company could consequently be required to accelerate the amortization of the segment’s deferred policy acquisition costs.
Pretax operating income from the Acquisitions segment was $43.5 million in the first six months of 2002, an increase of $11.9 million from the first six months of 2001. Earnings from the Inter-State and First Variable acquisitions contributed $7.7 million in the first six months of 2002. Operating income related to a block of business coinsured in early 2001 increased $1.8 million in the first six months of 2002 as compared to the same period in 2001.
The Stable Value Contracts segment had pretax operating income of $19.5 million in the first six months of 2002 as compared to $16.7 million in the corresponding period of 2001. The increase is due to an increase in account balances and a widening of operating spreads.
The Annuities segment’s pretax operating income for the first six months of 2002 was $10.0 million as compared to $8.4 million in the first six months of 2001. The increase reflects the segment’s growth through sales.
The segment’s future results may be negatively affected by the economy. Lower interest rates could negatively affect sales of fixed annuities. Volatile equity markets could negatively affect sales of variable annuities. Declines in the equity markets decrease the fees the segment assesses on variable annuity contracts and increase the cost of providing minimum death benefit guarantees. The segment’s variable annuity products generally contain provisions that guarantee a minimum level of an annuity’s account value at the time of the contract holder’s death. The Company paid approximately $2.0 million of guaranteed minimum death benefits in the first six months of 2002. Sharp or prolonged declines in the equity markets can also accelerate the amortization of deferred policy acquisition costs and, accordingly, reduce reported results in the future.
The Credit Products segment had pretax operating income of $10.7 million in the first six months of 2002 as compared to $17.2 million for the same period in 2001. The decrease was attributable to lower sales volume and negative claims experience in the current period. The segment has also experienced losses in several ancillary lines of business. The Company is taking action to curtail sales in several of these lines, but does not expect improvement in the results of these lines over the next several quarters. Included in the segment’s pretax income for 2002 was $2.7 million of income related to the sale of the inactive charter of a small subsidiary.
The segment has also experienced much higher claims than expected in certain blocks of its vehicle service contract business in recent quarters. Vehicle service contracts represent approximately 40% of the segment’s sales. The Company has raised the rates in its vehicle service contract business in an effort to achieve an appropriate level of profitability in this line of business. The Company is monitoring the level of policy liabilities and accruals established to cover future claims in this line of business. An increase in accruals, and a reduction in the segment’s earnings, could be required in future periods if such claim's trends persist.
Weakness in the overall economy is expected to continue to negatively impact the segment’s sales and may also contribute to higher levels of claims. Lower levels of consumer lending and lower automobile sales could negatively affect the segment’s sales and earnings. Also, the level of claims in this segment generally increases in a slowing economy.
The Corporate and Other segment consists primarily of net investment income on capital, interest expense on all debt, and various other items not associated with the other segments. The segment had pretax operating income of $2.7 million in the first six months of 2002 as compared to a pretax operating loss of $4.9 million in the first six months of 2001. The increase in earnings as compared to the same period last year is primarily due to an increase in participating mortgage loan income and other investment income and a decrease in other operating expenses.
The following table sets forth the effective tax rates for the periods shown:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------- ---------------------
2002 2001 2002 2001
---- ---- ---- ----
Estimated Effective Income Tax Rates 33.2% 32.3% 33.2% 33.5%
The effective income tax rate for the full year of 2001 was approximately 32.7%. Management's estimate of the effective income tax rate for 2002 is approximately 33.2%.
The following table sets forth net income from continuing operations before cumulative effect of change in accounting principle and related per share information for the periods shown:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------ ----------------------
2002 2001 2002 2001
---- ---- ---- ----
Net income from continuing operations before
cumulative effect of change in accounting
principle (in thousands) $54,430 $33,002 $96,036 $74,678
Per share-basic .77 .47 1.37 1.08
Per share-diluted .77 .46 1.36 1.07
Compared to the same period in 2001, net income from continuing operations before cumulative effect of change in accounting principle per share-diluted in the first six months of 2002 increased 27.1%, reflecting improved operating earnings in the Life Marketing, Acquisitions, Stable Value Contracts, Annuities, and Corporate and Other segments and higher realized investment gains partially offset by lower operating results in the Credit Products segment.
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. The Company does not expect the adoption of SFAS No. 143 to have a material effect on the Company’s financial position or results of operations.
In August 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 sale, 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 operation accounting is applied. The Company adopted SFAS No. 144 on January 1, 2002, and the adoption did not have a material effect on the Company’s financial position or results of operations.
With respect to the unaudited consolidated condensed financial information of Protective Life Corporation for the three-month and six-month periods ended June 30, 2002 and 2001. PricewaterhouseCoopers LLP (“PricewaterhouseCoopers”) reported that they have applied limited procedures in accordance with professional standards for a review of such information. However, their separate report dated August 14, 2002 appearing herein, stated that they did not audit and they do not express an opinion on that unaudited consolidated condensed financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers is not subject to the liability provisions of Section 11 of the Securities Act of 1933 for their report on the unaudited consolidated condensed financial information because that report is not a “report” or a “part” of the registration statement prepared or certified by PricewaterhouseCoopers within the meaining of Sections 7 and 11 of the Act.
The Company’s operations usually produce a positive cash flow. This cash flow is used to fund an investment portfolio to finance future benefit payments. Since future benefit payments largely represent medium- and long-term obligations reserved using certain assumed interest rates, the Company’s investments are predominantly in medium- and long-term, fixed-rate investments such as bonds and mortgage loans.
The Company generally purchases its investments with the intent to hold to maturity by purchasing investments that match future cash flow needs. However, the Company may sell any of its investments to maintain proper matching of assets and liabilities. Accordingly, the Company has classified its fixed maturities and certain other securities as “available for sale.”
The Company’s investments in debt and equity securities are reported at market value, and investments in mortgage loans are reported at amortized cost. At June 30, 2002, the fixed maturity investments (bonds and redeemable preferred stocks) had a market value of $11,049.5 million, which is 1.6% above amortized cost of $10,879.1 million. The Company had $2,600.6 million in mortgage loans at June 30, 2002. While the Company’s mortgage loans do not have quoted market values, at June 30, 2002, the Company estimates the market value of its mortgage loans to be $2,778.9 million (using discounted cash flows from the next call date), which is 6.9% above amortized cost. Most of the Company’s mortgage loans have significant prepayment penalties. These assets are invested for terms approximately corresponding to anticipated future benefit payments. Thus, market value fluctuations are not expected to adversely affect liquidity.
For several years, the Company has offered a type of commercial loan under which the Company 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 June 30, 2002, approximately $522.2 million of the Company’s mortgage loans have this participation feature.
At June 30, 2002, delinquent mortgage loans and foreclosed properties were 0.2% of invested assets. Bonds rated less than investment grade were 2.8% of invested assets. The Company does not expect these investments to adversely affect its liquidity or ability to maintain proper matching of assets and liabilities.
Policy loans at June 30, 2002, were $552.0 million, an increase of $30.2 million from December 31, 2001. Policy loan rates are generally in the 4.0% 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, the Company 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 the Company’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 June 30, 2002, the Company had outstanding mortgage loan commitments of $398.7 million.
Many of the Company’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 the Company against investment losses if interest rates are higher at the time of surrender than at the time of issue.
At June 30, 2002, the Company had policy liabilities and accruals of $8.6 billion. The Company’s interest-sensitive life insurance products have a weighted average minimum credited interest rate of approximately 4.5%.
At June 30, 2002, the Company had $4.1 billion of stable value contract account balances and $3.6 billion of annuity account balances.
The Company 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. The Company used interest rate swap contracts, swaptions (options to enter into interest rate swap contracts), caps, and floors to modify the interest characteristics of certain investments, its Senior Notes, Medium-Term Notes, and TOPrS. Swap contracts are also used to alter the effective durations of assets and liabilities. The Company uses 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 the Company to credit and market risk. The Company minimizes its credit risk by entering into transactions with highly rated counterparties. The Company 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.
The Company monitors its use of derivatives in connection with its overall asset/liability management programs and procedures. The Company’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 the Company’s overall interest rate and currency exchange risk management strategies.
The Company’s asset/liability management programs and procedures involve the monitoring of asset and liability durations for various product lines; cash flow testing under various interest rate scenarios; and the continuous rebalancing of assets and liabilities with respect to yield, risk, and cash flow characteristics. It is the Company’s policy to generally maintain asset and liability durations within one half year of one another, although, from time to time, a broader interval may be allowed.
The Company believes its asset/liability management programs and procedures and certain product features provide some degree of protection for the Company against the effects of changes in interest rates under various scenarios. Additionally, the Company believes its asset/liability management programs and procedures provide sufficient liquidity to enable it to fulfill its obligations to pay benefits under its various insurance and deposit contracts. However, the Company’s asset/liability management programs and procedures incorporate assumptions about the relationship between short-term and long-term interest rates (i.e., the slope of the yield curve), relationships between risk-adjusted and risk-free interest rates, market liquidity and other factors, and the effectiveness of the Company’s asset/liability management programs and procedures may be negatively affected whenever actual results differ from those assumptions.
In general terms, the Company’s results are improved when the yield curve is positively sloped (i.e., when long-term interest rates are higher than short-term interest rates), and will be adversely affected by a flat or negatively sloped curve. The yield curve is currently positively sloped, and this has positively affected the Company’s results. A rapid increase in short-term interest rates would negatively affect the Company’s future results.
Approximately 20% of the Company’s liabilities relate to products (primarily whole life insurance) the profitability of which may be affected by changes in interest rates.
Cash outflows related to stable value contracts (primarily maturing contracts, scheduled interest payments and expected withdrawals) were approximately $735 million during 2001. Cash outflows related to stable value contracts are estimated to be approximately $1,086 million in 2002. At June 30, 2002, the Company had $112.8 million of stable value contracts which may be terminated by the contract holder upon ninety days notice. The Company’s asset/liability management programs and procedures take into account maturing contracts and expected withdrawals. Accordingly, the Company currently expects to have sufficient sources of liquidity to pay expected stable value contract related cash outflows.
The life insurance subsidiaries were committed at June 30, 2002, to fund mortgage loans in the amount of $398.7 million. The Company’s subsidiaries held $288.7 million in cash and short-term investments at June 30, 2002. The Company had an additional $12.6 million in cash and short-term investments available for general corporate purposes.
While the Company generally anticipates that the cash flows of its subsidiaries will be sufficient to meet their investment commitments and operating cash needs, the Company recognizes that investment commitments scheduled to be funded may, from time to time, exceed the funds then available. Therefore, the Company has arranged sources of credit for its insurance subsidiaries to use when needed. The Company expects that the rate received on its investments will equal or exceed its borrowing rate. Additionally, the Company may from time to time sell short-duration stable value products to complement its cash management practices.
At June 30, 2002, Protective Life Corporation had borrowed $10.5 million under its $200.0 million revolving lines of credit.
The Company’s cash flow is dependent on cash dividends and payments on surplus notes from its subsidiaries, revenues from investment, data processing, legal and management services rendered to the subsidiaries, and investment income. At December 31, 2001, approximately $282.1 million of consolidated share-owners’ equity, excluding net unrealized investment gains and losses, represented net assets of the Company’s insurance subsidiaries that cannot be transferred to the Company. In addition, the states in which the Company’s insurance subsidiaries are domiciled impose certain restrictions on the insurance subsidiaries’ ability to pay dividends to the Company.
The Company plans to retain substantial portions of the earnings of its life insurance subsidiaries in those companies primarily to support their future growth. The Company’s cash disbursements have from time to time exceeded its cash receipts, and these shortfalls have been funded through various external financings. Therefore, the Company may, from time to time, require additional external financing.
To give the Company flexibility in connection with future acquisitions and other growth opportunities, the Company has registered debt securities, preferred and common stock, and stock purchase contracts of the Company, and additional preferred securities of special purpose finance subsidiaries under the Securities Act of 1933 on a delayed (or shelf) basis.
A life insurance company’s statutory capital is computed according to rules prescribed by the National Association of Insurance Commissioners (“NAIC”), as modified by the insurance company’s state of domicile. Statutory accounting rules are different from GAAP and are intended to reflect a more conservative view by, for example, requiring immediate expensing of policy acquisition costs. The NAIC’s risk-based capital requirements require insurance companies to calculate and report information under a risk-based capital formula. The achievement of long-term growth will require growth in the statutory capital of the Company’s insurance subsidiaries. The subsidiaries may secure additional statutory capital through various sources, such as retained statutory earnings or equity contributions by the Company.
The table below sets forth future maturities of debt, guaranteed preferred beneficial interests in the Company’s subordinated debentures (guaranteed preferred beneficial interests), and stable value contracts.
(IN THOUSANDS) 2002 2003-2004 2005-2006 After 2006
-------------- ---- --------- --------- ----------
Debt $ 175,000 $ 10,500 $194,231
Guaranteed preferred beneficial interests 175,000
Stable value contracts $562,857 1,930,342 1,211,862 373,702
Under insurance guaranty fund laws in most states, insurance companies doing business in a participating state can be assessed up to prescribed limits for policyholder losses incurred by insolvent companies. The Company does not currently believe that any such assessments will be materially different from amounts already reflected in the financial statements.
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 other persons with whom the insurer does business, and other matters. Increasingly these lawsuits have resulted in the award of substantial judgments that are disproportionate to the actual damages, including material amounts of punitive and non-economic compensatory damages. In some states, juries, judges, and arbitrators have substantial discretion in awarding punitive and non-economic compensatory damages, which creates the potential for unpredictable material adverse judgments or awards in any given lawsuit or arbitration. Arbitration awards are subject to very little appellate review. In addition, in some class action and other lawsuits, companies have made material settlement payments. The Company, like other financial services companies, in the ordinary course of business, is involved in such litigation or, alternatively, in arbitration. Although the outcome of any such litigation or arbitration cannot be predicted, the Company believes that at the present time there are no pending or threatened lawsuits that are reasonably likely to have a material adverse effect on the financial position, results of operations, or liquidity of the Company.
The Company and its subsidiaries from time to time are subject to examination, review, and investigation by regulatory authorities, including insurance and securities regulators, and tax authorities. Among other actions, a state insurance department is currently investigating the Company's management of a small block of the health insurance business in a discontinued line of business, apparently as part of a larger inquiry related to the overall health insurance industry. Although the Company cannot predict what actions may be taken by any regulatory authority, the Company does not believe that this or any other matter currently under examination, review or investigation or any other pending or threatened regulatory or tax-related action with respect to the Company or any of its subsidiaries is reasonably likely to have a material effect on the Company.
Legislation has been enacted that permits commercial banks, insurance companies and investment banks to combine, provided certain requirements are satisfied. While the Company cannot predict the impact of this legislation, it could cause the Company to experience increased competition as larger, potentially more efficient organizations emerge from such combinations.
Legislation has been enacted that would, over time, reduce and ultimately eliminate the estate tax. Life insurance products are often used to fund estate tax obligations. If the estate tax is significantly reduced or eliminated, the demand for certain life insurance products would be adversely affected.
The Company’s Life Marketing segment is currently developing and implementing a more sophisticated administrative system capable of calculating more precise estimates of the segment’s deferred policy acquisition costs, policy liabilities and accruals, and various other components of the segment’s balance sheet. The segment's future results may be affected, positively or negatively, by changes in such estimates arising from the implementation of this system.
The tragic events of September 11, 2001, had little direct effect on the Company’s operations or financial strength. However, many of the Company’s businesses and the performance of the Company’s investment portfolio are affected by general economic conditions, therefore a downturn in the general economy could have a negative effect on the Company’s operations and financial strength.
In recent years, most financial services companies, including the Company, experienced a decrease in the market price of their common stock. Although the Company believes it has sufficient capital to fund its immediate growth and capital needs, a lower stock price may limit the Company’s ability to raise capital to fund other growth opportunities and acquisitions.
There has been no material change from the disclosures in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Share Owners was held on May 6, 2002. Shares entitled to vote at the Annual Meeting totaled 68,643,043 of which 56,338,402 shares were represented. The number of shares entitled to vote was determined as of March 8, 2002.
At the Annual Meeting the following directors were elected. The number of shares cast for and authorization withheld for each nominee is shown below.
AUTHORIZATION
FOR WITHHELD
---------- ---------
William J. Cabaniss, Jr. 55,321,332 1,017,070
Drayton Nabers, Jr. 55,984,337 354,065
John J. McMahon, Jr. 55,981,667 356,735
A. W. Dahlberg 55,984,112 354,290
James S. M. French 55,321,831 1,016,571
Robert A. Yellowlees 55,984,702 353,700
John D. Johns 55,984,202 354,200
Donald M. James 55,325,639 1,012,763
J. Gary Cooper 55,296,996 1,041,406
H. Corbin Day 55,326,469 1,011,933
W. Michael Warren, Jr. 55,981,944 356,458
Susan Molinari 55,914,187 424,215
At the Annual Meeting, share owners also approved two proposals. The first proposal was to approve the Company’s Annual Incentive Plan. Shares voting for this proposal were 54,443,076, shares voting against were 1,678,085, and shares abstaining were 217,231.
Additionally, share owners approved a proposal to ratify the appointment by the Board of Directors of PricewaterhouseCoopers LLP as independent public accountants for the Company and its subsidiaries for 2002. Shares voting for this proposal were 53,885,641, shares voting against were 2,371,405, and shares abstaining were 81,357.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 15
(b) Exhibit 99 - Safe Harbor for Forward-Looking Statements
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Protective Life Corporation | |||
|---|---|---|---|
| Date: | August 14, 2002 | /s/ Jerry W. Defoor | |
| Jerry W. DeFoor | |||
| Vice President and Controller | |||
| and Chief Accounting Officer | |||
| (Duly authrorized officer) |