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FORM 10-Q
____________________

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
 
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2005
 
OR
 
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from __ to __
 
Commission File Number 333-42425
 
Protective Life and Annuity Insurance Company
(Exact name of registrant as specified in its charter)
 
Alabama
(State or other jurisdiction of
incorporation or organization)
 
63-0761690
(IRS Employer Identification Number)
 
2801 Highway 280 South
Birmingham, Alabama 35223
(Address of principal executive offices and zip code)
 
(205) 268-1000
(Registrant's telephone number, including area code)
 
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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
 
Number of shares of Common Stock, $10.00 par value, outstanding as of May 11, 2004: 250,000 shares.
 
The registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format pursuant to General Instruction H(2).
 


PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
Quarterly Report on Form 10-Q
For Quarter Ended March 31, 2005
 
INDEX
 
 
Page
Part I. Financial Information:
  
Item 1. Financial Statements (unaudited):
  
Report of Independent Registered Public Accounting Firm
2
 
Condensed Statements of Income for the Three Months
  
ended March 31, 2005 and 2004
3
 
Condensed Balance Sheets as of March 31, 2005
  
and December 31, 2004
4
 
Condensed Statements of Cash Flows for the
  
three months ended March 31, 2005 and 2004
5
 
Notes to Condensed Financial Statements
 
6
   
Item 2. Management’s Narrative Analysis of the Results of Operations
11
Item 4. Controls and Procedures
14
   
Part II. Other Information:
  
Item 6. Exhibits
15
   
Signature 
16
   
   
   



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Directors and Share Owners
Protective Life and Annuity Insurance Company

We have reviewed the accompanying condensed balance sheet of Protective Life and Annuity Insurance Company as of March 31, 2005, and the related condensed statements of income and cash flows  for each of the three-month periods ended March 31, 2005 and 2004 .  These interim financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, 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 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 the standards of the Public Company Accounting Oversight Board (United States), the balance sheet as of December 31, 2004 and the related statements of income, share-owners’ equity and cash flows for the year then ended (not presented herein), and in our report dated March 30, 2005, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying condensed balance sheet as of December 31, 2004, is fairly stated in all material respects in relation to the balance sheet from which it has been derived.
 

/s/PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Birmingham, Alabama
May 13, 2005


 
 





PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
CONDENSED STATEMENTS OF INCOME
(Unaudited)


   
Three Months Ended
   
March 31
     
2005
2004

REVENUES
          
Premiums and policy fees
  
$
14,631,801
  
$
16,549,566
  
Reinsurance ceded
    
(8,754,119
)
  
(10,350,957
)
Premiums and policy fees, net of reinsurance ceded
    
5,877,682
    
6,198,609
  
Net investment income
    
9,874,639
    
9,933,930
  
Realized investment gains (losses)
    
(351,403
)
  
240,458
  
Other income
   
(898
)
  
13,054
  
     
15,400,020
    
16,386,051
  
BENEFITS AND EXPENSES
Benefits and settlement expenses
(net of reinsurance ceded:
three months: 2005 - $6,180,228; 2004 - $6,585,056)
    
6,644,573
    
7,356,998
  
Amortization of deferred policy acquisition costs
    
2,076,066
    
1,703,843
  
Other operating expenses (net of reinsurance ceded:
three months: 2005 - $374,645; 2004 - $(20,278))
    
1,694,135
    
2,286,626
  
     
10,414,774
    
11,347,467
  
INCOME BEFORE INCOME TAX
    
4,985,246
    
5,038,584
  
Income tax expense
    
1,779,109
    
1,758,494
  
NET INCOME
  
$
3,206,137
  
$
3,280,090
  


 

See notes to condensed financial statements

 
 

PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
CONDENSED BALANCE SHEETS
(Unaudited)

 
March 31
December 31
 
2005
2004

ASSETS
Investments:
Fixed maturities, at market
(amortized cost: 2005 - $585,270,534; 2004 - $578,812,588)
  
$
625,519,208
  
$
625,095,231
  
Mortgage loans on real estate
    
1,123,237
    
1,177,521
  
Policy loans
    
51,954,737
    
52,994,451
  
Short-term investments
    
6,926,613
    
10
  
Total investments
    
685,523,795
    
679,267,213
  
Cash
    
0
    
10,337,198
  
Accrued investment income
    
9,511,259
    
10,825,632
  
Accounts and premiums receivable, net of allowance
for uncollectible amounts
    
554,127
    
396,654
  
Reinsurance receivables
    
39,377,284
    
43,363,998
  
Deferred policy acquisition costs
    
93,538,197
    
93,107,390
  
Other assets
    
12,522
    
13,027
  
Assets related to separate accounts
Variable Annuity
    
10,194,210
    
10,629,080
  
Total assets
  
$
838,711,394
  
$
847,940,192
  
LIABILITIES
Policy liabilities and accruals:
Future policy benefits and claims
  
$
483,512,540
  
$
486,995,573
  
Unearned premiums
    
6,522,976
    
7,513,955
  
Total policy liabilities and accruals
    
490,035,516
    
494,509,528
  
Annuity account balances
    
59,653,806
    
59,989,579
  
Other policyholders' funds
    
2,822,136
    
2,765,727
  
Funds held-coinsurance
    
21,656,743
    
25,713,359
  
Other liabilities
    
8,530,670
    
8,736,280
  
Accrued income taxes
    
890,803
    
(529,937
)
Deferred income taxes
    
40,266,261
    
41,614,693
  
Liabilities related to separate accounts
Variable Annuity
    
10,194,210
    
10,629,080
  
Total liabilities
    
634,050,145
    
643,428,309
  
COMMITMENTS AND CONTINGENT LIABILITIES - NOTE 2
SHARE-OWNERS' EQUITY
Preferred Stock, $1.00 par value, shares authorized and issued: 2,000
    
2,000
    
2,000
  
Common Stock, $10.00 par value,
shares authorized: 500,000
shares issued and outstanding: 250,000
    
2,500,000
    
2,500,000
  
Additional paid-in capital
    
171,386,324
    
171,386,324
  
Retained earnings
    
10,868,520
    
7,662,382
  
Accumulated other comprehensive income:
Net unrealized gains on investments (net of income tax:
2005 - $10,717,757; 2004 - $12,363,711)
    
19,904,405
    
22,961,177
  
     
204,661,249
    
204,511,883
  
   
$
838,711,394
  
$
847,940,192
  

 
See notes to condensed financial statements

 
 


PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)

 
Three Months Ended
 
March 31
 
2005
2004

CASH FLOWS FROM OPERATING ACTIVITIES
Net income
  
$
3,206,137
  
$
3,280,090
  
Adjustments to reconcile net income to net cash used in operating activities:
Realized investment (gains) losses
    
351,403
    
(240,458
)
Amortization of deferred policy acquisition costs
    
2,076,066
    
1,703,843
  
Capitalization of deferred policy acquisition costs
    
(1,157,821
)
  
(739,930
)
Deferred income tax
    
297,522
    
(95,066
)
Accrued income tax
    
1,420,740
    
1,853,560
  
Interest credited to universal life and investment products
    
4,945,539
    
5,093,586
  
Policy fees assessed on universal life and investment products
    
(8,187,992
)
  
(8,423,342
)
Change in accrued investment income and other receivables
    
5,143,614
    
7,312,122
  
Change in policy liabilities and other policyholders' funds of traditional
life and health products
    
(4,005,922
)
  
(9,342,727
)
Change in funds held-coinsurance
    
(4,056,616
)
  
(6,781,391
)
Change in other liabilities
    
(205,610
)
  
1,011,439
  
Other, net
    
10,386
    
1,378
  
Net cash used in operating activities
    
(162,554
)
  
(5,366,896
)
CASH FLOWS FROM INVESTING ACTIVITIES
Investments available for sale, net of short-term investments:
Maturities and principal reductions of investments
    
7,378,761
    
13,497,992
  
Sale of investments
    
2,697,500
    
7,208,363
  
Cost of investments acquired
    
(16,913,300
)
  
(17,833,197
)
Change in mortgage loans, net
    
54,284
    
51,600
  
Change in policy loans, net
    
1,039,714
    
747,693
  
Change in short-term investments, net
    
(6,926,603
)
  
(2,083
)
Net cash (used in) provided by investing activities
    
(12,669,644
)
  
3,670,368
  
CASH FLOWS FROM FINANCING ACTIVITIES
Investment product deposits and change in universal life deposits
    
5,558,363
    
6,017,531
  
Investment product withdrawals
    
(3,063,363
)
  
(1,911,373
)
Net cash provided by financing activities
    
2,495,000
    
4,106,158
  
CHANGE IN CASH
    
(10,337,198
)
  
2,409,630
  
CASH AT BEGINNING OF PERIOD
    
10,337,198
    
13,052,781
  
CASH AT END OF PERIOD
  
$
0
  
$
15,462,411
  

 

See notes to condensed financial statements


 
 


PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)


NOTE 1 - BASIS OF PRESENTATION

The accompanying unaudited condensed financial statements of Protective Life and Annuity Insurance Company (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America  (“GAAP”) 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 GAAP 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 three-month period ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. For further information, refer to the financial statements and notes thereto included in the Company's annual report on  Form 10-K for the year ended December 31, 2004.

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 or share-owners' equity.

All outstanding shares of the Company’s common stock are owned by Protective Life Insurance Company (“Protective”), which is a wholly owned subsidiary of Protective Life Corporation (“PLC”). All outstanding shares of the Company’s preferred stock are owned by PLC.

With respect to the unaudited condensed financial information of the Company for the three-month periods ended March 31, 2005 and 2004, 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 May 13, 2005, appearing herein, stated that they did not audit and they do not express an opinion on that unaudited 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 condensed financial information because that report is not a "report" or a "part" of a registration statement prepared or certified by PricewaterhouseCoopers into which this Form 10-Q may be incorporated by reference within the meaning of Sections 7 and 11 of the Act.

NOTE 2 - COMMITMENTS AND CONTINGENT LIABILITIES

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 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 limited 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 and 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.

NOTE 3 - OPERATING SEGMENTS

PLC, through its subsidiaries, operates several business segments each having a strategic focus. An operating segment is generally distinguished by products and/or channels of distribution. A brief description of each segment in which the Company operates follows:

Life Marketing. The Company became involved with PLC’s Life Marketing segment beginning in 2002. PLC’s Life Marketing segment markets level premium term and term-like insurance, universal life, variable universal life and “bank owned life insurance”  (BOLI) products on a national basis primarily through networks of independent insurance agents and brokers, and in the BOLI market.

Acquisitions. 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.

Annuities. The Annuities segment manufactures, sells, and supports fixed annuity products. The Annuities segment also supports variable annuity products sold in prior periods. These products are primarily sold through stockbrokers, but are also sold through financial institutions and independent insurance agents and brokers.

Asset Protection. The Asset Protection segment markets extended service contracts and credit life and disability insurance to protect consumers’ investments in automobiles and watercraft.

The Company has an additional segment herein referred to as Corporate and Other. The Corporate and Other segment primarily consists of net investment income and expenses not attributable to the segments above (including net investment income on unallocated capital and interest on all debt).

The Company uses the same accounting policies and procedures to measure segment operating income and assets as it uses to measure its net income and assets. Segment operating income is generally income before income tax, adjusted to exclude net realized investment gains and losses. Segment operating income represents the basis on which the performance of the Company’s business is assessed by management. 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. Assets are allocated based on statutory policy liabilities and deferred policy acquisition costs directly attributable to each segment.

There are no significant intersegment transactions.

The following tables sets forth total revenue by segment, segment operating income, and assets for the period shown. Asset adjustments represent the inclusion of assets related to discontinued operations.

   
Three Months Ended
March 31
  
   
2005
  
2004
  
Total Revenue
          
Life Marketing
  
$
332,006
  
$
126,969
  
Acquisitions
    
11,922,829
    
12,408,386
  
Annuities
    
1,072,912
    
1,247,379
  
Asset Protection
    
880,403
    
995,854
  
Corporate and Other
    
1,191,870
    
1,607,463
  
   
$
15,400,020
  
$
16,386,051
  


   
Three Months Ended
March 31
  
   
2005
  
2004
  
Segment Operating Income
          
Life Marketing
  
$
285,415
  
$
233,388
  
Acquisitions
    
2,986,585
    
2,787,410
  
Annuities
    
60,911
    
6,624
  
Asset Protection
    
465,033
    
225,063
  
Corporate and Other
    
1,538,705
    
1,545,641
  
Total segment operating income
    
5,336,649
    
4,798,126
  
               
Add back: realized investment gains (losses)
    
(351,403
)
  
240,458
  
Income before income tax
    
4,985,246
    
5,038,584
  
Income tax expense
    
1,779,109
    
1,758,494
  
Net income
  
$
3,206,137
  
$
3,280,090
  



 
 

Operating Segment Assets
March 31, 2005
   
Life
Marketing
  
Acquisitions
  
Annuities
  
               
Investments and other assets
  
$
8,895,508
  
$
546,174,168
  
$
58,513,051
  
Deferred policy acquisition costs
    
4,500,271
    
85,837,841
    
2,020,053
  
Total assets
  
$
13,395,779
  
$
632,012,009
  
$
60,533,104
  


   
Asset
Protection
  
Corporate
and Other
  
Adjustments
  
Total
Consolidated
  
                   
Investments and other assets
  
$
19,769,692
  
$
111,700,963
  
$
119,815
  
$
745,173,197
  
Deferred policy acquisition costs
    
1,180,032
                
93,538,197
  
Total assets
  
$
20,949,724
  
$
111,700,963
  
$
119,815
  
$
838,711,394
  



Operating Segment Assets
December 31, 2004
   
Life
Marketing
  
Acquisitions
  
Annuities
  
               
Investments and other assets
  
$
8,440,192
  
$
558,422,751
  
$
59,057,983
  
Deferred policy acquisition costs
    
4,094,472
    
85,663,856
    
2,090,306
  
Total assets
  
$
12,534,664
  
$
644,086,607
  
$
61,148,289
  


   
Asset
Protection
  
Corporate
and Other
  
Adjustments
  
Total
Consolidated
  
                   
Investments and other assets
  
$
23,408,930
  
$
105,382,771
  
$
120,175
  
$
754,832,802
  
Deferred policy acquisition costs
    
1,258,756
                
93,107,390
  
Total assets
  
$
24,667,686
  
$
105,382,771
  
$
120,175
  
$
847,940,192
  


NOTE 4 - STATUTORY REPORTING PRACTICES

Financial statements prepared in conformity with GAAP differ in some respects from the statutory accounting practices prescribed or permitted by insurance regulatory authorities. In accordance with statutory reporting practices, at March 31, 2005, and for the three months then ended, the Company had capital and surplus of $110.2 million and net income of $4.1 million. At March 31, 2005, the asset valuation reserve held by the Company was $4.8 million.


 
 

NOTE 5 - COMPREHENSIVE INCOME

The following table sets forth the Company’s comprehensive income for the periods shown:

   
Three Months Ended
March 31
  
   
2005
  
2004
  
           
Net Income
  
$
3,206,137
  
$
3,280,090
  
Change in net unrealized gains/losses
on investments (net of income tax:
three months: 2005 - $(1,768,945); 2004 - $4,393,931)
    
(3,285,184
)
  
8,160,157
  
Reclassification adjustment for amounts
included in net income (net of income tax:
three months: 2005 - $122,991; 2004 - $(84,160))
    
228,412
    
(156,298
)
Comprehensive income
  
$
149,365
  
$
11,283,949
  



 
 

ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS


Protective Life and Annuity Insurance Company ("the Company"), a stock life insurance company, was founded in 1978. Since 1983, all outstanding shares of the Company’s common stock have been owned by Protective Life Insurance Company (“Protective”), which 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 under the symbol "PL". All outstanding shares of the Company’s preferred stock are owned by PLC. The Company is authorized to transact insurance business, as an insurance company or a reinsurance company, in 49 states, including New York.

In accordance with General Instruction H(2)(a), the Company includes the following analysis with the reduced disclosure format.

For a more complete understanding of the Company's business and its current period results, please read the following Management's Narrative Analysis of the Results of Operations in conjunction with the Company's latest annual report on Form 10-K and other filings with the SEC.

PLC, through its subsidiaries, provides financial services through the production, distribution, and administration of insurance and investment products. PLC, through its subsidiaries, operates several business segments each having a strategic focus. An operating segment is generally distinguished by products and/or channels of distribution. PLC periodically evaluates its operating segments in light of the segment reporting requirements prescribed by SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”, and makes adjustments to its segment reporting as needed. PLC’s operating segments are Life Marketing, Acquisitions, Stable Value Products, Annuities and Asset Protection. PLC has an additional segment referred to as Corporate and Other.

The Company, since it is licensed in the State of New York, is the entity through which PLC markets, distributes, and services insurance and annuity products in New York. As of March 31, 2005, the Company was involved in the businesses of four of PLC’s operating segments: Life Marketing, Acquisitions, Asset Protection,  Annuities and  Corporate and Other.

Protective has entered into an intercompany guaranty agreement, enforceable by the Company or its successors, whereby Protective has guaranteed the Company’s payment of claims made by the holders of Company policies according to the terms of such policies. The guarantee will remain in force until the earlier of (a) when the Company achieves a claims-paying rating equal to or better than Protective without the benefit of any intercompany guaranty agreement or (b) 90 days after the guaranty agreement is revoked by written instrument; provided, however, even after any revocation or termination by such notice, the guarantee shall remain effective as to policies issued during the existence of the guaranty agreement.

This report reviews the Company's financial condition and results of operations including its liquidity and capital resources. Historical information is presented and discussed. Where appropriate, factors that may affect future financial performance are also identified and discussed. Certain statements made in this report include "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include any statement that may predict, forecast, indicate or imply future results, performance or achievements instead of historical facts and may contain words like "believe," "expect," "estimate," "project," "budget," "forecast," "anticipate," "plan," "will," "shall," “may,” and other words, phrases, or expressions with similar meanings. Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from the results contained in the forward-looking statements, and the Company cannot give assurances that such statements will prove to be correct. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Please refer to Exhibit 99, incorporated by reference herein, for more information about factors which could affect future results.

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.

Revenues

The following table sets forth revenues by source for the periods shown:

   
Three Months Ended
March 31
  
   
2005
  
2004
  
           
Premiums and policy fees, net of reinsurance
  
$
5,877,682
  
$
6,198,609
  
Net investment income
    
9,874,639
    
9,933,930
  
Realized investment gains (losses)
    
(351,403
)
  
240,458
  
Other income (loss)
    
(898
)
  
13,054
  
   
$
15,400,020
  
$
16,386,051
  


Premiums and policy fees, net of reinsurance (“premiums and policy fees”) decreased $0.3 million or 5.2% in the first three months of 2005 from the first three months of 2004. Premiums and policy fees in the Acquisitions Division are expected to decline with time unless new acquisitions are made. No acquisitions were made in this Division in 2004 or the first three months of 2005, therefore decreases in older acquired policies resulted in a decrease of $0.4 million in the first three months of 2005 as compared with the first three months of 2004. The Asset Protection segment had a decrease of $0.1 million in premiums and policy fees in the first three months of 2005 compared to the same period of 2004. Premiums and policy fees in the Annuities segment remained relatively flat in the first three months of 2005 as compared to 2004, while premiums and policy fees in the Life Marketing segment increased $0.2 million for the same period.

Net investment income in the first three months of 2005 remained relatively unchanged from the corresponding period of the preceding year. The percentage earned on average cash and investments was 5.9% in the first three months of 2005 compared to 5.5% in the same period of 2004.

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 generally result from portfolio management decisions to maintain proper matching of assets and liabilities. Accordingly, the Company has classified its fixed maturities and certain other securities as "available for sale."

Realized investment losses were $0.4 million in the first three months of 2005 compared to realized investment gains of $0.2 million in the first three months of 2004. During the first three months of 2005, the Company recorded no other-than-temporary impairments on its investments as compared to $0.3 million in the first three months of 2004.

 
 



Each quarter the Company reviews investments with material unrealized losses and tests for other-than-temporary impairments. Management analyzes various factors to determine if any specific other-than-temporary asset impairments exist. Once a determination has been made that a specific other-than-temporary impairment exists, a realized loss is recognized and the cost basis of the impaired asset is adjusted to its fair value. An other-than-temporary impairment loss is recognized based upon all relevant facts and circumstances for each investment. With respect to unrealized losses due to issuer-specific events, the Company considers the creditworthiness and financial performance of the issuer and other available information. With respect to unrealized losses that are not due to issuer-specific events, such as losses due to interest rate fluctuations, general market conditions or industry-related events, the Company considers its intent and ability to hold the investment to allow for a market recovery or to maturity together with an assessment of the likelihood of full recovery.

Income Before Income Tax and Segment Operating Income

In the following discussion, segment operating income is defined as income before income tax excluding net realized investment gains and losses and related amortization of deferred policy acquisition costs  (DAC). Management believes that segment operating income provides relevant and useful information to investors, as it represents the basis on which the performance of the Company’s business is internally assessed. Although the items excluded from segment operating may be significant components in understanding and assessing the Company’s overall financial performance, management believes that segment operation income enhances an investor’s understanding of the Company’s results of operations. Note that the Company’s segment operating income measures may not be comparable to similarly titled measures reported by other companies.

The following table sets forth a summary of results and reconciles segment operating income to net income:

   
Three Months Ended
March 31
      
   
2005
  
2004
  
Change
  
Segment Operating Income
              
Life Marketing
  
$
285,415
  
$
233,388
    
22.3
%
Acquisitions
    
2,986,585
    
2,787,410
    
7.1
  
Annuities
    
60,911
    
6,624
    
819.6
  
Asset Protection
    
465,033
    
225,063
    
106.6
  
Corporate and Other
    
1,538,705
    
1,545,641
    
(0.4
)
     
5,336,649
    
4,798,126
        
                     
Realized investment gains (losses) - investments
    
(351,403
)
  
240,458
        
Income tax expense
    
(1,779,109
)
  
(1,758,494
)
      
Net income
  
$
3,206,137
  
$
3,280,090
    
(2.3
)


Net income for the first quarter of 2005 reflects strong growth in segment operating income, offset by lower net realized investment gains compared to the first quarter of 2004. Segment operating income for the first three months of 2005 increased 11.2% from the same period in 2004, while the Company recorded net realized investment losses of $0.4  million in the first quarter of 2005 compared to net realized investment gains of $0.2  million in the first quarter of 2005. Life Marketing’s operating income increased 22.3% from the first quarter of 2004, reflecting continued growth in life insurance in-force through new sales. The Acquisitions segment’s earnings for the quarter increased 7.1% primarily due to a 17.1% reduction in other operating expenses, partially offset by a 3.9% decline in revenues due to the normal runoff of the segment’s previously acquired blocks of business. Earnings from the Acquisitions segment are 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. There were no new acquisitions made in 2004 or in the first three months of 2005. Improvement in the equity markets and higher sales contributed to the increase in the Annuities segment’s earnings. Asset Protection segment operating income increased significantly over the first quarter of 2004, primarily due to improvements in all of the segment’s core product lines. The Corporate and Other segment consists of net investment income and expenses not identified with the preceding business segments. Operating income for the Corporate and Other segment for the first quarter of 2005 remained relatively unchanged from the same quarter of 2004.

Income Taxes Expense

The following table sets forth the effective tax rates for the periods shown:

   
Three Months Ended
March 31
  
   
2005
  
2004
  
           
Effective Income Tax Rates
    
35.7
%
  
34.9
%


The effective income tax rate for the full year of 2004 was 35.2%. Management's estimate of the effective income tax rate for the full year of 2005 is approximately 35.7%.

Item 4. Controls and Procedures
 
 
 
(a)
Disclosure controls and procedures

Under the direction of our President (Principal Executive Officer) and Chief Financial Officer, we evaluated our disclosure controls and procedures and concluded that our disclosure controls and procedures were effective as of March 31, 2005. It should be noted that any system of controls, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of any control system is based in part upon certain judgments, including the costs and benefits of controls and the likelihood of future events. Because of these and other inherent limitations of control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within the Company have been detected.

(b)  
Changes in internal control over financial reporting

No significant changes in our internal control over financial reporting occurred during the quarter ended March 31, 2005, that have materially affected, or is reasonably likely to materially affect, such internal control over financial reporting. Our internal controls exist within a dynamic environment and the Company continually strives to improve its internal controls and procedures to enhance the quality of its financial reporting.



 
 

PART II


Item 6. Exhibits

(a)  
Exhibit 31(a) - Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 31(b) - - Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 32(a) - - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 32(b) - - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 99 - - Safe Harbor for Forward-Looking Statements.



 
 

SIGNATURE


Pursuant to the requirements 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.


 
Protective Life and Annuity Insurance Company
   
   
   
Date: May 13, 2005
  
 
/s/ Steven G. Walker
 
Steven G. Walker
 
Senior Vice President, Controller
 
and Chief Accounting Officer
 
(Duly authorized officer)