| ALABAMA | 63-0761690 | ||
|---|---|---|---|
| (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 and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No[ ]
Number of shares of Common Stock, $10.00 par value, outstanding as of August 9, 2002: 250,000 shares.
The registrant meets the conditions set forth in General Instruction H(1)(a)and (b) of Form 10-Q andItem 1. Financial Statements:
Report of Independent AccountantsItem 6. Exhibits and Reports on Form 8-K
Signature
To the Directors and Share Owners
Protective Life and Annuity Insurance Company
Birmingham, Alabama
We have reviewed the accompanying condensed balance sheet of Protective Life and Annuity Insurance Company as of June 30, 2002, and the related condensed statements of income for each of the three-month and six-month periods ended June 30, 2002 and 2001, and the 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 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 balance sheet as of December 31, 2001, 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 1, 2002, 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, 2001, 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
August 14, 2002
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
----------------------------- --------------------------
2002 2001 2002 2001
---- ---- ---- ----
REVENUES
Premiums and policy fees $11,447,368 $11,742,829 $23,074,134 $23,682,190
Reinsurance ceded (3,696,597) (3,324,679) (8,223,764) (7,974,591)
------------ ------------ ------------ ------------
Premiums and policy fees, net of reinsurance ceded 7,750,771 8,418,150 14,850,370 15,707,599
Net investment income 8,938,842 8,447,484 17,604,612 16,500,098
Realized investment gains (losses) (509,709) (53,164) (529,692) 611,280
Other income (902) 501 2,213 2,482
------------ ------------ ------------ ------------
16,179,002 16,812,971 31,927,503 32,821,459
------------ ------------ ------------ ------------
BENEFITS AND EXPENSES
Benefits and settlement expenses
(net of reinsurance ceded:
three months: 2002 - $2,918,803; 2001 - $2,248,001
six months: 2002 - $6,483,335; 2001 - $5,447,964) 8,557,440 9,280,095 16,602,419 17,312,652
Amortization of deferred policy acquisition costs 2,541,468 1,763,835 4,916,545 3,533,157
Other operating expenses (net of reinsurance ceded:
three months: 2002 - $(135,882); 2001 - $26,942
six months: 2002 - $(51,062); 2001 - $67,263) 2,308,641 2,289,642 4,505,892 4,304,835
------------ ------------ ------------ ------------
13,407,549 13,333,572 26,024,856 25,150,644
------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAX 2,771,453 3,479,399 5,902,647 7,670,815
Income tax expense 968,911 1,200,393 2,063,664 2,646,432
------------ ------------ ------------ ------------
NET INCOME FROM CONTINUING OPERATIONS
BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 1,802,542 2,279,006 3,838,983 5,024,383
Income from discontinued operations, net of tax 38,103 22,222
Net income before cumulative effect of change
in accounting principle 1,802,542 2,317,109 3,838,983 5,046,605
Cumulative effect of change in accounting
principle, net of tax (284,968)
------------ ------------ ------------ ------------
NET INCOME $1,802,542 $2,317,109 $ 3,838,983 $ 4,761,637
============ ============ ============ ============
See notes to condensed financial statements
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
CONDENSED BALANCE SHEETS
June 30 December 31
2002 2001
------------ -------------
(Unaudited)
ASSETS
Investments:
Fixed maturities, at market
(amortized cost: 2002 - $480,064,917; 2001 - $442,583,178) $487,990,988 $445,730,493
Mortgage loans on real estate 2,466,597 2,717,495
Other long term investments 673,869 470,030
Policy loans 54,021,519 54,565,016
Short-term investments 1,832,820 12,000,000
------------ ------------
Total investments 546,985,793 515,483,034
Cash 1,143,519 4,284,257
Accrued investment income 8,537,116 8,432,689
Accounts and premiums receivable, net of allowance for
uncollectible amounts 414,573 7,888,382
Reinsurance receivables 20,813,341 20,642,570
Deferred policy acquisition costs 112,875,024 118,997,438
Other assets 30,539 19,689
Assets related to separate accounts
Variable Annuity 8,552,724 9,001,016
------------ ------------
$699,352,629 $684,749,075
============ ============
LIABILITIES
Policy liabilities and accruals:
Future policy benefits and claims $463,293,936 $458,568,381
Unearned premiums 6,482,621 7,767,028
------------ ------------
469,776,557 466,335,409
Annuity deposits 57,140,121 47,324,337
Other policyholders' funds 5,847,721 5,874,932
Other liabilities 10,874,987 17,390,459
Deferred income taxes 19,993,726 17,077,829
Liabilities related to separate accounts
Variable Annuity 8,552,724 9,001,016
------------ ------------
572,185,836 563,003,982
------------ ------------
COMMITMENTS AND CONTINGENT LIABILITIES - NOTE B
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 101,386,324 101,386,324
Retained earnings 19,307,499 15,468,517
Accumulated other comprehensive income:
Net unrealized gains on investments (net of income
tax: 2002 - $2,138,215; 2001 - $1,285,982) 3,970,970 2,388,252
------------ ------------
127,166,793 121,745,093
------------ ------------
$669,352,629 $684,749,075
============ ============
See notes to condensed financial statements
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30
-------------------------------
2002 2001
------ -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,838,983 $ 4,761,637
Adjustments to reconcile net income to net cash provided by operating activities:
Realized investment losses (gains) 529,692 (611,280)
Amortization of deferred policy acquisition costs 4,916,445 3,533,157
Capitalization of deferred policy acquisition costs (1,137,837) (690,107)
Deferred income tax 2,063,664 2,658,136
Interest credited to universal life and investment products 18,731,490 15,061,287
Policy fees assessed on universal life and investment products (17,479,689) (18,286,723)
Change in accrued investment income and other receivables 7,198,612 (1,773,089)
Change in policy liabilities and other policyholders' funds
of traditional life and health products (295,668) 2,557,594
Change in other liabilities (6,515,471) (996,276)
Other (net) (10,849) 5,450
------------- ------------
Net cash provided by operating activities 11,839,372 6,219,786
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reductions of investments
Investments available for sale 35,558,343 216,467,309
Other 801,687 667,061
Sale of available for sale investments
Investments available for sale 198,751,403 48,615,511
Cost of investments acquired
Investments available for sale (263,616,932) (279,385,109)
------------- ------------
Net cash used in investing activities (28,505,499) (13,635,228)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Investment product deposits and change in universal life deposits 30,503,057 21,058,020
Investment product withdrawals (16,977,668) (12,860,711)
------------- ------------
Net cash provided by financing activities 13,525,389 8,197,309
------------- ------------
(DECREASE) INCREASE IN CASH (3,140,738) 781,867
CASH AT BEGINNING OF PERIOD 4,284,257 1,165,410
------------- ------------
CASH AT END OF PERIOD $ 1,143,519 $ 1,947,277
============= ============
See notes to condensed financial statements
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of Protective Life and Annuity Insurance Company (“the Company”) have been prepared on the basis of 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 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 financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2001.
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.
NOTE B - 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 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, 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 operation, or liquidity of the Company.
NOTE C - OPERATING SEGMENTS
PLC, through its subsidiaries, operates several 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 in which the Company operates follows:
Life Insurance
The Life Marketing segment markets level premium term and term-like insurance, universal life, and variable universal life products on a national basis primarily through networks of independent agents and brokers, and in the “bank owned life insurance” market.
The Acquisitions segment focuses on acquiring, converting, and servicing policies acquired from other companies. The segment’s primary focus is on life insurance policies sold to individuals.
Retirement Savings and Investment Products
The 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.
Specialty Insurance Products
The Credit Products segment markets credit life and disability insurance products through banks, consumer finance companies and automobile dealers, and markets vehicle and recreational marine extended service contracts.
Corporate and Other
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).
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. 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 period shown. Adjustments represent the inclusion of unallocated realized investment gains (losses), income from discontinued operations, cumulative effect of change in accounting principle, and the recognition of income tax expense. Asset adjustments represent the inclusion of assets related to discontinued operations.
In December 2001, the Company sold substantially all of its Dental Division, and discontinued other Dental Division related operations. Prior period segment results have been restated to reflect these changes.
Operating Segment Income for the
Three Months Ended June 30,2002
---------------------------------------------------------------------
Retirement Savings and
Life Insurance Investment Products
Life
Marketing Acquisitions Annuities
--------- ------------ ---------
Premiums and policy fees $241,389 $10,318,784 $ 40,998
Reinsurance ceded (142,703) (3,552,726) 0
--------- ------------ ---------
Net of reinsurance ceded 98,686 6,766,058 40,998
Net investment income (695) 7,571,771 947,610
Realized investment gains 923
Other income (902)
--------- ------------ ---------
Total revenues 97,991 14,337,829 988,629
--------- ------------ ---------
Benefits and settlement expenses (12,627) 7,192,798 883,657
Amortization of deferred policy
acquisition costs (16,791) 2,103,139 291,060
Other operating expenses 86,908 2,103,358 88,213
--------- ------------ ---------
Total benefits and expenses 57,490 11,399,295 1,262,930
--------- ------------ ---------
Income (loss) before income tax 40,501 2,938,534 (274,301)
Specialty Insurance
Products
Corporate
Credit and
Products Other Adjustments Total
--------- -------- ----------- ------------
Premiums and policy fees $846,197 $11,447,368
Reinsurance ceded (1,168) (3,696,597)
-------- ------------
Net of reinsurance ceded 845,029 7,750,771
Net investment income 138,697 $281,459 8,938,842
Realized investment gains (losses) $(510,632) (509,709)
Other income (902)
-------- -------- ---------- ------------
Total revenues 983,726 281,459 (510,632) 16,179,002
-------- -------- ---------- ------------
Benefits and settlement expenses 493,612 8,557,440
Amortization of deferred policy
acquisition costs 164,060 2,541,468
Other operating expenses 29,954 208 2,308,641
-------- --------- ------------
Total benefits and expenses 687,626 208 13,407,549
-------- --------- ------------
Income (loss) before income tax 296,100 281,251 (510,632) 2,771,453
Income tax expense 968,911 968,911
------------
Net income $ 1,802,542
============
Operating Segment Income for the
Three Months Ended June 30, 2001
------------------------------------------------------------
Retirement Savings and
Life Insurance Investment Products
Acquisitions Annuities
------------ -----------
Premiums and policy fees $10,724,242 $ 35,075
Reinsurance ceded (3,440,410) 0
------------ ---------
Net of reinsurance ceded 7,283,832 35,075
Net investment income 7,406,215 185,165
Other income 501
------------ ---------
Total revenues 14,690,047 220,741
------------ ---------
Benefits and settlement expenses 8,110,065 479,052
Amortization of deferred policy
acquisition costs 1,529,444 56,343
Other operating expenses 2,245,698 14,470
------------ ---------
Total benefits and expenses 11,885,207 549,865
------------ ---------
Income (loss) from continuing operations
before income tax 2,804,840 (329,124)
Specialty Insurance
Products
Corporate
Credit and
Products Other Adjustments Total
---------- --------- ----------- -----------
Premiums and policy fees $ 983,512 $11,742,829
Reinsurance ceded 115,731 (3,324,679)
---------- ------------
Net of reinsurance ceded 1,099,243 8,418,150
Net investment income 149,180 $706,924 8,447,484
Realized investment gains (losses) $ (53,164) (53,164)
Other income 501
---------- -------- ------------ -----------
Total revenues 1,248,423 706,924 (53,164) 16,812,971
---------- -------- ------------ -----------
Benefits and settlement expenses 690,978 9,280,095
Amortization of deferred policy
acquisition costs 178,048 1,763,835
Other operating expenses 29,474 2,289,642
---------- -----------
Total benefits and expenses 898,500 13,333,572
---------- -----------
Income from continuing operations
before income tax 349,923 706,924 (53,164) 3,479,399
Income tax expense 1,200,393 1,200,393
Income from discontinued operations,
net of income tax 38,103 38,103
-----------
Net income $ 2,317,109
===========
Operating Segment Income for the
Six Months Ended June 30, 2002
----------------------------------------------------------------------
Retirement Savings and
Life Insurance Investment Products
Life
Marketing Acquisitions Annuities
----------- ------------- ---------
Premiums and policy fees $364,209 $20,931,210 $ 76,876
Reinsurance ceded (142,703) (8,054,907) 0
----------- ------------ ---------
Net of reinsurance ceded 221,506 12,876,303 76,876
Net investment income (208) 15,264,331 1,758,697
Realized investment gains (losses) 66,277
Other income 2,213
----------- ------------ ---------
Total revenues 221,298 28,140,634 1,904,063
----------- ------------ ---------
Benefits and settlement expenses 31,723 13,971,889 1,620,858
Amortization of deferred policy
acquisition costs (14,705) 4,022,153 579,608
Other operating expenses 113,079 4,286,466 119,131
----------- ------------ ---------
Total benefits and expenses 130,097 22,280,508 2,319,597
----------- ------------ ---------
Income before income tax 91,201 5,860,126 (415,534)
Specialty Insurance
Products
Corporate
Credit and
Products Other Adjustments Total
------------ ---------- ----------- -------------
Premiums and policy fees $1,701,839 $23,074,134
Reinsurance ceded (26,154) (8,223,764)
------------ ------------
Net of reinsurance ceded 1,675,685 14,850,370
Net investment income 283,900 $297,892 17,604,612
Realized investment gains (losses) $(595,969) (529,692)
Other income 2,213
------------ ---------- ----------- -------------
Total revenues 1,959,585 297,892 (595,969) 31,927,503
------------ ---------- ----------- -------------
Benefits and settlement expenses 977,949 16,602,419
Amortization of deferred policy
acquisition costs 329,489 4,916,545
Other operating expenses 57,994 (70,778) 4,505,892
------------ ---------- -------------
Total benefits and expenses 1,365,432 (70,778) 26,024,856
------------ ---------- -------------
Income before income tax 594,153 368,670 (595,969) 5,902,647
Income tax expense 2,063,664 2,063,664
-------------
Net income $ 3,838,983
=============
Operating Segment Income for the
Six Months Ended June 30, 2001
Retirement Savings and
Life Insurance Investment Products
Acquisitions Annuities
------------- -----------
Premiums and policy fees $21,898,439 $ 66,385
Reinsurance ceded (8,058,932) 0
------------- -----------
Net of reinsurance ceded 13,839,507 66,385
Net investment income 14,671,180 499,363
Other income 244 2,238
------------- -----------
Total revenues 28,510,931 567,986
------------- -----------
Benefits and settlement expenses 15,215,332 954,515
Amortization of deferred policy
acquisition costs 3,087,180 110,104
Other operating expenses 4,246,176 97,829
------------- -----------
Total benefits and expenses 22,548,688 1,162,448
------------- -----------
Income (loss) from continuing operations
before income tax 5,962,243 (594,462)
Specialty Insurance
Products
Corporate
Credit and
Products Other Adjustments Total
----------- ----------- ------------- -------------
Premiums and policy fees $1,717,366 $23,682,190
Reinsurance ceded 84,341 (7,974,591)
----------- -------------
Net of reinsurance ceded 1,801,707 15,707,599
Net investment income 307,863 $1,021,692 16,500,098
Realized investment gains (losses) $ 611,280 611,280
Other income 2,482
----------- ----------- ------------- -------------
Total revenues 2,109,570 1,021,692 611,280 32,821,459
----------- ----------- ------------- -------------
Benefits and settlement expenses 1,142,805 17,312,652
Amortization of deferred policy
acquisition costs 335,873 3,533,157
Other operating expenses 39,008 (78,178) 4,304,835
----------- ----------- -------------
Total benefits and expenses 1,517,686 (78,178) 25,150,644
----------- ----------- -------------
Income (loss) from continuing operations
before income tax 591,884 1,099,870 611,280 7,670,815
Income tax expense 2,646,432 2,646,432
Income from discontinued operations,
net of income tax 22,222 22,222
Cumulative effect of change in accounting
principle, net of income tax (284,968) (284,968)
-------------
Net income $ 4,761,637
=============
Operating Segment Assets
June 30, 2002
----------------------------------------------------------------------
Retirement Savings and
Life Insurance Investment Products
Life
Marketing Acquisitions Annuities
--------- ------------ -----------
Investments and other assets $304,500 $473,980,993 $56,149,609
Deferred policy acquisition costs 268,149 108,536,546 2,455,663
--------- ------------ -----------
Total assets $572,649 $582,517,539 $58,605,272
========= ============ ===========
Specialty Insurance
Products
Corporate
Credit and
Products Other Adjustments Total
------------ ----------- ------------ ------------
Investments and other assets $10,087,214 $42,230,648 $3,724,641 $586,477,605
Deferred policy acquisition costs 1,614,666 112,875,024
------------ ----------- ----------- ------------
Total assets $11,701,880 $42,230,648 $3,724,641 $699,352,629
============ =========== ============ ============
Operating Segment Assets
December 31, 2001
Retirement Savings and
Life Insurance Investment Products
Acquisitions Annuities
--------------- -----------
Investments and other assets $471,065,653 $46,091,122
Deferred policy acquisition costs 114,902,459 2,483,640
--------------- -----------
Total assets $585,968,112 $48,574,762
=============== ===========
Specialty Insurance
Products
Corporate
Credit and
Products Other Adjustments Total
----------- ----------- ------------ -------------
Investments and other assets $10,390,438 $34,248,362 $3,956,062 $565,751,637
Deferred policy acquisition costs 1,611,339 118,997,438
----------- ----------- ------------ -------------
Total assets $12,001,777 $34,248,362 $3,956,062 $684,749,075
=========== =========== ============ =============
NOTE D - STATUTORY REPORTING PRACTICES
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 accounting reporting practices, at June 30, 2002, and for the six months then ended, the Company had share-owners’ equity of $42.2 million and net income of $6.4 million.
NOTE E - COMPREHENSIVE INCOME
The following table sets forth the Company's comprehensive income for the periods shown:
Three Months Ended Six Months Ended
June 30 June 30
---------------------------- --------------------------
2002 2001 2002 2001
---- ---- ---- ----
Net income $1,802,542 $2,317,109 $3,838,983 $4,761,637
Change in net unrealized gains/losses
on investments (net of income tax:
three months: 2002 - $2,210,781; 2001 - $(540,486)
six months: 2002 - $666,840; 2001 - $1,507,879) 4,105,736 (1,003,760) 1,238,418 2,800,347
Reclassification adjustment for amounts
included in net income (net of income tax:
three months: 2002 - $178,398; 2001 - $18,607
six months: 2002 - $185,392; 2001 - $(213,948)) 331,311 34,557 344,300 (397,332)
Transition adjustment on derivative financial
instruments (net of income tax:
six months: 2001 - $153,444) 284,968
---------- ---------- ---------- ----------
Comprehensive income $6,239,589 $1,347,906 $5,421,701 $7,449,620
========== ========== ========== ==========
NOTE F - RECLASSIFICATIONS
Certain reclassifications have been made in the previously reported financial statements and accompanying notes to make the prior year amounts comparable to those of the current year. Such reclassifications had no effect on previously reported net income, total assets, or share-owners’ equity.
NOTE G - RECENTLY ISSUED ACCOUNTING STANDARDS
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.
NOTE H - DISCONTINUED OPERATIONS
On December 31, 2001, PLC 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. These discontinued operations have been included in various operating subsidiaries of PLC, including the Company. The results of the operations of the Dental Division as related to the Company have been included herein as discontinued 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.
PLC, through its subsidiaries, provides financial services through the production, distribution, and administration of insurance and investment products. PLC, through its subsidiaries, operates several 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 life insurance category includes the Life Marketing and Acquisitions segments. The specialty insurance products category includes the Credit Products segment. The retirement savings and investment products category includes the Stable Value contracts and Annuities segments.
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 June 30, 2002, the Company was involved in the businesses of four of PLC’s operating segments: Acquisitions, Life Marketing, Credit Products and Annuities. The Company has an additional business segment which is described herein as 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 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 include large amounts of data. Assumptions and estimates involve judgement and by their nature are imprecise and subject to changes and revisions 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 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 insurance enterprises are not necessarily indicative of results to be achieved in succeeding quarters, 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 Six Months Ended
June 30 June 30
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2002 2001 2002 2001
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Premiums and policy fees, net of
reinsurance $ 7,750,771 $ 8,418,150 $14,850,370 $15,707,599
Net investment income 8,938,842 8,447,484 17,604,612 16,500,098
Realized investment (losses) gains (509,709) (53,164) (529,692) 611,280
Other income (902) 501 2,213 2,482
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$ 16,179,002 $ 16,812,971 $31,927,503 $32,821,459
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Premiums and policy fees, net of reinsurance (“premiums and policy fees”) decreased $0.9 million or 5.5% in the first six months of 2002 from the first six months of 2001. 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 2001 or the first six months of 2002, therefore decreases in older acquired policies resulted in a decrease of $1.0 million in the first six months of 2002 as compared with the first six months of 2001. This decrease was partially offset by increases in premiums and policy fees in the Annuities segment and the addition of the Life Marketing segment in the first quarter of 2002.
Net investment income in the first six months of 2002 increased by $1.1 million as compared to the corresponding period of the preceding year primarily due to increases in the average amount of invested assets.
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 approximate matching of assets and liabilities. Accordingly, the Company has classified its fixed maturities and certain other securities as “available for sale.” The sales of investments that have occurred generally result from portfolio management decisions to maintain proper matching of assets and liabilities.
Realized investment losses were approximately $0.5 million in the first six months of 2002. During the first six months of 2002, the Company recorded other than temporary impairments on its investments of $1.5 million which were partially offset by $1.0 million of realized gains. Realized investment gains were approximately $0.6 million in the first six months of 2001.
The Company reported an insignificant amount of other income in the first six months of 2002 and 2001.
Income Before Income Tax
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
Three Months Ended Six Months Ended
June 30 June 30
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2002 2001 2002 2001
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Operating Income (Loss)1
Life Insurance
Acquisitions $2,938,534 $2,804,840 $5,860,126 $5,962,243
Life Marketing 40,501 91,201
Specialty Insurance Products
Credit Products 296,100 349,923 594,153 591,884
Retirement Savings and Investment
Products
Annuities (275,224) (329,124) (481,811) (594,462)
Corporate and Other 281,251 706,924 368,670 1,099,870
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Total operating income 3,281,162 3,532,563 6,432,339 7,059,535
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Realized Investment Gains (Losses)
Annuities 923 66,277
Unallocated Realized Investment
Gains (Losses) (510,632) (53,164) (595,969) 611,280
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Total (509,709) (53,164) (529,692) 611,280
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Income (Loss) Before Income Tax
Life Insurance
Acquisitions 2,938,534 2,804,840 5,860,126 5,962,243
Life Marketing 40,501 91,201
Specialty Insurance Products
Credit Products 296,100 349,923 594,153 591,884
Retirement Savings and Investment
Products
Annuities (274,301) (329,124) (415,534) (594,462)
Corporate and Other 281,251 706,924 368,670 1,099,870
Unallocated Realized Investment
Gains (Losses) (510,632) (53,164) (595,969) 611,280
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Total income before income tax $2,771,453 $3,479,399 $5,902,647 $7,670,815
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1 Income (loss) from continuing operations before income tax excluding realized investment gains and losses.
Pretax operating income from the Acquisitions segment was $5.9 million in the first six months of 2002 as compared to $6.0 million in the same period of 2001. 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. The increase in investment income on invested assets allocated to the segment partially offset the decrease in premiums and policy fees.
The Credit Products segment's pretax operating income remained relatively unchanged in the first six months of 2002 as compared to the same period of 2001.
The Annuity segment had pretax operating losses of $0.5 million in the first six months of 2002 and $0.6 million of pretax operating losses in the same period of 2001, as the segment continues to gain sales momentum.
The Corporate and Other segment consist of net investment income and expenses not identified with the preceding business segments. Pretax operating income from this segment was $0.4 million in the first six months of 2002 as compared to $1.1 million in the first six months of 2001.
Income Taxes
The following table sets forth the effective tax rates for the periods shown:
Three Months Ended Six Months Ended
June 30 June 30
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2002 2001 2002 2001
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Estimated Effective Income Tax Rates 35.0% 34.5% 35.0% 34.5%
The effective income tax rate for the full year of 2001 was 34.5%. Management’s estimate of the effective income tax rate for 2002 is approximately 35.0%.
Net Income
The following table sets forth net income for the periods shown:
Three Months Ended Six Months Ended
Net Income June 30 June 30
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2002 2001 2002 2001
---- ------ ------ ----
Total $1,802,542 $2,317,109 $3,838,983 $4,761,637
Compared to the same period in 2001, net income in the first six months of 2002 decreased $0.9 million, reflecting decreases in the Acquisitions segment and the Corporate and Other segment and unallocated realized gains, which were partially offset by increases in the Credit Products, Annuities and Life Marketing segments.
Item 6. Exhibits and Reports on Form 8-K
(a) 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 and Annuity Insurance Company
Date: August 14, 2002/s/Jerry W. DeFoor
Jerry W. DeFoor
Vice President and Controller
and Chief Accounting Officer
(Duly authorized officer)