| 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 November 8, 2002: 250,000 shares.
The registrant meets the conditions set forth in General Instruction H(1)(a)and (b) of Form 10-Q and
Part I. Financial Information:
Item 1. Financial Statements:
Report of Independent Accountants
Condensed Statements of Income for the Three and
Nine Months ended September 30, 2002 and 2001 (unaudited)
Condensed Balance Sheets as of September 30, 2002
(unaudited) and December 31, 2001
Condensed Statements of Cash Flows for the
Nine Months ended September 30, 2002 and 2001 (unaudited)
Notes to Condensed Financial Statements (unaudited)
Item 2. Management's Narrative Analysis of the Results of Operations
Item 4. Controls and Procedures
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K
Signature
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 September 30, 2002, and the related condensed statements of income for each of the three-month and nine-month periods ended September 30, 2002 and 2001, and the condensed statements of cash flows for the nine-month periods ended September 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
November 13, 2002
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
---------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
REVENUES
Premiums and policy fees $12,998,040 $11,427,735 $36,072,174 $35,109,925
Reinsurance ceded (6,108,778) (4,172,347) (14,332,542) (12,146,938)
------------ ------------ ------------ ------------
Premiums and policy fees, net of reinsurance ceded 6,889,262 7,255,388 21,739,632 22,962,987
Net investment income 9,348,179 8,578,650 26,952,791 25,078,748
Realized investment gains (losses) (249,668) (1,858,929) (779,360) (1,247,649)
Other income 6,378 (365) 8,591 2,117
------------ ------------ ------------ ------------
15,994,151 13,974,744 47,921,654 46,796,203
------------ ------------ ------------ ------------
BENEFITS AND EXPENSES
Benefits and settlement expenses
(net of reinsurance ceded:
three months: 2002 - $5,381,394; 2001 - $2,834,142
nine months: 2002 - $11,864,729; 2001 - $8,282,106) 9,174,577 8,851,015 25,776,996 26,163,667
Amortization of deferred policy acquisition costs 1,975,347 1,715,286 6,891,892 5,248,443
Other operating expenses (net of reinsurance ceded:
three months: 2002 - $531,435; 2001 - $21,616
nine months: 2002 - $480,373; 2001 - $88,879) 1,786,366 2,276,686 6,292,258 6,581,521
------------ ------------ ------------ ------------
12,936,290 12,842,987 38,961,146 37,993,631
------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAX 3,057,861 1,131,757 8,960,508 8,802,572
Income tax expense 1,062,881 337,640 3,126,545 2,984,072
------------ ------------ ------------ ------------
NET INCOME FROM CONTINUING OPERATIONS
BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 1,994,980 794,117 5,833,963 5,818,500
Income from discontinued operations, net of income tax 0 55,006 0 77,228
NET INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 1,994,980 849,123 5,833,963 5,895,728
Cumulative effect of change in accounting
principle, net of income tax 0 0 0 (284,968)
------------ ------------ ------------ ------------
NET INCOME $ 1,994,980 $ 849,123 $ 5,833,963 $ 5,610,760
============ ============ ============ ============
See notes to condensed financial statements
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
CONDENSED BALANCE SHEETS
September 30 December 31
2002 2001
-------------- -------------
(Unaudited)
ASSETS
Investments:
Fixed maturities, at market
(amortized cost: 2002 - $483,240,356; 2001 - $442,583,178) $507,352,158 $445,730,493
Mortgage loans on real estate 2,324,727 2,717,495
Other long term investments 818,610 470,030
Policy loans 54,389,108 54,565,016
Short-term investments 5,450,101 12,000,000
-------------- -------------
Total investments 570,334,704 515,483,034
Cash 2,079,303 4,284,257
Accrued investment income 8,905,112 8,432,689
Accounts and premiums receivable, net of allowance for
uncollectible amounts 376,314 7,888,382
Reinsurance receivables 20,299,614 20,642,570
Deferred policy acquisition costs 105,516,164 118,997,438
Other assets 21,007 19,689
Assets related to separate accounts
Variable Annuity 7,595,063 9,001,016
-------------- -------------
$715,127,281 $684,749,075
============== =============
LIABILITIES
Policy liabilities and accruals:
Future policy benefits and claims $464,221,080 $458,568,381
Unearned premiums 6,512,699 7,767,028
-------------- -------------
470,733,779 466,335,409
Annuity deposits 58,792,492 47,324,337
Other policyholders' funds 5,772,997 5,874,932
Other liabilities 12,066,989 17,390,459
Deferred income taxes 24,538,259 17,077,829
Liabilities related to separate accounts
Variable Annuity 7,595,063 9,001,016
-------------- -------------
579,499,579 563,003,982
-------------- -------------
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 21,302,480 15,468,517
Accumulated other comprehensive income:
Net unrealized gains on investments (net of income
tax: 2002 - $5,619,868; 2001 - $1,285,982) 10,436,898 2,388,252
-------------- -------------
135,627,702 121,745,093
-------------- -------------
$715,127,281 $684,749,075
============== =============
See notes to condensed financial statements
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30
---------------------------
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,833,963 $ 5,610,760
Adjustments to reconcile net income to net cash provided by operating activities:
Realized investment losses 779,360 1,247,649
Amortization of deferred policy acquisition costs 6,891,892 5,248,443
Capitalization of deferred policy acquisition costs (1,643,281) (1,222,606)
Deferred income tax 3,126,545 3,023,679
Interest credited to universal life and investment products 24,579,534 26,004,415
Policy fees assessed on universal life and investment products (26,117,836) (27,210,713)
Change in accrued investment income and other receivables 7,382,601 (1,548,246)
Change in policy liabilities and other policyholders' funds
of traditional life and health products (1,085,040) 442,632
Change in other liabilities (5,323,470) 2,534,696
Other (net) (1,318) 6,864
------------- ------------
Net cash provided by operating activities 14,422,950 14,137,573
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reductions of investments
Investments available for sale 54,573,275 130,773,152
Other 577,349 812,016
Sale of available for sale investments
Investments available for sale 249,674,713 52,729,791
Cost of investments acquired
Investments available for sale (338,302,871) (208,181,079)
------------- ------------
Net cash used in investing activities (33,477,534) (23,866,120)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Investment product deposits and change in universal life deposits 37,432,640 38,498,681
Investment product withdrawals (20,583,010) (21,528,098)
------------- ------------
Net cash provided by financing activities 16,849,630 16,970,583
------------- ------------
(DECREASE) INCREASE IN CASH (2,204,954) 7,242,036
CASH AT BEGINNING OF PERIOD 4,284,257 1,165,410
------------- ------------
CASH AT END OF PERIOD $ 2,079,303 $ 8,407,446
============= ============
See notes to condensed financial statements
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 nine month period ended September 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 LIABILITIESUnder 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, broker-dealers, 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 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 SEGMENTSPLC, 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 InsuranceThe 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 ProductsThe 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 ProductsThe Asset Protection segment primarily markets credit life and disability insurance products through banks, consumer finance companies and automobile dealers, and vehicle and recreational marine extended service contracts.
Corporate and OtherThe 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 (see Note H “Discontinued Operations”). Prior period segment results have been restated to reflect these changes.
Operating Segment Income for the
Three Months Ended September 30, 2002
--------------------------------------------------------------------
Retirement Savings and
Life Insurance Investment Products
Life
Marketing Acquisitions Annuities
----------- ------------ ---------
Premiums and policy fees $289,921 $11,770,967 $ 44,904
Reinsurance ceded (395,020) (5,713,054)
--------- ------------ -------
Net of reinsurance ceded (105,099) 6,057,913 44,904
Net investment income 1,942 7,864,982 984,708
Realized investment gains 13,443
Other income 5,071 1,307
--------- ------------ ---------
Total revenues (103,157) 13,927,966 1,044,362
--------- ------------ ---------
Benefits and settlement expenses 115,853 7,582,972 1,021,216
Amortization of deferred policy
acquisition costs 57,829 1,752,875 (1,706)
Other operating expenses (217,419) 1,955,356 35,751
--------- ------------ ---------
Total benefits and expenses (43,737) 11,291,203 1,055,261
--------- ------------ ---------
Income (loss) before income tax (59,420) 2,636,763 (10,899)
Specialty Insurance
Products
Corporate
Asset and
Protection Other Adjustments Total
------------ --------- ------------ -----------
Premiums and policy fees $ 892,248 $12,998,040
Reinsurance ceded (704) (6,108,778)
------------ --------- ------------ -----------
Net of reinsurance ceded 891,544 6,889,262
Net investment income 145,671 $350,876 9,348,179
Realized investment gains (losses) $ (263,111) (249,668)
Other income 6,378
------------ --------- ------------ -----------
Total revenues 1,037,215 350,876 (263,111) 15,994,151
------------ --------- ------------ -----------
Benefits and settlement expenses 454,536 9,174,577
Amortization of deferred policy
acquisition costs 166,349 1,975,347
Other operating expenses 33,350 (20,672) 1,786,366
------------ --------- ------------ -----------
Total benefits and expenses 654,235 (20,672) 12,936,290
------------ --------- ------------ -----------
Income (loss) before income tax 382,980 371,548 (263,111) 3,057,861
Income tax expense 1,062,881 1,062,881
------------ --------- ------------ -----------
Net income $ 1,994,980
===========
Operating Segment Income for the
Three Months Ended September 30, 2001
-------------------------------------------------------------
Retirement Savings and
Life Insurance Investment Products
Acquisitions Annuities
-------------- -----------
Premiums and policy fees $10,545,795 $ 42,596
Reinsurance ceded (4,171,320)
-------------- -----------
Net of reinsurance ceded 6,374,475 42,596
Net investment income 7,606,652 662,561
Other income (365)
-------------- -----------
Total revenues 13,981,127 704,792
-------------- -----------
Benefits and settlement expenses 7,459,729 666,852
Amortization of deferred policy
acquisition costs 1,498,790 61,428
Other operating expenses 2,156,286 75,775
-------------- -----------
Total benefits and expenses 11,114,805 804,055
-------------- -----------
Income (loss) from continuing operations
before income tax 2,866,322 (99,263)
Specialty Insurance
Products
Corporate
Asset and
Protection Other Adjustments Total
------------ ---------- ----------- -------------
Premiums and policy fees $839,344 $11,427,735
Reinsurance ceded (1,027) (4,172,347)
------------ ---------- ----------- -------------
Net of reinsurance ceded 838,317 7,255,388
Net investment income 150,456 $158,981 8,578,650
Realized investment gains (losses) $(1,858,929) (1,858,929)
Other income (365)
------------ ---------- ----------- -------------
Total revenues 988,773 158,981 (1,858,929) 13,974,744
------------ ---------- ----------- -------------
Benefits and settlement expenses 724,434 8,851,015
Amortization of deferred policy
acquisition costs 155,068 1,715,286
Other operating expenses 20,944 23,681 2,276,686
------------ ---------- ----------- -------------
Total benefits and expenses 900,446 23,681 12,842,987
------------ ---------- ----------- -------------
Income (loss) from continuing operations
before income tax 88,327 135,300 (1,858,929) 1,131,757
Income tax expense 337,640 337,640
Income from discontinued operations,
net of income tax 55,006 55,006
-------------
Net income $ 849,123
=============
Operating Segment Income for the
Nine Months Ended September 30, 2002
Retirement Savings and
Life Insurance Investment Products
Life
Marketing Acquisitions Annuities
Premiums and policy fees $654,130 $32,702,177 $ 121,780
Reinsurance ceded (537,723) (13,767,961)
---------- ------------ -----------
Net of reinsurance ceded 116,407 18,934,216 121,780
Net investment income 1,734 23,129,313 2,743,405
Realized investment gains (losses) 79,720
Other income 5,071 3,520
---------- ------------ -----------
Total revenues 118,141 42,068,600 2,948,425
---------- ------------ -----------
Benefits and settlement expenses 147,576 21,554,861 2,642,074
Amortization of deferred policy
acquisition costs 43,124 5,775,028 577,902
Other operating expenses (104,340) 6,241,822 154,882
---------- ------------ -----------
Total benefits and expenses 86,360 33,571,711 3,374,858
---------- ------------ -----------
Income (loss) before income tax 31,781 8,496,889 (426,433)
Specialty Insurance
Products
Corporate
Asset and
Protection Other Adjustments Total
------------- ---------- ------------- ------------
Premiums and policy fees $2,594,087 $36,072,174
Reinsurance ceded (26,858) (14,332,542)
------------- ---------- ------------- ------------
Net of reinsurance ceded 2,567,229 21,739,632
Net investment income 429,571 $648,768 26,952,791
Realized investment gains (losses) $ (859,080) (779,360)
Other income 8,591
------------- ---------- ------------- ------------
Total revenues 2,996,800 648,768 (859,080) 47,921,654
------------- ---------- ------------- ------------
Benefits and settlement expenses 1,432,485 25,776,996
Amortization of deferred policy
acquisition costs 495,838 6,891,892
Other operating expenses 91,344 (91,450) 6,292,258
------------- ---------- ------------- ------------
Total benefits and expenses 2,019,667 (91,450) 38,961,146
------------- ---------- ------------- ------------
Income (loss) before income tax 977,133 740,218 (859,080) 8,960,508
Income tax expense 3,126,545 3,126,545
------------
Net income $ 5,833,963
============
Operating Segment Income for the
Nine Months Ended September 30, 2001
Retirement Savings and
Life Insurance Investment Products
Acquisitions Annuities
-------------- ------------
Premiums and policy fees $32,444,234 $ 108,981
Reinsurance ceded (12,230,252)
-------------- ------------
Net of reinsurance ceded 20,213,982 108,981
Net investment income 22,277,832 1,161,924
Other income 244 1,873
-------------- ------------
Total revenues 42,492,058 1,272,778
-------------- ------------
Benefits and settlement expenses 22,675,061 1,621,367
Amortization of deferred policy
acquisition costs 4,585,970 171,532
Other operating expenses 6,402,462 173,604
-------------- ------------
Total benefits and expenses 33,663,493 1,966,503
-------------- ------------
Income (loss) from continuing operations
before income tax 8,828,565 (693,725)
Specialty Insurance
Products
Corporate
Asset and
Protection Other Adjustments Total
------------- ------------ ----------- -----------
Premiums and policy fees $2,556,710 $35,109,925
Reinsurance ceded 83,314 (12,146,938)
------------- ------------ ----------- -----------
Net of reinsurance ceded 2,640,024 22,962,987
Net investment income 458,319 $1,180,673 25,078,748
Realized investment gains (losses) $(1,247,649) (1,247,649)
Other income 2,117
------------- ------------ ----------- -----------
Total revenues 3,098,343 1,180,673 (1,247,649) 46,796,203
------------- ------------ ----------- -----------
Benefits and settlement expenses 1,867,239 26,163,667
Amortization of deferred policy
acquisition costs 490,941 5,248,443
Other operating expenses 59,952 (54,497) 6,581,521
------------- ------------ ----------- -----------
Total benefits and expenses 2,418,132 (54,497) 37,993,631
------------- ------------ ----------- -----------
Income (loss) from continuing operations
before income tax 680,211 1,235,170 (1,247,649) 8,802,572
Income tax expense 2,984,072 2,984,072
Income from discontinued operations,
net of income tax 77,228 77,228
Cumulative effect of change in accounting
principle, net of income tax (284,968) (284,968)
------------
Net income $ 5,610,760
============
Operating Segment Assets
September 30, 2002
Retirement Savings and
Life Insurance Investment Products
Life
Marketing Acquisitions Annuities
------------ ------------- ------------
Investments and other assets $(257,886) $501,903,971 $52,738,045
Deferred policy acquisition costs 355,375 100,912,159 2,607,538
------------ ------------- ------------
Total assets $ 97,489 $602,816,130 $55,345,583
============ ============= ============
Specialty Insurance
Products
Corporate
Asset and
Protection Other Adjustments Total
-------------- ----------- ----------- ------------
Investments and other assets $6,614,059 $44,899,831 $3,713,097 $609,611,117
Deferred policy acquisition costs 1,641,092 105,516,164
-------------- ----------- ----------- ------------
Total assets $8,255,151 $44,899,831 $3,713,097 $715,127,281
============== =========== =========== ============
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
Asset and
Protection 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
============= ============= ============ =============
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 September 30, 2002, and for the nine months then ended, the Company had share-owners’ equity of $44.9 million and net income of $10.0 million.
NOTE E - COMPREHENSIVE INCOMEThe following table sets forth the Company’s comprehensive income for the periods shown:
September 30 September 30
----------------------------- ----------------------------
2002 2001 2002 2001
---- ---- ---- ----
Net income $1,994,980 $ 849,123 $ 5,833,963 $ 5,610,760
Change in net unrealized gains/losses
on investments (net of income tax:
three months: 2002 - $3,394,269; 2001 - $2,411,645
nine months: 2002 - $4,061,110; 2001 - $3,919,524) 6,303,644 4,478,770 7,542,062 7,279,117
Reclassification adjustment for amounts
included in net income (net of income tax:
three months: 2002 - $87,384; 2001 - $650,625
nine months: 2002 - $272,776; 2001 - $436,677) 162,284 1,208,304 506,584 810,972
Transition adjustment on derivative financial
instruments (net of income tax:
nine months: 2001 - $153,444) 284,968
----------- ---------- ----------- -----------
Comprehensive income $8,460,908 $6,536,197 $13,882,609 $13,985,817
=========== ========== =========== ===========
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 STANDARDSIn August 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“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 September 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 operations 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.
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of April 2002." SFAS No. 145 rescinds SFAS No. 4, which required companies to treat the extinguishment of debt as an extraordinary item. SFAS No. 145 requires companies to apply APB Opinion 30 when determinin the accounting for the extinguishment of debt. The statement also rescinds and amends other statements to make various technical corrections and clarifications. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. The Company does not expect the adoption of SFAS No. 145 to have a material effect on the Company's financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 requires companies to record a liability for a cost associated with an exit or disposal activity when the liability is incurred. The statement is effective for exit or disposal activities initiated after December 31, 2002. The Company does not expect the adoption of SFAS No. 146 to have a material effect on the Company’s financial position or results of operations.
NOTE H - DISCONTINUED OPERATIONSOn 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 Asset Protection 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 September 30, 2002, the Company was involved in the businesses of four of PLC’s operating segments: Acquisitions, Life Marketing, Asset Protection 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(a), incorporated by reference 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 statements of income are necessarily complex and involve analyzing and interpreting large quantities of data. Assumptions and estimates involve judgement and by their nature are imprecise and subject to change 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 changes arising from implementing more sophisticated administrative systems and procedures that facilitate the calculation of more precise estimates.
The following discussion and analysis primarily relates to the nine months ended September 30, 2002, as it compares to the same period last year. Unless otherwise noted, the general factors discussed also apply to the quarter ended September 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 September 30, 2002, and September 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.
Revenues
The following table sets forth revenues by source for the periods shown:
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------- ------------------------------
2002 2001 2002 2001
---- ---- ---- ----
Premiums and policy fees, net of
reinsurance $ 6,889,262 $ 7,255,388 $21,739,632 $22,962,987
Net investment income 9,348,179 8,578,650 26,952,791 25,078,748
Realized investment losses (249,668) (1,858,929) (779,360) (1,247,649)
Other income 6,378 (365) 8,591 2,117
------------ ------------ ------------ ------------
$15,994,151 $13,974,744 $47,921,654 $46,796,203
============ ============ ============ ============
Premiums and policy fees, net of reinsurance (“premiums and policy fees”) decreased $1.2 million or 5.3% in the first nine months of 2002 from the first nine 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 nine months of 2002, therefore decreases in older acquired policies resulted in a decrease of $1.3 million in the first nine months of 2002 as compared with the first nine months of 2001. This decrease and the $0.1 million decrease in the Asset Protection segment were 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 nine months of 2002 increased by $1.9 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 $0.8 million in the first nine months of 2002. During the first nine months of 2002, the Company recorded other than temporary impairments on its investments of $1.5 million which were partially offset by $0.7 million of realized gains. Realized investment losses were approximately $1.2 million in the first nine months of 2001.
The Company reported an insignificant amount of other income in the first nine months of 2002 and 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
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------ -----------------------------
2002 2001 2002 2001
---- ---- ---- ----
Operating Income (Loss)1
Life Insurance
Acquisitions $2,636,763 $2,866,322 $8,496,889 $ 8,828,565
Life Marketing (59,420) 31,781
Specialty Insurance Products
Asset Protection 382,980 88,327 977,133 680,211
Retirement Savings and Investment
Products
Annuities (24,342) (99,263) (506,153) (693,725)
Corporate and Other 371,548 135,300 740,218 1,235,170
----------- ----------- ----------- ------------
Total operating income 3,307,529 2,990,686 9,739,868 10,050,221
----------- ----------- ----------- ------------
Realized Investment Gains (Losses)
Annuities 13,443 79,720
Unallocated Realized Investment Losses (263,111) (1,858,929) (859,080) (1,247,649)
----------- ----------- ----------- ------------
Total (249,668) (1,858,929) (779,360) (1,247,649)
----------- ----------- ----------- ------------
Income (Loss) Before Income Tax
Life Insurance
Acquisitions 2,636,763 2,866,322 8,496,889 8,828,565
Life Marketing (59,420) 31,781
Specialty Insurance Products
Asset Protection 382,980 88,327 977,133 680,211
Retirement Savings and Investment
Products
Annuities (10,899) (99,263) (426,433) (693,725)
Corporate and Other 371,548 135,300 740,218 1,235,170
Unallocated Realized Investment
Gains (Losses) (263,111) (1,858,929) (859,080) (1,247,649)
----------- ----------- ----------- ------------
Total income before income tax $3,057,861 $1,131,757 $8,960,508 $ 8,802,572
=========== =========== =========== ============
1 Income (loss) from continuing operations before income tax excluding realized investment gains and losses.
Pretax operating income from the Acquisitions segment was $2.6 million in the first nine months of 2002 as compared to $2.9 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 Asset Protection segment's pretax operating income was $1.0 million in the first nine months of 2002 as compared to $0.7 million in the same period of 2001 primarily due to a $0.4 million decrease in benefits and settlement expenses.
The Annuity segment had pretax operating losses of $0.5 million in the first nine months of 2002 and $0.7 million of pretax operating losses in the same period of 2001, as the segment continues to gain sales momentum and an increase in investment income allocated to the segment.
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 $0.7 million in the first nine months of 2002 as compared to $1.2 million in the first nine months of 2001.
Income Taxes
The following table sets forth the effective tax rates for the periods shown:
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
Estimated Effective Income Tax Rates 34.8% 29.8% 34.9% 33.9%
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 IncomeThe following table sets forth net income for the periods shown:
Three Months Ended Nine Months Ended
Net Income September 30 September 30
--------------- ------------------------------- ---------------------------
2002 2001 2002 2001
---- ---- ---- ----
Total $1,994,980 $849,123 $5,833,963 $5,610,760
Compared to the same period in 2001, net income in the first nine months of 2002 increased $0.2 million, reflecting increases in the Life Marketing, Asset Protection and Annuities segments, and smaller unallocated realized losses, which were partially offset by decreases in the Acquisitions and Corporate and Other segments.
The Company’s President and Chief Financial Officer have, within the 90-day period preceding the filing of the report, evaluated the Company’s disclosure controls and procedures and believe them to be operating effectively to make known to them on a timely basis any material information required to be included in the Company’s periodic filings with the Securities and Exchange Commission. There have been no significant changes in the internal controls, or in other factors that could significantly affect internal controls, subsequent to the date this evaluation was completed.
(a) Exhibit 99(a) - Safe Harbor for Forward-Looking Statements
Exhibit 99(b) - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Exhibit 99(c) - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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: November 14, 2002 /s/ Jerry W. DeFoor
Jerry W. DeFoor
Vice President and Controller
and Chief Accounting Officer
(Duly authorized officer)
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Wayne E. Stuenkel, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Protective Life and Annuity Insurance Company;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Wayne E. Stuenkel
Title: President and Chief Actuary
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Allen W. Ritchie, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Protective Life and Annuity Insurance Company;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Allen W. Ritchie
Title: Executive Vice President and
Chief Financial Officer