| ALABAMA | 63-0761690 | ||
|---|---|---|---|
| (State or other jurisdiction of | (IRS Employer | ||
| incorporation or organization) | Identificiation No.) |
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No[ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Number of shares of Common Stock, $10.00 par value, outstanding as of May 9, 2003: 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 Months
ended March 31, 2003 and 2002 (unaudited)
Condensed Balance Sheets as of March 31, 2003
(unaudited) and December 31, 2002
Condensed Statements of Cash Flows for the
Three Months ended March 31, 2003 and 2002 (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 March 31, 2003, and the related condensed statements of income for each of the three-month periods ended March 31, 2003 and 2002, and the condensed statements of cash flows for the three-month periods ended March 31, 2003 and 2002. 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, 2002, 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 3, 2003, 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, 2002, is fairly stated in all material respects in relation to the balance sheet from which it has been derived.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Birmingham, Alabama
May 9, 2003
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31
---------------------------
2003 2002
---- ----
REVENUES
Premiums and policy fees $19,870,307 $12,181,462
Reinsurance ceded (13,510,673) (5,081,864)
------------ ------------
Premiums and policy fees, net of reinsurance ceded 6,359,634 7,099,598
Net investment income 10,132,301 8,665,770
Realized investment gains (losses) 733,557 (19,983)
Other income (loss) (568) 3,115
------------ ------------
17,224,924 15,748,500
------------ ------------
BENEFITS AND EXPENSES
Benefits and settlement expenses
(net of reinsurance ceded:
three months: 2003 - $6,015,224; 2002 - $3,969,782) 7,837,609 8,044,979
Amortization of deferred policy acquisition costs 2,078,112 2,375,077
Other operating expenses (net of reinsurance ceded:
three months: 2003 - $(879,203); 2002 - $157,951) 2,123,828 2,197,251
------------ ------------
12,039,549 12,617,307
------------ ------------
INCOME BEFORE INCOME TAX 5,185,375 3,131,193
INCOME TAX EXPENSE 1,805,331 1,094,753
------------ ------------
NET INCOME $ 3,380,044 $ 2,036,440
============ ============
See notes to condensed financial statements
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
CONDENSED BALANCE SHEETS
March 31 December 31
2003 2002
----------- -----------
(Unaudited)
ASSETS
Investments:
Fixed maturities, at market
(amortized cost: 2003 - $589,934,614; 2002 - $466,924,086) $623,462,584 $488,701,807
Mortgage loans on real estate 1,742,179 1,793,590
Other long term investments 572,818 572,818
Policy loans 54,156,724 54,807,151
Short-term investments 46,566,264 178,805,245
----------- -----------
Total investments 726,500,569 724,680,611
Cash 0 1,669,532
Accrued investment income 9,755,549 8,382,989
Accounts and premiums receivable, net of allowance for
uncollectible amounts 1,469,164 325,479
Reinsurance receivables 79,874,790 92,256,257
Deferred policy acquisition costs 100,105,002 104,779,582
Other assets 23,525 21,955
Assets related to separate accounts
Variable Annuity 8,482,447 8,382,367
----------- -----------
$926,211,046 $940,498,772
=========== ===========
LIABILITIES
Policy liabilities and accruals:
Future policy benefits and claims $509,824,150 $517,624,864
Unearned premiums 21,644,435 26,349,028
----------- -----------
531,468,585 543,973,892
Annuity deposits 59,648,428 60,080,082
Other policyholders' funds 6,066,006 6,025,066
Funds held-coinsurance 75,912,970 89,552,015
Other liabilities 12,600,081 14,214,260
Deferred income taxes 30,339,991 25,533,038
Liabilities related to separate accounts
Variable Annuity 8,482,447 8,382,367
----------- -----------
724,518,508 747,760,720
----------- -----------
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 171,386,324 171,386,324
Retained earnings 12,723,210 9,343,166
Accumulated other comprehensive income:
Net unrealized gains on investments (net of income
tax: 2003 - $8,120,541; 2002 - $5,118,918) 15,081,004 9,506,562
----------- -----------
201,692,538 192,738,052
----------- -----------
$926,211,046 $940,498,772
=========== ===========
See notes to condensed financial statements
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31
-------------------------------
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,380,044 $ 2,036,440
Adjustments to reconcile net income to net cash provided by operating activities:
Realized investment (gains) losses (733,557) 19,983
Amortization of deferred policy acquisition costs 2,078,112 2,375,077
Capitalization of deferred policy acquisition costs (601,929) (449,262)
Deferred income tax 1,805,331 1,094,753
Interest credited to universal life and investment products 4,498,577 8,586,220
Policy fees assessed on universal life and investment products (8,551,518) (8,806,779)
Change in accrued investment income and other receivables 9,865,222 5,423,061
Change in policy liabilities and other policyholders' funds
of traditional life and health products (13,803,879) (248,741)
Change in fund held-coinsurance (13,639,045)
Change in other liabilities (1,614,179) (7,276,584)
Other (net) (1,570) (5,821)
----------- -----------
Net cash (used in) provided by operating activities (17,318,391) 2,748,347
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reductions of investments
Investments available for sale 221,488,068 10,788,286
Other 701,838 643,049
Sale of investments
Investments available for sale 184,563,691 125,815,313
Cost of investments acquired
Investments available for sale (396,065,537) (148,499,167)
----------- -----------
Net cash provided by (used in) investing activities 10,688,060 (11,252,519)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Investment product deposits and change in universal life deposits 6,182,501 6,694,608
Investment product withdrawals (1,221,702) (672,679)
----------- -----------
Net cash provided by financing activities 4,960,799 6,021,929
----------- -----------
(DECREASE) INCREASE IN CASH (1,669,532) (2,482,243)
CASH AT BEGINNING OF PERIOD 1,669,532 4,284,257
----------- -----------
CASH AT END OF PERIOD $ 0 $ 1,802,014
=========== ===========
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 three month period ended March 31, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. 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, 2002.
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 that any such assessments will be materially different from amounts already provided for in the financial statements. Most of these laws do provide, however, that an assessment may be excused or deferred if it would threaten an insurer’s own financial strength.
A number of civil jury verdicts have been returned against insurers and other providers of financial services involving sales practices, alleged agent misconduct, failure to properly supervise representatives’ relationships with agents or other persons with whom the insurer does business, and other matters. Increasingly these lawsuits have resulted in the award of substantial judgments that are disproportionate to the actual damages, including material amounts of punitive and non-economic compensatory damages. In some states, juries, judges, and arbitrators have substantial discretion in awarding punitive and non-economic compensatory damages which creates the potential for unpredictable material adverse judgments or awards in any given lawsuit or arbitration. Arbitration awards are subject to very limited appellate review. In addition, in some class action and other lawsuits, companies have made material settlement payments. The Company, like other financial services companies, in the ordinary course of business, is involved in such litigation 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 business segments. An operating segment is generally distinguished by products and/or channels of distribution. A brief description of each segment in which the Company operates follows:
| Life Marketing. The 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. |
| Annuities. The Annuities segment manufactures, sells, and supports fixed and variable annuity products. These products are primarily sold through stockbrokers, but are also sold through financial institutions and the Life Marketing segment's sales force. |
| Acquisitions. The Acquisitions segment focuses on acquiring, converting, and servicing policies acquired from other companies. The segment's primary focus is on life insurance policies sold to individuals. |
| Asset Protection. The Asset Protection segment primarily 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) and the recognition of income tax expense. Asset adjustments represent the inclusion of assets related to discontinued operations.
Operating Segment Income for the
Three Months Ended March 31, 2003
-----------------------------------------------------------------------
Life
Marketing Annuities Acquisitions
----------- ------------ --------------
Premiums and policy fees $710,912 $ 54,312 $10,424,899
Reinsurance ceded (652,625) (5,053,413)
--------- -------- ------------
Net of reinsurance ceded 58,287 54,312 5,371,486
Net investment income 2,939 943,460 7,332,057
Realized investment gains
Other income (loss) 4,477 (5,045)
--------- -------- ------------
Total revenues 61,226 1,002,249 12,698,498
--------- -------- ------------
Benefits and settlement expenses 12,862 904,489 6,456,153
Amortization of deferred policy
acquisition costs 169,174 56,853 1,660,575
Other operating expenses 2,406 (43,556) 2,176,225
--------- -------- ------------
Total benefits and expenses 184,442 917,786 10,292,953
--------- -------- ------------
Income (loss) before income tax (123,216) 84,463 2,405,545
Corporate
Asset and Total
Protection Other Adjustments Consolidated
------------ ------------ ------------- ------------
Premiums and policy fees $8,680,184 $19,870,307
Reinsurance ceded (7,804,635) (13,510,673)
----------- -----------
Net of reinsurance ceded 875,549 6,359,634
Net investment income 99,378 $1,754,467 10,132,301
Realized investment gains $ 733,557 733,557
Other income (loss) (568)
-------- --------- --------- -----------
Total revenues 974,927 1,754,467 733,557 17,224,924
-------- --------- --------- -----------
Benefits and settlement expenses 464,105 7,837,609
Amortization of deferred policy
acquisition costs 191,510 2,078,112
Other operating expenses 27,142 (38,389) 2,123,828
-------- --------- -----------
Total benefits and expenses 682,757 (38,389) 12,039,549
-------- --------- -----------
Income (loss) before income tax 292,170 1,792,856 733,557 5,185,375
Income tax expense 1,805,331 1,805,331
-----------
Net income $ 3,380,044
===========
Operating Segment Income for the
Three Months Ended March 31, 2002
-----------------------------------------------------------------------
Life
Marketing Annuities Acquisitions
----------- ------------ --------------
Premiums and policy fees $122,820 $ 35,878 $11,167,122
Reinsurance ceded (5,056,878)
--------- -------- ------------
Net of reinsurance ceded 122,820 35,878 6,110,244
Net investment income 487 811,087 7,692,560
Realized investment gains 65,354
Other income 3,115
--------- -------- ------------
Total revenues 123,307 915,434 13,802,804
--------- -------- ------------
Benefits and settlement expenses 44,350 737,201 6,779,091
Amortization of deferred policy
acquisition costs 2,086 288,548 1,919,014
Other operating expenses 26,171 30,918 2,183,108
--------- -------- ------------
Total benefits and expenses 72,607 1,056,667 10,881,213
--------- -------- ------------
Income (loss) before income tax 50,700 (141,233) 2,921,591
Corporate
Asset and Total
Protection Other Adjustments Consolidated
------------ ------------ ------------- ------------
Premiums and policy fees $855,642 $12,181,462
Reinsurance ceded (24,986) (5,081,864)
----------- -----------
Net of reinsurance ceded 830,656 7,099,598
Net investment income 145,203 $16,433 8,665,770
Realized investment gains (losses) $ (85,337) (19,983)
Other income 3,115
-------- --------- --------- -----------
Total revenues 975,859 16,433 (85,337) 15,748,500
-------- --------- --------- -----------
Benefits and settlement expenses 484,337 8,044,979
Amortization of deferred policy
acquisition costs 165,429 2,375,077
Other operating expenses 28,040 (70,986) 2,197,251
-------- --------- -----------
Total benefits and expenses 677,806 (70,986) 12,617,307
-------- --------- -----------
Income (loss) before income tax 298,053 87,419 (85,337) 3,131,193
Income tax expense 1,094,753 1,094,753
-----------
Net income $ 2,036,440
===========
Operating Segment Assets
March 31, 2003
-----------------------------------------------------------------------------
Life
Marketing Annuities Acquisitions
----------- ----------- -------------
Investments and other assets $ 955,360 $53,619,578 $598,246,388
Deferred policy acquisition costs 691,422 2,619,604 95,214,119
----------- ----------- ------------
Total assets $ 1,646,782 $56,239,182 $693,460,507
=========== =========== ============
Corporate
Asset and
Protection Other Adjustments Total
------------ ------------ ------------ ------------
Investments and other assets $65,290,039 $104,414,375 $3,580,304 $826,106,044
Deferred policy acquisition costs 1,579,857 100,105,002
------------ ------------ ------------ ------------
Total assets $66,869,896 $104,414,375 $3,580,304 $926,211,046
============ ============ ============ ============
Operating Segment Assets
December 31, 2002
-----------------------------------------------------------------------------
Life
Marketing Annuities Acquisitions
----------- ----------- -------------
Investments and other assets $ 523,211 $54,071,804 $600,231,727
Deferred policy acquisition costs 583,131 2,581,309 100,007,935
----------- ----------- -------------
Total assets $ 1,106,342 $56,653,113 $700,239,662
=========== =========== =============
Corporate
Asset and
Protection Other Adjustments Total
------------ ------------ ------------ ------------
Investments and other assets $78,120,621 $99,048,739 $3,723,088 $835,719,190
Deferred policy acquisition costs 1,607,207 104,779,582
------------ ------------ ------------ ------------
Total assets $79,727,828 $99,048,739 $3,723,088 $940,498,772
============ ============= ============ ============
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 March 31, 2003, and for the three months then ended, the Company had share-owners’ equity of $108.1 million and net income of $6.1 million.
NOTE E - COMPREHENSIVE INCOMEThe following table sets forth the Company's comprehensive income for the periods shown:
Three Months Ended
March 31
------------------------
2003 2002
---- ----
Net income $3,380,044 $2,036,440
Change in net unrealized gains/losses
on investments (net of income tax:
three months: 2003 - $3,258,368; 2002 - $(1,543,940)) 6,051,254 (2,867,318)
Reclassification adjustment for amounts
included in net income (net of income tax:
three months: 2003 - $(256,745); 2002 - $6,994) (476,812) 12,989
----------- -----------
Comprehensive income $8,954,486 $ (817,889)
=========== ===========
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.
Protective Life and Annuity Insurance Company (“the Company”), a stock life insurance company, was founded in 1978. Since 1983, all outstanding shares of the Company’s common stock have been owned by Protective Life Insurance Company (“Protective”), which is a wholly owned subsidiary of Protective Life Corporation (“PLC”), an insurance holding company whose common stock is traded on the New York Stock Exchange under the symbol “PL”. All outstanding shares of the Company’s preferred stock are owned by PLC. The Company is authorized to transact insurance business as an insurance company or a reinsurance company in 49 states, including New York.
In accordance with General Instruction H(2)(a), the Company includes the following analysis with the reduced disclosure format.
For a more complete understanding of the Company’s business and its current period results, please read the following Management’s Narrative Analysis of the Results of Operations in conjunction with the Company’s latest annual report on Form 10-K and our other filings with the SEC.
PLC, through its subsidiaries, provides financial services through the production, distribution, and administration of insurance and investment products. PLC, through its subsidiaries, operates several business segments each having a strategic focus. An operating segment is generally distinguished by products and/or channels of distribution.
The Company, since it is licensed in the State of New York, is the entity through which PLC markets, distributes, and services insurance and annuity products in New York. As of March 31, 2003, the Company was involved in the businesses of four of PLC’s operating segments: Life Marketing, Annuities, Acquisitions, and Asset Protection. 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 reviews the Company’s financial condition and results of operations including its liquidity and capital resources. Historical information is presented and discussed. Where appropriate, factors that may affect future financial performance are also identified and discussed. Certain statements made in this report include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include any statement that may predict, forecast, indicate or imply future results, performance or achievements instead of historical facts and may contain words like “believe,” “expect,” “estimate,” “project,” “budget,” “forecast,” “anticipate,” “plan,” “will,” “shall,” and other words, phrases, or expressions with similar meanings. Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from the results contained in the forward-looking statements, and the Company cannot give assurances that such statements will prove to be correct. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Please refer to Exhibit 99(a), incorporated by reference herein, for more information about factors which could affect future results.
The Company’s results may fluctuate from period to period due to fluctuations in mortality, persistency, claims, expenses, interest rates, and other factors. Therefore, it is management’s opinion that quarterly operating results for an insurance company are not necessarily indicative of results to be achieved in future periods, and that a review of operating results over a longer period is necessary to assess an insurance company’s performance.
RevenuesThe following table sets forth revenues by source for the periods shown:
Three Months Ended
March 31
--------------------------------
2003 2002
---- ----
Premiums and policy fees, net of reinsurance $ 6,359,634 $ 7,099,598
Net investment income 10,132,301 8,665,770
Realized investment losses 733,557 (19,983)
Other income (568) 3,115
----------- -----------
$17,224,924 $15,748,500
=========== ===========
Premiums and policy fees, net of reinsurance (“premiums and policy fees”) decreased $0.7 million or 10.4% in the first three months of 2003 from the first three months of 2002. 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 2002 or the first three months of 2003, therefore decreases in older acquired policies resulted in a decrease of $0.7 million in the first three months of 2003 as compared with the first three months of 2002. Premiums and policy fees in the Life Marketing, Annuities and Asset Protection segments were relatively unchanged in the first three months of 2003 as compared to 2002.
Net investment income in the first three months of 2003 increased by $1.5 million as compared to the corresponding period of the preceding year primarily due to increases in the average amount of invested assets. The percentage earned on average cash and investments was 5.6% in the first quarter of 2003 compared to 6.7% in the first quarter of 2002. Investment returns have been negatively affected by higher prepayment on mortgage-backed securities and mortgage loans, and lower interest rates.
The Company generally purchases its investments with the intent to hold to maturity by purchasing investments that match future cash-flow needs. The sales of investments that have occurred generally result from portfolio management decisions to maintain proper matching of assets and liabilities. Accordingly, the Company has classified its fixed maturities and certain other securities as “available for sale.”
Realized investment gains were approximately $0.7 million in the first three months of 2003. During the first three months of 2003, the Company recorded other than temporary impairments on its investments of $0.3 million. Realized investment gains were approximately $1.0 million in the first three months of 2003.
Each quarter the Company reviews investments with material unrealized losses and tests for other-than-temporary impairments. Management analyzes various factors to determine if any specific other-than-temporary asset impairments exist. Once a determination has been made that a specific other-than-temporary impairment exists, a realized loss is recognized and the cost basis of the impaired asset is adjusted to its fair value. An other-than-temporary impairment loss is recognized based upon all relevant facts and circumstances for each investment. With respect to unrealized losses due to issuer-specific events, the Company considers the creditworthiness and financial performance of the issuer and other available information. With respect to unrealized losses that are not due to issuer-specific events, such as losses due to interest rate fluctuations, general market conditions or industry-related events, the Company considers its intent and ability to hold the investment to allow for a market recovery or to maturity together with an assessment of the likelihood of full recovery.
The Company reported an insignificant amount of other income in the first three months of 2003 and 2002.
Income Before Income TaxManagement evaluates the results of the Company’s segments on a before-income-tax basis as adjusted for certain items which management believes are not indicative of the Company’s core operations. Segment operating income (loss) excludes net realized investment gains and losses and the related amortization of deferred policy acquisition costs because fluctuations in these items are due to changes in interest rates and other financial market factors instead of mortality and morbidity. Also, segment operating income (loss) excludes any net gains or losses on disposals of businesses, discontinued operations, extraordinary items, the cumulative effect of changes in accounting principles, and any other items, that, in each case, are neither normal nor recurring. Although the items excluded from segment operating income (loss) may be significant components in understanding and assessing the Company’s overall financial performance, management believes that segment operating income (loss) enhances an investor’s understanding of the Company’s results of operations by highlighting the income (loss) attributable to the normal, recurring operations of the insurance business (i.e., mortality and morbidity), consistent with industry practice. However, the Company’s segment income (loss) measures may not be comparable to similarly titled measures reported by other companies. Segment operating income (loss) should not be construed as a substitute for net income (loss) determined in accordance with accounting principles generally accepted in the United States of America (GAAP). “Total income before income tax” is a GAAP measure to which the non-GAAP measure “total operating income” may be compared. Unlike total operating income, total income before income tax includes net realized investment gains and losses and the related amortization of deferred policy acquisition costs.
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
March 31
---------------------------
2003 2002
---- ----
Operating Income (Loss)1
Life Marketing $ (123,216) $ 50,700
Annuities 84,463 (206,587)
Acquisitions 2,405,545 2,921,591
Asset Protection 292,170 298,053
Corporate and Other 1,792,856 87,419
--------- ---------
Total operating income 4,451,818 3,151,176
--------- ---------
Realized Investment Gains (Losses)
Annuities 65,354
Unallocated Realized Investment Gains (Losses) 733,557 (85,337)
--------- ---------
Total 733,557 (19,983)
--------- ---------
Income (Loss) Before Income Tax
Life Marketing (123,216) 50,700
Annuities 84,463 (141,233)
Asset Protection 292,170 298,053
Acquisitions 2,405,545 2,921,591
Corporate and Other 1,792,856 87,419
Unallocated Realized Investment Gains (Losses) 733,557 (85,337)
--------- ---------
Total income before income tax $5,185,375 $3,131,193
========= =========
1 Income (loss) before income tax excluding realized investment gains and losses.
The Life Marketing segment had pretax operating losses of $0.1 million in the first three months of 2003 and $0.1 million of operating income in the same period of 2002 primarily due to an increase in amortization of deferred policy acquisition costs.
The Annuity segment had pretax operating income of $0.1 million in the first three months of 2003 and $0.2 million of pretax operating losses in the same period of 2002, primarily due to an increase in net investment income on capital and a decrease in amortization of deferred policy acquisition costs. The Annuities segment’s future results may be negatively affected by a slow economy. Volatile equity markets could negatively affect sales of variable annuities and the fees the segment assesses on variable annuity contracts. Lower interest rates could negatively affect sales of fixed annuities. In this segment, equity market volatility may create uncertainty regarding the level of future profitability in the variable annuity business and the related rate of amortization of deferred policy acquisition costs. Also, beginning January 2003, the Company is no longer marketing variable annuity products.
In accordance with statutory accounting practices prescribed or permitted by regulatory authorities (which require the assumption that equity markets will significantly worsen), the Company reported GMDB related policy liabilities and accruals of $0.2 million at March 31, 2003.
Pretax operating income from the Acquisitions segment was $2.4 million in the first three months of 2003 as compared to $2.9 million in the same period of 2002. 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 decrease in benefit and settlement expenses and the decrease in deferred policy acquisition costs partially offset the decrease in premiums and policy fees and the decrease in investment income on invested assets allocated to the segment.
The Asset Protection segment’s pretax operating income was $0.3 million in the first three months of 2003, relatively unchanged from the same period of 2002.
The Corporate and Other segment consists of net investment income and expenses not identified with the preceding business segments. Pretax operating income from this segment was $1.8 million in the first three months of 2003 as compared to $0.1 million in the first three months of 2002.
Income TaxesThe following table sets forth the effective tax rates for the periods shown:
Three Months Ended
March 31
---------------------
2003 2002
---- ----
Effective Income Tax Rates 34.8% 35.0%
The effective income tax rate for the full year of 2002 was 34.9%. Management’s estimate of the effective income tax rate for the full year of 2003 is approximately 35.0%.
Net IncomeThe following table sets forth net income for the periods shown:
Three Months Ended
March 31
-----------------------------
2003 2002
---- ----
$3,380,044 $2,036,440
Compared to the same period in 2002, net income in the first three months of 2003 increased $1.3 million, reflecting increases in the Annuities and Corporate and Other segments, and larger unallocated realized gains, which were partially offset by decreases in the Life Marketing, Acquisitions, and Asset Protection segments.
Review by Independent AccountantsWith respect to the unaudited condensed financial information of Protective Life and Annuity Insurance Company for the three-month periods ended March 31, 2003 and 2002, PricewaterhouseCoopers LLP (“PricewaterhouseCoopers”) reported that they have applied limited procedures in accordance with professional standards for a review of such information. However, their separate report dated May 9, 2003, appearing herein, stated that they did not audit and they do not express an opinion on that unaudited condensed financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers is not subject to the liability provisions of Section 11 of the Securities Act of 1933 for their report on the unaudited condensed financial information because that report is not a “report” or a “part” of a registration statement prepared or certified by PricewaterhouseCoopers into which this Form 10-Q may be incorporated by reference within the meaning of Sections 7 and 11 of the Act.
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
Pursuant 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.
Protective Life and Annuity Insurance Company
Date: May 15, 2003 /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: May 15, 2003
/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: May 15, 2003
/s/ Allen W. Ritchie
Title: Executive Vice President and
Chief Financial Officer