| 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 August 8, 2003: 250,000 shares.
The registrant meets the conditions set forth in General Instruction H(1)(a)and (b) of Form 10-Q and
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
INDEX
Part I. Financial Information:
Item 1. Financial Statements:
Report of Independent Auditors
Condensed Statements of Income for the Three and
Six Months ended June 30, 2003 and 2002 (unaudited)
Condensed Balance Sheets as of June 30, 2003
(unaudited) and December 31, 2002
Condensed Statements of Cash Flows for the
Six Months ended June 30, 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
REPORT OF INDEPENDENT AUDITORS
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 June 30, 2003, and the related condensed statements of income for each of the three-month and six-month periods ended June 30, 2003 and 2002, and the condensed statements of cash flows for the six-month periods ended June 30, 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
August 6,
2003
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
2003 2002 2003 2002
___________________________________________________________________________________________________________________________
REVENUES
Premiums and policy fees $18,285,505 $11,447,368 $38,155,812 $23,074,134
Reinsurance ceded (11,175,217) (3,696,597) (24,685,890) (8,223,764)
___________________________________________________________________________________________________________________________
Premiums and policy fees, net of reinsurance ceded 7,110,288 7,750,771 13,469,922 14,850,370
Net investment income 10,726,002 8,938,842 20,858,303 17,604,612
Realized investment gains (losses) 1,544,973 (509,709) 2,278,530 (529,692)
Other income (loss) 143,222 (902) 142,654 2,213
___________________________________________________________________________________________________________________________
19,524,485 16,179,002 36,749,409 31,927,503
___________________________________________________________________________________________________________________________
BENEFITS AND EXPENSES
Benefits and settlement expenses
(net of reinsurance ceded:
three months: 2003 - $8,516,353; 2002 - $2,918,803
six months: 2003 - $14,531,577; 2002 - $6,483,335) 8,283,554 8,557,440 16,121,163 16,602,419
Amortization of deferred policy acquisition costs 2,005,643 2,541,468 4,083,755 4,916,545
Other operating expenses (net of reinsurance ceded:
three months: 2003 - $(518,446); 2002 - $(135,882)
six months: 2003 - $(1,397,649); 2002 - $(51,062)) 2,217,090 2,308,641 4,340,918 4,505,892
___________________________________________________________________________________________________________________________
12,506,287 13,407,549 24,545,836 26,024,856
___________________________________________________________________________________________________________________________
INCOME BEFORE INCOME TAX 7,018,198 2,771,453 12,203,573 5,902,647
INCOME TAX EXPENSE 2,454,091 968,911 4,259,422 2,063,664
___________________________________________________________________________________________________________________________
NET INCOME $ 4,564,107 $ 1,802,542 $7,944,151 $ 3,838,983
___________________________________________________________________________________________________________________________
See notes to condensed financial statements
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
CONDENSED BALANCE SHEETS
June 30 December 31
2003 2002
(Unaudited)
___________________________________________________________________________________________________________________________
ASSETS
Investments:
Fixed maturities, at market
(amortized cost: 2003 - $615,515,611; 2002 - $466,924,086) $671,215,348 $488,701,807
Mortgage loans on real estate 1,693,663 1,793,590
Policy loans 54,129,415 54,807,151
Short-term investments 26,284 178,805,245
___________________________________________________________________________________________________________________________
Total investments 727,064,710 724,107,793
Cash 16,379,080 1,669,532
Accrued investment income 11,087,699 8,955,807
Accounts and premiums receivable, net of allowance for
uncollectible amounts 452,317 325,479
Reinsurance receivables 72,030,174 92,256,257
Deferred policy acquisition costs 92,112,564 104,779,582
Other assets 15,317 21,955
Assets related to separate accounts
Variable Annuity 9,918,090 8,382,367
___________________________________________________________________________________________________________________________
$929,059,951 $940,498,772
___________________________________________________________________________________________________________________________
LIABILITIES
Policy liabilities and accruals:
Future policy benefits and claims $505,762,020 $517,624,864
Unearned premiums 18,225,359 26,349,028
___________________________________________________________________________________________________________________________
523,987,379 543,973,892
Annuity deposits 57,546,917 60,080,082
Other policyholders' funds 2,825,516 6,025,066
Funds held-coinsurance 65,673,120 89,552,015
Other liabilities 14,412,874 14,214,260
Deferred income taxes 38,269,947 25,533,038
Liabilities related to separate accounts
Variable Annuity 9,918,090 8,382,367
___________________________________________________________________________________________________________________________
712,633,843 747,760,720
___________________________________________________________________________________________________________________________
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 17,287,317 9,343,166
Accumulated other comprehensive income:
Net unrealized gains on investments (net of income
tax: 2003 - $13,596,405; 2002 - $5,118,918) 25,250,467 9,506,562
___________________________________________________________________________________________________________________________
216,426,108 192,738,052
___________________________________________________________________________________________________________________________
$929,059,951 $940,498,772
___________________________________________________________________________________________________________________________
See notes to condensed financial statements
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30
2003 2002
___________________________________________________________________________________________________________________________
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 7,944,151 $ 3,838,983
Adjustments to reconcile net income to net cash provided by operating activities:
Realized investment (gains) losses (2,278,530) 529,692
Amortization of deferred policy acquisition costs 4,083,755 4,916,445
Capitalization of deferred policy acquisition costs (1,148,405) (1,137,837)
Deferred income tax 4,259,422 2,063,664
Interest credited to universal life and investment products 10,928,975 18,731,490
Policy fees assessed on universal life and investment products (17,074,457) (17,479,689)
Change in accrued investment income and other receivables 17,967,353 7,198,612
Change in policy liabilities and other policyholders' funds
of traditional life and health products (25,072,210) (295,668)
Change in funds held-coinsurance (23,878,895) (57,660)
Change in other liabilities 198,614 (6,457,811)
Other, net 6,638 (10,849)
___________________________________________________________________________________________________________________________
Net cash (used in) provided by operating activities (24,063,589) 11,839,372
___________________________________________________________________________________________________________________________
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reductions of investments
Investments available for sale 252,066,361 35,558,343
Other 777,664 801,687
Sale of investments
Investments available for sale 287,983,735 198,751,403
Cost of investments acquired
Investments available for sale (507,553,087) (263,616,932)
___________________________________________________________________________________________________________________________
Net cash provided by (used in) investing activities 33,274,673 (28,505,499)
___________________________________________________________________________________________________________________________
CASH FLOWS FROM FINANCING ACTIVITIES
Investment product deposits and change in universal life deposits 12,796,003 30,503,057
Investment product withdrawals (7,297,539) (16,977,668)
___________________________________________________________________________________________________________________________
Net cash provided by financing activities 5,498,464 13,525,389
___________________________________________________________________________________________________________________________
INCREASE (DECREASE) IN CASH 14,709,548 (3,140,738)
CASH AT BEGINNING OF PERIOD 1,669,532 4,284,257
___________________________________________________________________________________________________________________________
CASH AT END OF PERIOD $ 16,379,080 $ 1,143,519
___________________________________________________________________________________________________________________________
See notes to condensed financial statements
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE A – BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of Protective Life and Annuity Insurance Company (“the Company”) have been prepared on the basis of accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair statement have been included. Operating results for the six month period ended June 30, 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 LIABILITIES
Under insurance guaranty fund laws, in most states insurance companies doing business therein can be assessed up to prescribed limits for policyholder losses incurred by insolvent companies. The Company does not currently believe 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 SEGMENTS
PLC, 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. |
| Acquisitions.The Acquisitions segment focuses on acquiring, converting, and servicing policies acquired from other companies. The segment’s primary focus is on life insurance policies sold to individuals. |
| Annuities.The Annuities segment manufactures, sells, and supports fixed 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. |
| Asset Protection. The Asset Protection segment primarily markets credit life and disability insurance products through banks, consumer finance companies and automobile dealers. |
| 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
Six Months Ended June 30, 2003
___________________________________________________________________________________________________________________________
Life
Marketing Acquisitions Annuities
___________________________________________________________________________________________________________________________
Premiums and policy fees $1,529,446 $20,263,275 $ 163,879
Reinsurance ceded (1,543,708) (8,701,921)
___________________________________________________________________________________________________________________________
Net of reinsurance ceded (14,262) 11,561,354 163,879
Net investment income 23,124 14,884,783 1,870,020
Realized investment gains 149,820
Other income (5,045) 11,068
___________________________________________________________________________________________________________________________
Total revenues 8,862 26,441,092 2,194,787
___________________________________________________________________________________________________________________________
Benefits and settlement expenses (110,981) 12,897,723 2,006,339
Amortization of deferred policy
acquisition costs 262,952 3,335,901 96,497
Other operating expenses (225,722) 4,420,220 85,676
___________________________________________________________________________________________________________________________
Total benefits and expenses (73,751) 20,653,844 2,188,512
___________________________________________________________________________________________________________________________
Income before income tax 82,613 5,787,248 6,275
Less: realized investment gains (losses) 149,820
___________________________________________________________________________________________________________________________
Operating income (loss) 82,613 5,787,248 (143,545)
___________________________________________________________________________________________________________________________
Corporate
Asset and Total
Protection Other Adjustments Consolidated
___________________________________________________________________________________________________________________________
Premiums and policy fees $16,199,212 $38,155,812
Reinsurance ceded (14,440,261) (24,685,890)
___________________________________________________________________________________________________________________________
Net of reinsurance ceded 1,758,951 13,469,922
Net investment income 243,155 $3,837,221 20,858,303
Realized investment gains $2,128,710 2,278,530
Other income 136,631 142,654
___________________________________________________________________________________________________________________________
Total revenues 2,002,106 3,973,852 2,128,710 36,749,409
Benefits and settlement expenses 1,328,082 16,121,163
Amortization of deferred policy
acquisition costs 388,405 4,083,755
Other operating expenses 71,103 (10,359) 4,340,918
___________________________________________________________________________________________________________________________
Total benefits and expenses 1,787,590 (10,359) 24,545,836
Income before income tax 214,516 3,984,211 2,128,710 12,203,573
Less: realized investment gains (losses)
___________________________________________________________________________________________________________________________
Operating income (loss) 214,516 3,984,211 (143,545)
Income tax expense 4,259,422 4,259,422
___________________________________________________________________________________________________________________________
Net income $ 7,944,151
___________________________________________________________________________________________________________________________
___________________________________________________________________________________________________________________________
Operating Segment Income for the
Three Months Ended June 30, 2003
___________________________________________________________________________________________________________________________
Life
Marketing Acquisitions Annuities
___________________________________________________________________________________________________________________________
Premiums and policy fees $818,534 $ 9,838,376 $ 109,567
Reinsurance ceded (891,083) (3,648,508)
___________________________________________________________________________________________________________________________
Net of reinsurance ceded (72,549) 6,189,868 109,567
Net investment income 20,185 7,552,726 926,560
Realized investment gains 149,820
Other income 6,591
___________________________________________________________________________________________________________________________
Total revenues (52,364) 13,742,594 1,192,538
___________________________________________________________________________________________________________________________
Benefits and settlement expenses (123,843) 6,441,570 1,101,850
Amortization of deferred policy
acquisition costs 93,778 1,675,326 39,644
Other operating expenses (228,128) 2,243,995 129,232
___________________________________________________________________________________________________________________________
Total benefits and expenses (258,193) 10,360,891 1,270,726
___________________________________________________________________________________________________________________________
Income (loss) before income tax 205,829 3,381,703 (78,188)
Less: realized investment gains (losses) 149,820
___________________________________________________________________________________________________________________________
Operating income (loss) 205,829 3,381,703 (228,008) (143,545)
___________________________________________________________________________________________________________________________
Corporate
Asset and Total
Protection Other Adjustments Consolidated
___________________________________________________________________________________________________________________________
Premiums and policy fees $7,519,028 $18,285,505
Reinsurance ceded (6,635,626) (11,175,217)
___________________________________________________________________________________________________________________________
Net of reinsurance ceded 883,402 7,110,288
Net investment income 143,777 $2,082,754 10,726,002
Realized investment gains $1,395,153 1,544,973
Other income 136,631 143,222
___________________________________________________________________________________________________________________________
Total revenues 1,027,179 2,219,385 1,395,153 19,524,485
___________________________________________________________________________________________________________________________
Benefits and settlement expenses 863,977 8,283,554
Amortization of deferred policy
acquisition costs 196,895 2,005,643
Other operating expenses 43,961 28,030 2,217,090
___________________________________________________________________________________________________________________________
Total benefits and expenses 1,104,833 28,030 12,506,287
___________________________________________________________________________________________________________________________
Income (loss) before income tax (77,654) 2,191,355 1,395,153 7,018,198
Less: realized investment gains (losses)
___________________________________________________________________________________________________________________________
Operating income (loss) (77,654) 2,191,355 (143,545)
Income tax expense 2,454,091 2,454,091
___________________________________________________________________________________________________________________________
Net income $ 4,564,107
_________________________________________________________________________________________________________________________
___________________________________________________________________________________________________________________________
Operating Segment Income for the
Six Months Ended June 30, 2002
___________________________________________________________________________________________________________________________
Life
Marketing Acquisitions Annuities
___________________________________________________________________________________________________________________________
Premiums and policy fees $364,209 $20,931,210 $ 76,876
Reinsurance ceded (142,703) (8,054,907)
___________________________________________________________________________________________________________________________
Net of reinsurance ceded 221,506 12,876,303 76,876
Net investment income (208) 15,264,331 1,758,697
Realized investment gains 66,277
Other income 2,213
___________________________________________________________________________________________________________________________
Total revenues 221,298 28,140,634 1,904,063
___________________________________________________________________________________________________________________________
Benefits and settlement expenses 31,723 13,971,889 1,620,858
Amortization of deferred policy
acquisition costs (14,705) 4,022,153 579,608
Other operating expenses 113,079 4,286,466 119,131
___________________________________________________________________________________________________________________________
Total benefits and expenses 130,097 22,280,508 2,319,597
___________________________________________________________________________________________________________________________
Income (loss) before income tax 91,201 5,860,126 (415,534)
Less: realized investment gains (losses) 66,277
___________________________________________________________________________________________________________________________
Operating income (loss) 91,201 5,860,126 (481,811) (143,545)
___________________________________________________________________________________________________________________________
Corporate
Asset and Total
Protection Other Adjustments Consolidated
___________________________________________________________________________________________________________________________
Premiums and policy fees $1,701,839 $23,074,134
Reinsurance ceded (26,154) (8,223,764)
___________________________________________________________________________________________________________________________
Net of reinsurance ceded 1,675,685 14,850,370
Net investment income 283,900 $297,892 17,604,612
Realized investment gains (losses) $ (595,969) (529,692)
Other income 2,213
___________________________________________________________________________________________________________________________
Total revenues 1,959,585 297,892 (595,969) 31,927,503
___________________________________________________________________________________________________________________________
Benefits and settlement expenses 977,949 16,602,419
Amortization of deferred policy
acquisition costs 329,489 4,916,545
Other operating expenses 57,994 (70,778) 4,505,892
___________________________________________________________________________________________________________________________
Total benefits and expenses 1,365,432 (70,778) 26,024,856
___________________________________________________________________________________________________________________________
Income (loss) before income tax 594,153 368,670 (595,969) 5,902,647
Less: realized investment gains (losses)
___________________________________________________________________________________________________________________________
Operating income (loss) 594,153 368,670 (143,545)
Income tax expense 2,063,664 2,063,664
___________________________________________________________________________________________________________________________
Net income $ 3,838,983
___________________________________________________________________________________________________________________________
Operating Segment Income for the
Three Months Ended June 30, 2002
___________________________________________________________________________________________________________________________
Life
Marketing Acquisitions Annuities
___________________________________________________________________________________________________________________________
Premiums and policy fees $241,389 $10,318,784 $ 40,998
Reinsurance ceded (142,703) (3,552,726)
___________________________________________________________________________________________________________________________
Net of reinsurance ceded 98,686 6,766,058 40,998
Net investment income (695) 7,571,771 947,610
Realized investment gains 923
Other income (loss) (902)
___________________________________________________________________________________________________________________________
Total revenues 97,991 14,337,829 988,629
___________________________________________________________________________________________________________________________
Benefits and settlement expenses (12,627) 7,192,798 883,657
Amortization of deferred policy
acquisition costs (16,791) 2,103,139 291,060
Other operating expenses 86,908 2,103,358 88,213
___________________________________________________________________________________________________________________________
Total benefits and expenses 57,490 11,399,295 1,262,930
___________________________________________________________________________________________________________________________
Income (loss) before income tax 40,501 2,938,534 (274,301)
Less: realized investment gains (losses) 923
___________________________________________________________________________________________________________________________
Operating income (loss) 40,501 2,938,534 (275,224) (143,545)
___________________________________________________________________________________________________________________________
Corporate
Asset and Total
Protection Other Adjustments Consolidated
___________________________________________________________________________________________________________________________
Premiums and policy fees $846,197 $11,447,368
Reinsurance ceded (1,168) (3,696,597)
___________________________________________________________________________________________________________________________
Net of reinsurance ceded 845,029 7,750,771
Net investment income 138,697 $281,459 8,938,842
Realized investment gains (losses) $(510,632) (509,709)
Other income (loss) (902)
___________________________________________________________________________________________________________________________
Total revenues 983,726 281,459 (510,632) 16,179,002
Benefits and settlement expenses 493,612 8,557,440
Amortization of deferred policy
acquisition costs 164,060 2,541,468
Other operating expenses 29,954 208 2,308,641
___________________________________________________________________________________________________________________________
Total benefits and expenses 687,626 208 13,407,549
___________________________________________________________________________________________________________________________
Income (loss) before income tax 296,100 281,251 (510,632) 2,771,453
Less: realized investment gains (losses)
___________________________________________________________________________________________________________________________
Operating income (loss) 296,100 281,251 (143,545)
Income tax expense 968,911 968,911
___________________________________________________________________________________________________________________________
Net income $ 1,802,542
___________________________________________________________________________________________________________________________
Operating Segment Assets
June 30, 2003
___________________________________________________________________________________________________________________________
Life
Marketing Acquisitions Annuities
___________________________________________________________________________________________________________________________
Investments and other assets $1,420,231 $615,867,922 $51,836,797
Deferred policy acquisition costs 1,028,443 87,000,277 2,505,805
___________________________________________________________________________________________________________________________
Total assets $2,448,674 $702,868,199 $54,342,602
___________________________________________________________________________________________________________________________
___________________________________________________________________________________________________________________________
Corporate
Asset and
Protection Other Adjustments Total
___________________________________________________________________________________________________________________________
Investments and other assets $56,615,127 $111,042,011 $165,299 $836,947,387
Deferred policy acquisition costs 1,578,039 92,112,564
___________________________________________________________________________________________________________________________
Total assets $58,193,166 $111,042,011 $165,299 $929,059,951
___________________________________________________________________________________________________________________________
Operating Segment Assets
December 31, 2002
___________________________________________________________________________________________________________________________
Life
Marketing Acquisitions Annuities
___________________________________________________________________________________________________________________________
Investments and other assets $ 523,211 $600,231,727 $54,071,804
Deferred policy acquisition costs 583,131 100,007,935 2,581,309
___________________________________________________________________________________________________________________________
Total assets $1,106,342 $700,239,662 $56,653,113
___________________________________________________________________________________________________________________________
___________________________________________________________________________________________________________________________
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 June 30, 2003, and for the six months then ended, the Company had share-owners’ equity of $115.4 million and net income of $14.2 million.
NOTE E – COMPREHENSIVE INCOME
The following table sets forth the Company's comprehensive income for the periods shown:
Three Months Ended Six Months Ended
June 30 June 30
2003 2002 2003 2002
_____________________________________________________________________________________________________________________________
Net income $ 4,564,107 $1,802,542 $ 7,944,151 $3,838,983
Change in net unrealized gains/losses
on investments (net of income tax:
three months: 2003 - $6,016,605; 2002 - $2,210,781
six months: 2003 - $9,274,973; 2002 - $666,840) 11,173,695 4,105,736 17,224,950 1,238,418
Reclassification adjustment for amounts
included in net income (net of income tax:
three months: 2003 - $(540,741); 2002 - $178,398
six months: 2003 - $(797,485); 2002 - $185,392) (1,004,232) 331,311 (1,481,045) 344,300
_____________________________________________________________________________________________________________________________
Comprehensive income $14,733,570 $6,239,589 $23,688,056 $5,421,701
_____________________________________________________________________________________________________________________________
NOTE F – RECLASSIFICATIONS
Certain reclassifications have been made in the previously reported financial statements and accompanying notes to make the prior year amounts comparable to those of the current year. Such reclassifications had no effect on previously reported net income, total assets, or share-owners’ equity.
NOTE G – RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2003, the Derivatives Implementation Group of the Financial Accounting Standards Board (FASB) cleared Issue No. B36, “Embedded Derivatives: Modified Coinsurance Arrangements and Debt Instruments That Incorporate Credit Risk Exposures That Are Unrelated or Only Partially Related to the Creditworthiness of the Obligor under Those Instruments” (DIG B36). DIG B36 requires the bifurcation of embedded derivatives within modified coinsurance and funds withheld coinsurance arrangements that expose the creditor to credit risk of a company other than the debtor, even if the debtor owns as investment assets the third-party securities to which the creditor is exposed. The effective date of the implementation guidance in DIG B36 is for the first fiscal quarter beginning after September 15, 2003, and should be applied on a prospective basis. The Company is currently evaluating the impact of this pronouncement on its financial statements, but does not anticipate a material impact on its financial condition or results of operations.
In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133. This Statement is effective for contracts entered into or modified after June 30, 2003, and should be applied prospectively. The Company does not expect the adoption of SFAS No. 149 to have a material effect on the Company’s financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company does not expect the adoption of SFAS No. 150 to have a material effect on the Company’s financial position or results of operations.
ITEM 2. MANAGEMENT’S NARRATIVE ANALYSIS OF THE
RESULTS OF OPERATIONS
Protective Life and Annuity Insurance Company (“the Company”), a stock life insurance company, was founded in 1978. Since 1983, all outstanding shares of the Company’s common stock have been owned by Protective Life Insurance Company (“Protective”), which is a wholly owned subsidiary of Protective Life Corporation (“PLC”), an insurance holding company whose common stock is traded on the New York Stock Exchange under the symbol “PL”. All outstanding shares of the Company’s preferred stock are owned by PLC. The Company is authorized to transact insurance business as an insurance company or a reinsurance company in 49 states, including New York.
In accordance with General Instruction H(2)(a), the Company includes the following analysis with the reduced disclosure format.
For a more complete understanding of the Company’s business and its current period results, please read the following Management’s Narrative Analysis of the Results of Operations in conjunction with the Company’s latest annual report on Form 10-K and other filings with the SEC.
PLC, through its subsidiaries, provides financial services through the production, distribution, and administration of insurance and investment products. PLC, through its subsidiaries, operates several business segments each having a strategic focus. An operating segment is generally distinguished by products and/or channels of distribution.
The Company, since it is licensed in the State of New York, is the entity through which PLC markets, distributes, and services insurance and annuity products in New York. As of June 30, 2003, the Company was involved in the businesses of four of PLC’s operating segments: Life Marketing, Acquisitions, Annuities, 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 following discussion and analysis primarily relates to the six months ended June 30, 2003, as it compares to the same period last year. Unless otherwise noted, the general factors discussed also apply to the quarter ended June 30, 2003, as it compares to the same quarter last year. Where needed for a more complete understanding of the Company’s operating results, information related to the quarters ended June 30, 2003, and June 30, 2002, 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 Six Months Ended
June 30 June 30
2003 2002 2003 2002
_________________________________________________________________________________________________________________________
Premiums and policy fees,
net of reinsurance $ 7,110,288 $ 7,750,771 $13,469,922 $14,850,370
Net investment income 10,726,002 8,938,842 20,858,303 17,604,612
Realized investment gains(losses) 1,544,973 (509,709) 2,278,530 (529,692)
Other income (loss) 143,222 (902) 142,654 2,213
_________________________________________________________________________________________________________________________
$19,524,485 $16,179,002 $36,749,409 $31,927,503
_________________________________________________________________________________________________________________________
Premiums and policy fees, net of reinsurance (“premiums and policy fees”) decreased $1.4 million or 9.3% in the first six months of 2003 from the first six 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 six months of 2003, therefore decreases in older acquired policies resulted in a decrease of $1.3 million in the first six months of 2003 as compared with the first six months of 2002. Premiums and policy fees in both the Annuities and Asset Protection segments increased $0.1 million in the first six months of 2003 as compared to 2002, offsetting the $0.2 million decrease in the Life Marketing segment for the same period.
Net investment income in the first six months of 2003 increased by $3.3 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 5.7% in the first six months of 2003 compared to 6.6% in the first six months of 2002. Investment returns have been negatively affected by higher prepayments 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 $2.3 million in the first six months of 2003. During the first six months of 2003, the Company recorded other than temporary impairments on its investments of $0.3 million as compared to $3.8 million in the first six months of 2002. Realized investment losses were approximately $0.5 million in the first six months of 2002.
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 increase in the amount of other income in the first six months of 2003 of $0.1 million as compared to the first six months of 2002.
Income Before Income Tax and Operating Income
Consistent with the Company's segment reporting in the Notes to Condensed Financial Statements, management 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. In the Life Marketing, Acquisitions, Asset Protection, and Corporate and Other segments, operating income equals segment income before income tax for all periods. In the Annuities segment, operating income excludes realized investment gains and losses.
The following table sets forth operating income or loss and income or loss before income tax by business
segment for the periods shown:
Operating Income (Loss) and Income (Loss) Before Income Tax
_________________________________________________________________________________________________________________________
Three Months Ended Six Months Ended
June 30 June 30
2003 2002 2003 2002
_________________________________________________________________________________________________________________________
Operating income (loss)1
Life marketing $ 205,829 $ 40,501 $ 82,613 $ 91,201
Acquisitions 3,381,703 2,938,534 5,787,248 5,860,126
Annuities (228,008) (275,224) (143,545) (481,811)
Asset protection (77,654) 296,100 214,516 594,153
Corporate and other 2,191,355 281,251 3,984,211 368,670
_________________________________________________________________________________________________________________________
Realized investment gains (losses)
Annuities 149,820 923 149,820 66,277
Unallocated realized investment
gains (losses) 1,395,153 (510,632) 2,128,710 (595,969)
_________________________________________________________________________________________________________________________
Income (loss) before income tax
Life marketing $ 205,829 40,501 82,613 91,201
Acquisitions 3,381,703 2,938,534 5,787,248 5,860,126
Annuities (78,188) (274,301) 6,275 (415,534)
Asset protection (77,654) 296,100 214,516 594,153
Corporate and other 2,191,355 281,251 3,984,211 368,670
Unallocated realized investment
gains (losses) 1,395,153 (510,632) 2,128,710 (595,969)
_________________________________________________________________________________________________________________________
Total income before income tax $7,018,198 $2,771,453 $12,203,573 $5,902,647
_________________________________________________________________________________________________________________________
1 Income (loss) before income tax excluding realized investment gains and losses.
The Life Marketing segment had pretax operating income of $0.1 million in the first six months of 2003 and $0.1 million in the same period of 2002.
The Annuities segment had pretax operating losses of $0.1 million in the first six months of 2003 and $0.5 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 $0.1 million at June 30, 2003.
Pretax operating income from the Acquisitions segment was $5.8 million in the first six months of 2003 as compared to $5.9 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 $0.2 million in the first six months of 2003, as compared to $0.6 million in the first six months of 2002, primarily due to an increase in benefits and settlement expenses.
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 $4.0 million in the first six months of 2003 as compared to $0.4 million in the first six months of 2002, primarily due to an increase in net investment income on capital.
Income Taxes
The following table sets forth the effective tax rates for the periods shown:
Three Months Ended Six Months Ended
June 30 June 30
2003 2002 2003 2002
_________________________________________________________________________________________________________________________
Effective Income Tax Rates 35.0% 35.0% 34.9% 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 Income
The following table sets forth net income for the periods shown:
Three Months Ended Six Months Ended
June 30 June 30
2003 2002 2003 2002
____________________________________________________________________________________________________________
$4,564,107 $1,802,542 $7,944,151 $3,838,983
____________________________________________________________________________________________________________
Compared to the same period in 2002, net income in the first six months of 2003 increased $4.1 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 Auditors
With respect to the unaudited condensed financial information of Protective Life and Annuity Insurance Company for the three-month and six-month periods ended June 30, 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 August 6, 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.
Item 4. Controls and Procedures
The Company’s President and Chief Financial Officer have 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 changes in the Company’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.
PART II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 31(a) - Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31(b) - Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32(a) - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 32(b) - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 99 - Safe Harbor for Forward-Looking Statements.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Protective Life and Annuity Insurance Company
Date: August 14, 2003/s/Jerry W. DeFoor
Jerry W. DeFoor
Vice President
and Controller
and Chief Accounting Officer
(Duly authorized officer)