| For the fiscal year ended | Commission File Number | ||
|---|---|---|---|
| December 31, 2003 | 333-42425 |
| Alabama | 63-0761690 | ||
|---|---|---|---|
| (State or other jurisdiction of | (IRS Employer | ||
| incorporation or organization) | Identificiation No. |
| 2801 Highway 280 South | |||
|---|---|---|---|
| Birmingham, Alabama | 35223 | ||
| (Address of principal | (Zip Code) | ||
| executive offices) |
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by checkmark whether the registrant is an accelerated filer.
Yes [ ] No [X]
Aggregate market value of voting stock held by nonaffiliates of the registrant: None
Number of shares of Common Stock, $10.00 Par Value, outstanding as of February 27, 2004: 250,000
The registrant meets the conditions set forth in General Instruction I(1) (a) and (b) of Form 10-K and is therefore filing this Form with the reduced disclosure format pursuant to General Instruction I(2).
PART I
Item 1. Business
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.
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. PLC’s operating segments are Life Marketing, Acquisitions, Stable Value Products, Annuities, and Asset Protection.
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 December 31, 2003, the Company was involved in the businesses of four of PLC’s operating segments: Life Marketing, Acquisitions, Asset Protection, and Annuities. The Company has an additional segment referred to 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.
Item 2. Properties
The Company has no properties. The Company has contracts with PLC and Protective under which it receives investment, legal, and data processing services on a fee basis and other managerial and administrative services on a shared cost basis.
Protective’s administrative office building is located at 2801 Highway 280 South, Birmingham, Alabama 35223.
Item 3. Legal Proceedings
To the knowledge and in the opinion of management, there are no material pending legal proceedings, other than ordinary routine litigation incidental to the business of the Company, to which the Company or any of its affiliates is a party or of which any of its affiliates’ properties is subject. For additional information regarding legal proceedings see Note 5 to the financial statements included herein.
Item 4. Submission of Matters to a Vote of Security Holders
Not required in accordance with General Instruction I(2)(c).
PART II
Item 5. Market for the Registrant's Common Stock and Related Share-Owner Matters
The Company is a wholly-owned subsidiary of Protective. All of the preferred stock issued by the Company is owned by PLC. Therefore, neither the Company’s common stock nor its preferred stock is publicly traded.
At December 31, 2003, $84.8 million of share-owners’ equity, excluding net unrealized gains and losses, represented net assets of the Company that cannot be transferred to Protective in the form of dividends, loans, or advances.
Insurers are subject to various state statutory and regulatory restrictions on the insurers’ ability to pay dividends. In general, dividends up to specific levels are considered ordinary and may be paid thirty days after written notice to the insurance commissioner of the state of domicile unless such commissioner objects to the dividend prior to the expiration of such period. Dividends in larger amounts are considered extraordinary and are subject to affirmative prior approval by such commissioner. The maximum amount that would qualify as ordinary dividends to Protective by the Company in 2004 is estimated to be $23.1 million.
In 2003, the Company declared and paid a cash dividend on common stock of $12.1 million. In 2002, the Company declared and paid a cash dividend on common stock of $14.7 million. Preferred dividends of $50,000 were paid in 2002. The Company expects to continue to be able to pay cash dividends, subject to its earnings, financial condition and other relevant factors.
Item 6. Selected Financial Data
Not required in accordance with General Instruction I(2)(a).
Item 7. Management's Narrative Analysis of the Results of Operations
In accordance with General Instruction I(2)(a), the Company includes the following analysis with the reduced disclosure format.
Forward-Looking Statements – Cautionary Language
This report reviews the Company’s financial condition and results of operations. Historical information is presented and discussed. Where appropriate, factors that may affect future financial performance are also identified and discussed. Certain statements made in this report include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include any statement that may predict, forecast, indicate or imply future results, performance or achievements instead of historical facts, and may contain words like “believe,” “expect,” “estimate,” “project,” “budget,” “forecast,” “anticipate,” “plan,” “will,” “shall,” “may,” and other words, phrases or expressions with similar meaning. 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, undue reliance should not be placed on forward-looking statements as a prediction of actual results.
Critical Accounting Policies
The Company’s accounting policies inherently require the use of judgments relating to a variety of assumptions and estimates, in particular expectations of current and future mortality, morbidity, persistency, expenses, and interest rates. Because of the inherent uncertainty when using the assumptions and estimates, the effect of certain accounting policies under different conditions or assumptions could be materially different from those reported in the financial statements. A discussion of the various critical accounting policies is presented below.
The Company incurs significant costs in connection with acquiring new insurance business. These costs, which vary with and are primarily related to the production of new business and coinsurance of blocks of policies, are deferred. The recovery of such costs is dependent on the future profitability of the related policies. The amount of future profit is dependent principally on investment returns, mortality, morbidity, persistency, and expenses to administer the business and certain economic variables, such as inflation. These factors enter into management’s estimates of future profits which generally are used to amortize certain of such costs. Revisions to estimates result in changes to the amounts expensed in the reporting period in which the revisions are made and could result in the impairment of the asset and a charge to income if estimated future profits are less than the unamortized deferred amounts.
The Company has a deferred policy acquisition costs asset of approximately $0.9 million related to its variable annuity product lines with an account balance of $14.3 million at December 31, 2003. The Company monitors the rate of amortization of the deferred policy acquisition costs associated with its variable annuity product line. The methodologies employ varying assumptions about how much and how quickly the stock markets will appreciate. The primary assumptions used to project future profits as part of the recoverability analysis include: a long-term equity market growth rate of 9%, reversion to the mean methodology with a reversion to the mean cap rate of 14%, reversion to the mean period of 5 years, and an amortization period of 20 years. A recovery in equity markets, or methodologies and assumptions that anticipate a recovery, result in lower amounts of amortization, and a worsening of equity markets results in higher amounts of amortization.
Establishing an adequate liability for the Company’s obligations to its policyholders requires the use of assumptions. Liabilities for future policy benefits on traditional life insurance products requires the use of assumptions relative to future investment yields, mortality, persistency and other assumptions based on the Company’s historical experience, modified as necessary to reflect anticipated trends and to include provisions for possible adverse deviation.
The Company also establishes liabilities for guaranteed minimum death benefits (GMDB) on its variable annuity products. The methods used to estimate the liabilities employ assumptions about mortality and the performance of equity markets. The Company assumes mortality of 60% of the National Association of Insurance Commissioners 1994 Variable Annuity GMDB Mortality Table to reflect improvements in mortality since the table was derived and other factors. Future declines in the equity market would increase the Company’s GMDB liability. Differences between the actual experience and the assumptions used result in variances in profit and could result in losses. The Company’s GMDB at December 31, 2003, are subject to a dollar-for-dollar reduction upon withdrawal of related annuity deposits on contracts issued prior to January 1, 2003.
Determining whether a decline in the current fair value of invested assets is an other-than-temporary decline in value can involve a variety of assumptions and estimates, particularly for investments that are not actively traded on established markets. For example, assessing the value of some investments requires the Company to perform an analysis of expected future cash flows or rates of prepayments. Other investments, such as collateralized mortgage or bond obligations, represent selected tranches of a structured transaction, supported overall by underlying investments in a wide variety of issuers. The Company’s specific accounting policies related to its invested assets are discussed in the Notes to the Financial Statements.
The assessment of potential obligations for tax, regulatory, and litigation matters inherently involve a variety of estimates of potential future outcomes. The Company makes such estimates after consultation with its advisors and a review of available facts.
Revenues
The following table sets forth revenues by source for the periods shown:
Year Ended Percentage
December 31 Increase/(Decrease)
----------------------------------- ---------------------
2003 2002
---- ----
Premiums and policy fees........................... $ 24,898,748 $ 27,558,996 (9.7)%
Net investment income.............................. 41,295,486 36,245,837 13.9
Realized investment gains (losses)................. 3,347,309 (696,209) 581.0
Other income....................................... 156,495 11,087 1,311.5
------------- -------------
$ 69,698,038 $ 63,119,711
============= =============
Premiums and policy fees, net of reinsurance (“premiums and policy fees”) decreased $2.7 million or 9.7% in 2003 as compared to 2002. Premiums and policy fees in the Life Marketing segment increased $0.1 million in 2003 as compared to 2002. Premiums and policy fees in the Acquisitions segment are expected to decline with time unless new acquisitions are made. There were no new acquisitions made in 2003, resulting in a decrease of $2.9 million. Premiums and policy fees from the Asset Protection segment were relatively unchanged in 2003 as compared to 2002. The Annuities segment’s premiums in 2003 increased $0.1 million as compared to 2002.
Net investment income for 2003 was $41.3 million, 13.9% higher than for the preceding year primarily due to a full year of higher average invested assets in 2003. The percentage earned on average cash and investments was 5.9% in 2003 and 6.3% in 2002. Investment returns have been negatively affected by higher prepayments on mortgage-backed securities 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. However, the Company may sell any of its investments to maintain proper matching of assets and liabilities. Accordingly, the Company has classified its fixed maturities and certain other securities as “available for sale.” The sales of investments that have occurred generally result from portfolio management decisions to maintain proper matching of assets and liabilities.
Realized investment gains in 2003 were approximately $3.3 million and realized investment losses in 2002 were approximately $0.7 million. During 2003, the Company recorded other-than-temporary impairments in its investments of $0.3 million, as compared to $4.3 million in 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.
Income Before Income Tax
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, operating segment income (loss) excludes any net gains or losses on disposals of businesses, discontinued operations, extraordinary items, the cumulative effect of accounting changes, 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 operating segment 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 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 from continuing operations 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 Annuities and Corporate and Other segments, operating income excludes realized investment gains and losses and the related amortization.
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
Year Ended December 31
-------------------------------------------------
2003 2002
---- ----
Operating Income (Loss)(1)
Life Marketing................................ $ 771,259 $ 142,070
Acquisitions.................................. 10,690,666 11,732,882
Annuities..................................... (189,642) (536,584)
Asset Protection.............................. 639,252 1,593,905
Corporate and Other........................... 7,970,227 1,010,857
------------ ------------
Realized Investment Gains (Losses)
Annuities..................................... 262,490 79,719
Corporate and Other........................... 3,084,819 (775,928)
------------ ------------
Income (Loss) Before Income Tax
Life Marketing................................ 771,259 142,070
Acquisitions.................................. 10,690,666 11,732,882
Annuities..................................... 72,848 (456,865)
Asset Protection.............................. 639,252 1,593,905
Corporate and Other........................... 11,055,046 234,929
------------ ------------
Total income from continuing operations before income tax $23,229,071 $13,246,921
============ ============
(1) Income (loss) before income tax excluding realized investment gains and losses and related amortization of deferred
policy acquisition costs.
The Company became involved with PLC’s Life Marketing segment during 2002. Pretax earnings increased $0.6 million in 2003 as compared to 2002, primarily due to increased sales momentum.
Pretax earnings from the Acquisitions segment decreased $1.0 million in 2003 as compared to 2002. Earnings from the Acquisitions segment are normally 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. No new acquisitions were made in 2003.
The Asset Protection segment’s 2003 pretax earnings decreased $1.0 million as compared to 2002 primarily due to an increase in benefits and settlement expenses because much of the segment’s credit business is in runoff mode and the decrease in ceding commissions related to reinsurance agreements with affiliates. The reinsurance arrangements are discussed more fully in Note 9 to the Company’s financial statements included herein.
The Annuities segment’s 2003 pretax loss decreased $0.3 million primarily due to a decrease in the amortization of deferred policy acquisition costs based on a more precise method in 2003 of allocating these 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 have negatively affected 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 cost. Since January 2003, the Company no longer markets variable annuity products.
The Company offers a guaranteed minimum death benefit feature (GMDB) on its variable annuity products. The Company’s accounting policy has been to calculate its total exposure to GMDB, and then apply a mortality factor to determine the amount of claims that could be expected to occur in the coming twelve months. The Company then accrues to that amount over four quarters. At December 31, 2003, the total GMDB reserve was $0.1 million, a decrease of $0.1 million from December 31, 2002. At December 31, 2003, the total guaranteed amount payable under the GMDB feature based on variable annuity account balances was $16.1 million, a decrease of $0.3 million from December 31, 2002, caused by an improvement in the equity markets.
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 December 31, 2003, a decrease of $0.1 million from December 31, 2002.
The Corporate and Other segment consists of net investment income and expenses not identified with the preceding business segments. Pretax earnings in 2003 increased $10.8 million over 2002, primarily due to increased net investment income on capital.
Income Tax Expense
The following table sets forth the effective income tax rates for the periods shown:
Year Ended Effective Income
December 31 Tax Rates
-------------- -----------------------
2003................................... 34.9%
2002................................... 34.9
Management’s current estimate of the effective income tax rate for 2004 is 34.9%.
Discontinued Operations
On December 31, 2001, PLC completed the sale to Fortis, Inc. of substantially all of its Dental Benefits Division (Dental Division), and discontinued certain other remaining Dental Division related operations, primarily other health insurance lines. In 2001, income from discontinued operations was $158,889 and the gain from the sale of discontinued operations was $1,625,000, both net of income tax.
Change in Accounting Principle
On January 1, 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The adoption of SFAS No. 133 resulted in a cumulative after-tax charge to net income of approximately $0.3 million.
Net Income
The following table sets forth net income from continuing operations before cumulative effect of change in accounting principle for the periods shown:
Net Income
----------------------------------------
Year Ended Percentage
December 31 Amount Increase/(Decrease)
----------- ------ -------------------
2003.................. $15,117,367 75.3%
2002.................. 8,624,649 6.2
Net income in 2003 increased 75.3%, compared to 2002, reflecting improved operating earnings in the Life Marketing, Annuities, and the Corporate and Other segments offset by lower operating earnings in the Acquisitions and Asset Protection segments.
Recently Issued Accounting Standards
For information regarding recently issued accounting standards see Note 1 to the financial statements included herein.
Investments
The Company’s investment portfolio consists primarily of fixed maturity securities. The Company generally purchases its investments with the intent to hold to maturity by purchasing investments that match future cash flow needs. However, the Company may sell any of its investments to maintain proper matching of assets and liabilities. Accordingly, the Company has classified its fixed maturities and certain other securities as “available for sale.”
The Company’s investments in debt securities are reported at market value, and investments in mortgage loans are reported at amortized cost. At December 31, 2003, the Company’s fixed maturity investments (bonds) had a market value of $636.5 million, which is 6.3% above amortized cost of $598.9 million. The Company had $1.4 million in mortgage loans at December 31, 2003. While the Company’s mortgage loans do not have quoted market values, at December 31, 2003, the Company estimates the market value of its mortgage loans to also be $1.4 million (using discounted cash flows from the next call date).
At December 31, 2002, the Company’s fixed maturity investments had a market value of $488.7 million, which was 4.7% above amortized cost of $466.9 million. The Company estimated the market value of its mortgage loans to be $1.9 million at December 31, 2002, which was 3.9% above amortized cost of $1.8 million.
The following table sets forth the estimated market values of the Company’s fixed maturity investments and mortgage loans resulting from a hypothetical immediate 1 percentage point increase in interest rates from levels prevailing at December 31, and the percent change in market value the following estimated market values would represent.
Estimated Market Values Resulting From An
Immediate 1 Percentage Point Increase
In Interest Rates
Percent
At December 31, 2003 Amount Change
- -------------------- ------ -------
Fixed maturities....................................... $588,314,990 (7.6)%
Mortgage loans......................................... 1,418,972 (0.7)
At December 31, 2002
Fixed maturities....................................... $458,352,064 (6.2)%
Mortgage loans......................................... 1,847,861 (0.8)
Estimated market values were derived from the durations of the Company’s fixed maturities and mortgage loans. Duration measures the relationship between changes in market value to changes in interest rates. While these estimated market values generally provide an indication of how sensitive the market values of the Company’s fixed maturities and mortgage loans are to changes in interest rates, they do not represent management’s view of future market changes, and actual market results may differ from these estimates.
The Company monitors the overall credit quality of the Company’s portfolio within general guidelines. The approximate percentage distribution of the Company’s fixed maturity investments by quality rating at December 31 is as follows:
Rating 2003 2002
---------- ---- ----
AAA........................................... 9.7% 8.3%
AA............................................ 6.7 7.2
A............................................. 38.4 38.2
BBB........................................... 40.0 40.7
BB or Less.................................... 5.2 5.6
----- -----
100.0% 100.0%
===== =====
During 2003, the Company recorded pretax other-than-temporary impairments in its investments of $0.3 million.
The Company’s management considers a number of factors when determining the impairment status of individual securities. These include the economic condition of various industry segments and geographic locations and other areas of identified risks. Although it is possible for the impairment of one investment to affect other investments, the Company engages in ongoing risk management to safeguard against and limit any further risk to its investment portfolio. Special attention is given to correlative risks within specific industries, related parties and business markets.
Once management has determined that a particular investment has suffered an other-than-temporary impairment, the asset is written down to its estimated fair value. The Company generally considers a number of factors in determining whether the impairment is other than temporary. These include, but are not limited to: 1) actions taken by rating agencies, 2) default by the issuer, 3) the significance of the decline, 4) the intent and ability of the Company to hold the investment until recovery, 5) the time period during which the decline has occurred, 6) an economic analysis of the issuer’s industry, and 7) the financial strength, liquidity, and recoverability of the issuer. Management performs a security by security review each quarter in evaluating the need for any other-than-temporary impairments. Although no set formula is used in this process, the investment performance and continued viability of the issuer are significant measures.
The Company generally considers a number of factors relating to the issuer in determining the financial strength, liquidity, and recoverability of an issuer. These include but are not limited to: available collateral, tangible and intangible assets that might be available to repay debt, operating cash flows, financial ratios, access to capital markets, quality of management, market position, exposure to litigation or product warranties, and the effect of general economic conditions on the issuer.
There are certain risks and uncertainties associated with determining whether declines in market values are other than temporary. These include significant changes in general economic conditions and business markets, trends in certain industry segments, interest rate fluctuations, rating agency actions, changes in significant accounting estimates and assumptions, commission of fraud and legislative actions. The Company continuously monitors these factors as they relate to the investment portfolio in determining the status of each investment. Provided below are additional facts concerning the potential effect upon the Company’s earnings should circumstances lead management to conclude that some of the current declines in market value are other than temporary.
Market values for private, non-traded securities are determined as follows: 1) the Company obtains estimates from independent pricing services or 2) the Company estimates market value based upon a comparison to quoted issues of the same issuer or issues of other issuers with similar terms and risk characteristics. The market value of private, non-traded securities was $89.5 million at December 31, 2003, representing 12.9% of the Company’s total invested assets.
The majority of unrealized losses in the Company’s investment portfolio can be attributed to interest rate fluctuations and have been deemed temporary. As indicated above, when the Company’s investment management deems an investment’s market value decline as other than temporary, it is written down to estimated market value. In all cases, management will continue to carefully review and monitor each security.
The information presented below relates to investments at a certain point in time and is not necessarily indicative of the status of the portfolio at any time after December 31, 2003, the balance sheet date. Furthermore, since the timing of recognizing realized gains and losses is largely based on management’s decisions as to the timing and selection of investments to be sold, the tables and information provided below should be considered within the context of the overall unrealized gain (loss) position of the portfolio. At December 31, 2003, the Company had an overall net unrealized gain of $37.5 million.
For traded and private fixed maturity and equity securities held by the Company that are in an unrealized loss position at December 31, 2003, the estimated market value, amortized cost, unrealized loss and total time period that the security has been in an unrealized loss position are presented in the table below.
Estimated % Market % Amortized Unrealized % Unrealized
Market Value Value Amortized Cost Cost Loss Loss
----------------------------------------------------------------------------------------------------------------------------
‹= 90 days $23,786,890 26.4% $23,906,291 25.5% $ (119,401) 3.1%
›90 days but ‹=180 days 33,708,155 37.5 34,933,725 37.2 (1,225,570) 31.7
›180 days but ‹=270 days 22,404,572 24.9 24,009,553 25.6 (1,604,981) 41.6
›270 days but ‹=1 year 0 0.0 0 0.0 0 0.0
›1 year but ‹=2 years 0 0.0 0 0.0 0 0.0
›2 years but ‹=3 years 5,542,500 6.2 5,952,412 6.3 (409,912) 10.6
›3 years but ‹=4 years 0 0.0 0 0.0 0 0.0
›4 years but ‹=5 years 4,515,000 5.0 5,016,681 5.4 (501,681) 13.0
›5 years 0 0.0 0 0.0 0 0.0
- -----------------------------------------------------------------------------------------------------------------------------
Total $89,957,117 100.0% $93,818,662 100.0% $(3,861,545) 100.0%
- -----------------------------------------------------------------------------------------------------------------------------
The Company has no material concentrations of issuers or guarantors of fixed maturity securities. The industry segment composition of all securities in an unrealized loss position held by the Company at December 31, 2003, is presented in the following table.
Estimated % Market Amortized % Amortized Unrealized % Unrealized
Market Value Value Cost Cost Loss Loss
- ---------------------------- -------------- ------------- -------------- ---------------- --------------- --------------
Agency mortgages $7,868,260 8.7% $7,998,042 8.5% $(129,782) 3.4%
Banks 2,948,421 3.3 2,988,805 3.2 (40,384) 1.0
Basic industrial 3,838,624 4.3 4,024,026 4.3 (185,402) 4.8
Brokerage 5,967,444 6.6 5,998,841 6.4 (31,397) 0.8
Communications 6,059,088 6.8 6,933,113 7.4 (874,025) 22.6
Electric 29,557,222 32.9 30,889,651 32.9 (1,332,429) 34.5
Energy 1,897,614 2.1 1,998,215 2.1 (100,601) 2.6
Insurance 5,667,102 6.3 5,955,318 6.3 (288,216) 7.5
Natural gas 19,975,589 22.2 20,742,385 22.1 (766,796) 19.9
Non-agency mortgages 352,370 0.4 352,851 0.4 (481) 0.0
Other finance 826,715 0.9 828,787 0.9 (2,072) 0.0
Other industrial 988,521 1.1 994,867 1.1 (6,346) 0.2
Transportation 3,896,866 4.3 3,999,964 4.3 (103,098) 2.7
U.S. Government 113,281 0.1 113,797 0.1 (516) 0.0
- ---------------------------- -------------- ------------- -------------- ---------------- --------------- --------------
Total $89,957,117 100.0% $93,818,662 100.0% $(3,861,545) 100.0%
- ---------------------------- -------------- ------------- -------------- ---------------- --------------- --------------
The range of maturity dates for securities in an unrealized loss position at December 31, 2003 varies, with 21.6% maturing in less than 5 years, 16.9% maturing between 5 and 10 years, and 61.5% maturing after 10 years. The following table shows the credit rating of securities in an unrealized loss position at December 31, 2003.
S&Por Equivalent Estimated % Market Amortized Cost % Amortized Unrealized % Unrealized
Designation Market Value Value Cost Loss Loss
- ---------------------------- --------------- ------------ --------------- -------------- ---------------- --------------
AAA/AA/A $62,572,950 69.6% $65,007,146 69.3% $(2,434,196) 63.0%
BBB 14,466,667 16.1 14,966,785 16.0 (500,118) 13.0
- ---------------------------- --------------- ------------ --------------- -------------- ---------------- --------------
Investment grade 77,039,617 85.7 79,973,931 85.3 (2,934,314) 76.0
- ---------------------------- --------------- ------------ --------------- -------------- ---------------- --------------
BB 0 0.0 0 0.0 0 0.0
B 10,297,500 11.4 10,802,695 11.5 (505,195) 13.1
CCC or lower 2,610,000 2.9 3,017,036 3.2 (407,036) 10.5
In or near default 10,000 0.0 25,000 0.0 (15,000) 0.4
- ---------------------------- --------------- ------------ --------------- -------------- ---------------- --------------
Below investment grade 12,917,500 14.3 13,844,731 14.7 (927,231) 24.0
- ---------------------------- --------------- ------------ --------------- -------------- ---------------- --------------
Total $89,957,117 100.0% $93,818,662 100.0% $(3,861,545) 100.0%
- ---------------------------- --------------- ------------ --------------- -------------- ---------------- --------------
At December 31, 2003, 85.7% of total securities in an unrealized loss position were rated as investment grade. Bonds rated less than investment grade were 4.8% of invested assets. The Company generally purchases its investments with the intent to hold to maturity. The Company does not consider these unrealized losses as other-than-temporary impairments.
At December 31, 2003, securities in an unrealized loss position that were rated as below investment grade represented 14.3% of the total market value and 24.0% of the total unrealized loss. Unrealized losses related to below investment grade securities that had been in an unrealized loss position for more than twelve months were $10.1 million. Bonds in an unrealized loss position rated less than investment grade were 1.9% of invested assets. The Company does not expect these investments to adversely affect its liquidity or ability to maintain proper matching of assets and liabilities.
The following table shows the estimated market value, amortized cost, unrealized loss and total time period that the security has been in an unrealized loss position for all below investment grade securities.
Estimated % Market Value Amortized Cost % Amortized Unrealized % Unrealized
Market Value Cost Loss Loss
- ------------------------------------------------------------------------------------------------------------------------------
‹=90 days $2,850,000 22.1% $2,850,638 20.6% $ (638) 0.1%
›90 days but ‹=180 days 0 0.0 0 0.0 0 0.0
›180 days but ‹=270 days 10,000 0.0 25,000 0.2 (15,000) 1.6
›270 days but ‹=1 year 0 0.0 0 0.0 0 0.0
›1 year but ‹=2 years 0 0.0 0 0.0 0 0.0
›2 years but ‹=3 years 5,542,500 42.9 5,952,412 43.0 (409,912) 44.2
›3 years but ‹=4 years 0 0.0 0 0.0 0 0.0
›4 years but ‹=5 years 4,515,000 35.0 5,016,681 36.2 (501,681) 54.1
›5 years 0 0.0 0 0.0 0 0.0
- ------------------------------------------------------------------------------------------------------------------------------
Total $12,917,500 100.0% $13,844,731 100.0% $(927,231) 100.0%
- ------------------------------------------------------------------------------------------------------------------------------
Realized losses are comprised of both write-downs on other-than-temporary impairments and actual sales of investments.
During the year ended December 31, 2003, the Company recorded pretax other-than-temporary impairments in its investments of $0.3 million as compared to $4.3 million in the year ended December 31, 2002.
As discussed earlier, the Company’s management considers several factors when determining other than temporary impairments. Although the Company generally intends to hold securities until maturity, the Company may change its position as a result of a change in circumstances. Any such decision is consistent with the Company’s classification of all but a specific portion of its investment portfolio as available for sale. During the year ended December 31, 2003, the Company sold securities in an unrealized loss position with a market value of $24.7 million resulting in a realized loss of $0.2 million. For such securities, the proceeds, realized loss and total time period that the security had been in an unrealized loss position are presented in the table below.
Proceeds % Proceeds Realized Loss % Realized Loss
- ----------------------------- ---------------- --------------- -------------- ----------------
‹=90 days $24,693,854 100.0% $(188,562) 100.0%
Liabilities
Many of the Company's products contain surrender charges and other features that reward persistency and penalize the early withdrawal of funds. Certain annuity contracts have market-value adjustments that protect the Company against investment losses if interest rates are higher at the time of surrender than at the time of issue.
At December 31, 2003, the Company had $57.9 million of annuity account balances with an estimated fair value of $62.2 million (using surrender value).
At December 31, 2002, the Company had $60.1 million of annuity account balances with an estimated fair value of $63.0 million.
The following table sets forth the estimated fair values of the Company's annuity account balances resulting from a hypothetical immediate 1 percentage point decrease in interest rates from levels prevailing at December 31, and the percent change in fair value the following estimated fair values would represent.
Estimated Fair Values Resulting From An
Immediate 1 Percentage Point Decrease
In Interest Rates
Percent
At December 31, 2003 Amount Change
- -------------------- ------ -------
Annuity account balances............................... $64,959,635 4.5%
At December 31, 2002
- --------------------
Annuity account balances............................... $65,819,278 4.5%
Estimated fair values were derived from the durations of the Company's annuity account balances. While these estimated fair values generally provide an indication of how sensitive the fair values of the Company's annuity account balances are to changes in interest rates, they do not represent management's view of future market changes, and actual market results may differ from these estimates.
Approximately 20% of the Company's liabilities relate to products (primary whole life insurance) the profitability of which could be affected by changes in interest rates. The effect of such changes in any one year is not expected to be material.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is included in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 8, "Financial Statements and Supplementary Data".
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors........................................................................... 15
Statements of Income for the years ended December 31, 2003, 2002, and 2001............................... 16
Balance Sheets as of December 31, 2003 and 2002.......................................................... 17
Statements of Share-Owners' Equity for the years ended
December 31, 2003, 2002, and 2001..................................................................... 18
Statements of Cash Flows for the years ended December 31, 2003, 2002, and 2001........................... 19
Notes to Financial Statements............................................................................ 20
Financial Statement Schedules:
Schedule III-- Supplementary Insurance Information...................................................... 34
Schedule IV-- Reinsurance............................................................................... 35
All other schedules to the financial statements required by Article 7 of Regulation S-X are not required under
the related instructions or are inapplicable and therefore have been omitted.
REPORT OF INDEPENDENT AUDITORS
To the Directors and Share Owners of
Protective Life and Annuity Insurance Company:
In our opinion, the financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Protective Life and Annuity Insurance Company at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related financial statements. These financial statements and financial statement schedules are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1 of the Notes to the Financial Statements, effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities.”
PricewaterhouseCoopers LLP
Birmingham, Alabama
March 11, 2004
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
STATEMENTS OF INCOME
Year Ended December 31
-------------------------------------------------
2003 2002 2001
---- ---- ----
Revenues
Premiums and policy fees.............................................. $ 72,195,967 $ 51,293,397 $ 47,707,465
Reinsurance ceded..................................................... (47,297,219) (23,734,401) (18,621,035)
------------ ------------ ------------
Net of reinsurance ceded............................................ 24,898,748 27,558,996 29,086,430
Net investment income................................................. 41,295,486 36,245,837 33,876,409
Realized investment gains (losses).................................... 3,347,309 (696,209) (1,113,538)
Other income.......................................................... 156,495 11,087 5,731
------------ ------------ ------------
69,698,038 63,119,711 61,855,032
------------ ------------ ------------
Benefits and Expenses
Benefits and settlement expenses (net of reinsurance ceded:
2003-$30,371,296; ........................................................ 30,776,253 33,299,046 33,344,929
2002-$18,296,707; 2001-$13,449,131)....................................... 7,890,345 8,639,183 7,034,480
Amortization of deferred policy acquisition costs.....................
Other operating expenses (net of reinsurance ceded: 2003-$(1,700,478); 7,802,369 7,934,561 9,189,295
------------ ------------ ------------
2002-$31,857,142; 2001-397,265)..................................... 46,468,967 49,872,790 49,568,704
------------ ------------ ------------
Income from continuing operations before income tax....................... 23,229,071 13,246,921 12,286,328
------------ ------------ ------------
Income Tax Expense
Current............................................................... 702,883
Deferred.............................................................. 7,408,821 4,622,272 4,165,065
------------ ------------ ------------
Total Income Tax Expense.................................................. 8,111,704 4,622,272 4,165,065
------------ ------------ ------------
Net income from continuing operations before cumulative effect of change in
accounting principle...................................................... 15,117,367 8,624,649 8,121,263
Income from discontinued operations, net of income tax.................... 158,889
Gain from sale of discontinued operations, net of income tax.............. 1,625,000
------------ ------------ ------------
Net income before cumulative effect of change in accounting principle..... 15,117,367 8,624,649 9,905,152
Cumulative effect of change in accounting principle, net of income tax.... (284,968)
------------ ------------ ------------
Net income................................................................ $ 15,117,367 $ 8,624,649 $ 9,620,184
============ ============ =============
See notes to financial statements.
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
BALANCE SHEETS
December 31
----------------------------------
2003 2002
---- ----
ASSETS
Investments:
Fixed maturities, at market (amortized cost: 2003-$598,941,913; 2002 - $466,924,086) $636,460,275 $488,701,807
Mortgage loans on real estate....................................................... 1,393,720 1,793,590
Other long term investments......................................................... 0 572,818
Policy loans........................................................................ 54,066,125 54,807,151
Short-term investments.............................................................. 1,200,413 178,805,245
------------ ------------
Total investments............................................................... 693,120,533 724,680,611
Cash 13,052,781 1,669,532
Accrued investment income................................................................ 11,116,301 8,382,989
Accounts and premiums receivable, net of allowance for uncollectible
amounts (2003-$7,000; 2002-$7,000).................................................. 530,133 325,479
Reinsurance receivables.................................................................. 61,159,477 92,256,257
Deferred policy acquisition costs........................................................ 95,168,662 104,779,582
Other assets............................................................................. 14,897 21,955
Assets related to separate accounts
Variable annuity.................................................................... 10,987,259 8,382,367
------------ ------------
$885,150,043 $940,498,772
============ ============
LIABILITIES
Policy liabilities and accruals:
Future policy benefits and claims................................................... $496,884,724 $517,624,864
Unearned premiums................................................................... 13,824,017 26,349,028
------------ ------------
510,708,741 543,973,892
Annuity account balances................................................................. 57,894,232 60,080,082
Other policyholders' funds............................................................... 2,695,070 6,025,066
Funds held-coinsurance................................................................... 46,762,354 89,552,015
Other liabilities........................................................................ 15,506,447 14,214,260
Accrued income taxes..................................................................... 702,883 0
Deferred income taxes.................................................................... 36,842,882 25,533,038
Liabilities related to separate accounts
Variable annuity.................................................................... 10,987,259 8,382,367
------------ ------------
Total liabilities................................................................ 682,099,868 747,760,720
------------ ------------
COMMITMENTS AND CONTINGENT LIABILITIES-- NOTE 5
SHARE-OWNERS' EQUITY
Preferred Stock, $1.00 par value, shares
authorized, issued and outstanding: 2,000........................................... 2,000 2,000
Common Stock, $10.00 par value
Shares authorized: 2003 and 2002 - 500,000
Shares issued and outstanding: 2003 and 2002 - 250,000............................... 2,500,000 2,500,000
Additional paid-in capital............................................................... 171,386,324 171,386,324
Retained earnings........................................................................ 12,410,533 9,343,166
Accumulated other comprehensive income:
Net unrealized gains on investments
(net of income tax: 2003-$9,019,940; 2002-$5,118,918)............................... 16,751,318 9,506,562
------------ ------------
Total share-owners' equity.......................................................... 203,050,175 192,738,052
------------ ------------
$885,150,043 $940,498,772
============ ============
See notes to financial statements.
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
STATEMENTS OF SHARE-OWNERS' EQUITY
Net
Unrealized
Additional Gains Total
Preferred Common Paid-In Retained (Losses) On Share-Owners'
Stock Stock Capital Earnings Investments Equity
--------- ---------- ------------ ----------- ------------ -------------
Balance, December 31, 2000.................. $2,000 $2,500,000 $101,386,324 $18,748,333 $(3,268,198) $119,368,459
------------
Net income for 2001................... 9,620,184 9,620,184
Change in net unrealized gains/losses on
investments
(net of income tax: $2,502,598)..... 4,647,682 4,647,682
Reclassification adjustment for amounts
included in net income
(net of income tax: $389,738)........ 723,800 723,800
Transition adjustment on derivative
financial instruments (net of income
tax: $153,444)....................... 284,968 284,968
------------
Comprehensive income for 2001......... 15,276,634
------------
Common dividends ($47.60 per share)... (11,900,000) (11,900,000)
Preferred dividends ($500.00 per share) (1,000,000) (1,000,000)
--------- ---------- ------------ ----------- ------------ -------------
Balance, December 31, 2001 2,000 2,500,000 101,386,324 15,468,517 2,388,252 121,745,093
------------
Net income for 2002................... 8,624,649 8,624,649
Change in net unrealized gains/losses on
investments
(net of income tax: $3,589,263)...... 6,665,774 6,665,774
Reclassification adjustment for amounts
included in net income
(net of income tax: $243,673)........ 452,536 452,536
------------
Comprehensive income for 2002......... 15,742,959
------------
Common dividends ($58.80 per share)... (14,700,000) (14,700,000)
Preferred dividends ($25 per share)... (50,000) (50,000)
Capital contribution.................. 70,000,000 70,000,000
--------- ---------- ------------ ----------- ------------ -------------
Balance, December 31, 2002.................. 2,000 2,500,000 171,386,324 9,343,166 9,506,562 192,738,052
------------
Net income for 2003................... 15,117,367 15,117,367
Change in net unrealized gains/losses on
investments
(net of income tax: $5,072,581)...... 9,420,507 9,420,507
Reclassification adjustment for amounts
included in net income
(net of income tax: $(1,171,558)) (2,175,751) (2,175,751)
------------
Comprehensive income for 2003......... 22,362,123
------------
Common dividends ($48.20 per share)... (12,050,000) (12,050,000)
--------- ---------- ------------ ----------- ------------ -------------
Balance, December 31, 2003.................. $2,000 $2,500,000 $171,386,324 $12,410,533 $16,751,318 $203,050,175
========= ========== ============ =========== ============ =============
See notes to financial statements.
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
----------------------------------------------------
Year Ended December 31
----------------------------------------------------
2003 2002 2001
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income...................................................................... $ 15,117,367 $ 8,624,649 $ 9,620,184
Adjustments to reconcile net income to net cash provided by operating activities:
Realized investment losses (gains).......................................... (3,347,309) 696,209 1,113,538
Amortization of deferred policy acquisition costs........................... 7,890,345 8,639,183 7,034,480
Capitalization of deferred policy acquisition costs......................... (2,813,504) (2,161,267) (1,792,738)
Gain on sale of discontinued operations..................................... 0 0 (1,625,000)
Deferred income taxes....................................................... 7,408,821 4,622,272 5,121,553
Interest credited to universal life and investment products................. 21,321,965 29,693,764 37,752,197
Policy fees assessed on universal life and investment products.............. (33,916,456) (34,641,740) (36,063,990)
Change in accrued investment income and other receivables................... 28,158,814 (64,001,084) (2,959,990)
Change in policy liabilities and other policyholder funds of traditional life
and health products........................................................ (40,194,549) 70,326,971 1,495,557
Change in funds held-coinsurance............................................ (42,789,661) 86,607,188 (239,299)
Change in other liabilities................................................. 1,292,187 (231,372) (3,579,771)
Other (net)................................................................. 7,058 (2,266) (1,013,986)
------------- ------------- --------------
Net cash (used in) provided by operating activities............................. (41,864,922) 108,172,507 14,862,735
------------- ------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investments available for sale, net of short-term investments
Maturities and principal reductions of investments.......................... 94,119,188 54,755,061 24,176,348
Sale of investments......................................................... 81,324,718 80,524,090 103,550,588
Cost of investments acquired................................................ (303,472,324) (155,307,511) (140,629,695)
Decrease in mortgage loans, net................................................. 399,870 923,905 497,849
Decrease (Increase) in policy loans, net........................................ 741,026 (242,135) (99,123)
Decrease (Increase) in other long-term investments, net......................... 572,818 (102,788) (470,030)
Decrease (Increase) in short-term investments, net.............................. 177,604,832 (166,805,245) (8,000,000)
------------- ------------- --------------
Net cash provided by (used in) investing activities............................. 51,290,128 (186,254,623) (20,974,063)
------------- ------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends to share owners....................................................... (12,050,000) (14,750,000) (12,900,000)
Capital contribution............................................................ 0 70,000,000 0
Investment product deposits and change in universal life deposits............... 23,487,618 69,229,610 56,941,071
Investment product withdrawals.................................................. (9,479,575) (49,012,219) (34,810,896)
------------- ------------- --------------
Net cash provided by financing activities....................................... 1,958,043 75,467,391 9,230,175
------------- ------------- --------------
INCREASE (DECREASE) IN CASH..................................................... 11,383,249 (2,614,725) 3,118,847
CASH AT BEGINNING OF YEAR....................................................... 1,669,532 4,284,257 1,165,410
------------- ------------- --------------
CASH AT END OF YEAR............................................................. $ 13,052,781 $ 1,669,532 $ 4,284,257
============= ============= ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
There was no cash paid during any of the periods presented related to interest on indebtedness or income taxes.
See notes to financial statements.
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
Note 1 — SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements of Protective Life and Annuity Insurance Company (“the Company”) are prepared on the basis of accounting principles generally accepted in the United States of America. Such accounting principles differ from statutory reporting practices used by insurance companies in reporting to state regulatory authorities. (See also Note 2.)
The Company was founded in 1978 as American Foundation Life Insurance Company. Effective March 1, 1999, the Company’s name was changed to Protective Life and Annuity Insurance Company. 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 domiciled in the state of Delaware. All outstanding shares of the Company’s preferred stock are owned by PLC.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make various estimates that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities, as well as the reported amounts of revenues and expenses. Actual results could differ from these estimates.
NATURE OF OPERATIONS
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. The operating results of companies in the insurance industry have historically been subject to significant fluctuations due to changing competition, economic conditions, interest rates, investment performance, insurance ratings, and other factors.
RECENTLY ISSUED ACCOUNTING STANDARDS
On January 1, 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities”. SFAS No. 133, as amended by SFAS Nos. 137,138, and 149, requires the Company to record all derivative financial instruments at fair value on the balance sheet. Changes in fair value of a derivative instrument are reported in net income or other comprehensive income, depending on the designated use of the derivative instruments. The adoption of SFAS No. 133 resulted in a cumulative charge to net income, net of income tax, of $0.3 million and a cumulative after-tax increase to other comprehensive income of $0.3 million on January 1, 2001. The charge to net income and increase to other comprehensive income primarily resulted from the recognition of derivative instruments embedded in the Company’s corporate bond portfolio. The adoption of SFAS No. 133 has introduced volatility into the Company’s reported net income and other comprehensive income depending on market conditions and the Company’s hedging activities.
In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. (FIN) 46 “Consolidation of Variable Interest Entities,” which was revised in December 2003. FIN 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated support from other parties. The effective date of FIN 46 is March 31, 2004, for the Company. The Company does not expect the adoption of FIN 46 to have a material effect on the Company’s financial position or results of operations.
On October 1, 2003, the Company adopted Derivatives Implementation Group Issue No. B36, “Embedded Certain 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 certain 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 invested assets the third-party securities to which the creditor is exposed. The adoption did not have a material impact on its financial condition or results of operations.
In July 2003, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts.” SOP 03-1 is effective for fiscal years beginning after December 15, 2003. SOP 03-1 provides guidance related to the reporting and disclosure of certain insurance contracts and separate accounts, including the calculation of guaranteed minimum death benefits (GMDB). SOP 03-1 also addresses the capitalization and amortization of sales inducements to contract holders. Although the original intent of SOP 03-1 was to address the accounting for contract provisions not addressed by SFAS No. 97, such as guaranteed minimum death benefits within a variable annuity contract, it appears that SOP 03-1 contains language that may impact the accounting for universal life products in a material way. The life insurance industry and some insurance companies have filed letters with the American Institute of Certified Public Accountants seeking clarification, guidance, delay and/or revision to more appropriately reflect the underlying economic issues of universal life insurance products. The Company is currently evaluating the impact of SOP 03-1 on the accounting for its universal life products.
INVESTMENTS
The Company has classified all of its investments in fixed maturities and short-term investments as “available for sale.”
Investments are reported on the following bases less allowances for uncollectible amounts on investments, if applicable:
| • | Fixed maturities (bonds) – at current market value. Where market values are unavailable, the Company obtains estimates from independent pricing services or estimates market value based upon a comparison to quoted issues of the same issuer or issues of other issuers with similar terms and risk characteristics. |
| • | Mortgage loans – at unpaid balances, adjusted for loan origination costs, net of fees, and amortization of premium or discount. |
| • | Policy loans – at unpaid balances. |
| • | Other long-term investments – at a variety of methods similar to those listed above, as deemed appropriate for the specific investment. |
| • | Short-term investments – at cost, which approximates current market value. |
Estimated market values were derived from the durations of the Company’s fixed maturities and mortgage loans. Duration measures the relationship between changes in market value to changes in interest rates. While these estimated market values generally provide an indication of how sensitive the market values of the Company’s fixed maturities and mortgage loans are to changes in interest rates, they do not represent management’s view of future market changes, and actual market results may differ from these estimates. Substantially all short-term investments have maturities of three months or less at the time of acquisition.
The market values of fixed maturities increase or decrease as interest rates fall or rise. As prescribed by generally accepted accounting principles investments deemed as “available for sale” are recorded at their market values with the resulting unrealized gains and losses reduced by a related adjustment to deferred policy acquisition costs, net of income tax, reported as a component of share-owners’ equity.
Realized gains and losses on sales of investments are recognized in net income using the specific identification basis.
CASH
Cash includes all demand deposits reduced by the amount of outstanding checks and drafts. The Company has deposits with certain financial institutions which exceed federally insured limits. The Company has reviewed the creditworthiness of these financial institutions and believes there is minimal risk of a material loss.
DEFERRED POLICY ACQUISITION COSTS
Commissions and other costs of acquiring traditional life and health insurance, credit insurance, universal life insurance, and investment products that vary with and are primarily related to the production of new business, have been deferred. Traditional life and health insurance acquisition costs are amortized over the premium-payment period of the related policies in proportion to the ratio of annual premium income to the present value of the total anticipated premium income. Credit insurance acquisition costs are being amortized in proportion to earned premium. Acquisition costs for universal life and investment products are amortized over the lives of the policies in relation to the present value of estimated gross profits before amortization. Under SFAS No. 97, “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments,” the Company makes certain assumptions regarding the mortality, persistency, expenses, and interest rates (equal to the rate used to compute liabilities for future policy benefits; currently 2.6% to 9.4%) it expects to experience in future periods. These assumptions are to be best estimates and are to be periodically updated whenever actual experience and/or expectations for the future change from that assumed. Additionally, relating to SFAS No. 115, these costs have been adjusted by an amount equal to the amortization that would have been recorded if unrealized gains or losses on investments associated with the Company’s universal life and investment products had been realized.
The cost to acquire blocks of insurance representing the present value of future profits from such blocks of insurance is also included in deferred policy acquisition costs. The Company amortizes the present value of future profits over the premium payment period, including accrued interest of up to approximately 8.0%. The unamortized present value of future profits was approximately $100.1 million and $106.5 million at December 31, 2003 and 2002, respectively. During 2003, $6.4 million of present value of future profits was amortized. During 2002, $7.2 million of present value of future profits was amortized. No amounts were capitalized during 2003 or 2002.
The expected amortization of the present value of future profits for the next five years is as follows:
Expected
Year Amortization
---- -------------
2004 $5,553,514
2005 5,576,901
2006 5,698,837
2007 5,910,611
2008 6,155,289
SEPARATE ACCOUNTS
The assets and liabilities related to separate accounts in which the Company does not bear the investment risk are valued at market and reported separately as assets and liabilities related to separate accounts in the accompanying financial statements.
REVENUES AND BENEFITS EXPENSE
Traditional Life, Health, and Credit Insurance Products
Traditional life insurance products consist principally of those products with fixed and guaranteed premiums and benefits and include whole life insurance policies, term and term-like life insurance policies, limited-payment life insurance policies, and certain annuities with life contingencies. Life insurance and immediate annuity premiums are recognized as revenue when due. Health and credit insurance premiums are recognized as revenue over the terms of the policies. Benefits and expenses are associated with earned premiums so that profits are recognized over the life of the contracts. This is accomplished by means of the provision for liabilities for future policy benefits and the amortization of deferred policy acquisition costs. Gross premiums in excess of net premiums related to immediate annuities are deferred and recognized over the life of the policy.
Liabilities for future policy benefits on traditional life insurance products have been computed using a net level method including assumptions as to investment yields, mortality, persistency, and other assumptions based on the Company’s experience, modified as necessary to reflect anticipated trends and to include provisions for possible adverse deviation. Reserve investment yield assumptions on December 31, 2003 were 7.34%. The liability for future policy benefits and claims on traditional life, health, and credit insurance products includes estimated unpaid claims that have been reported to the Company and claims incurred but not yet reported. Policy claims are charged to expense in the period in which the claims are incurred.
Activity in the liability for unpaid claims is summarized as follows:
2003 2002 2001
---- ---- ----
Balance beginning of year.............................. $ 7,834,114 $ 7,074,480 $ 7,372,438
Less reinsurance.................................... 2,339,338 1,459,829 1,954,392
------------ ------------ ------------
Net balance beginning of year.......................... 5,494,776 5,614,651 5,418,046
------------ ------------ ------------
Incurred related to:
Current year........................................... 13,466,361 11,448,215 11,883,729
Prior year............................................. 776,513 181,838 584,972
------------ ------------ ------------
Total incurred...................................... 14,242,874 11,630,053 12,468,701
------------ ------------ ------------
Acquisitions and reserve transfers..................... (662,216)
Paid related to:
Current year........................................... 13,396,238 10,612,857 9,454,229
Prior year............................................. 991,334 1,137,071 2,155,651
------------ ------------ ------------
Total paid.......................................... 14,387,572 11,749,928 11,609,880
------------ ------------ ------------
Net balance end of year................................ 5,350,078 5,494,776 5,614,651
Plus reinsurance.................................... 4,616,804 2,339,338 1,459,829
------------ ------------ ------------
Balance end of year.................................... $ 9,966,882 $ 7,834,114 $ 7,074,480
============ ============ ============
Universal Life and Investment Products
Universal life and investment products include universal life insurance, deferred annuities, and annuities without life contingencies. Premiums and policy fees for universal life and investment products consist of policy fees that have been assessed against policy account balances for the costs of insurance, policy administration, and surrenders. Such fees are recognized when assessed and earned. Benefit reserves for universal life and investment products represent policy account balances before applicable surrender charges plus certain deferred policy initiation fees that are recognized in income over the term of the policies. Policy benefits and claims that are charged to expense include benefit claims incurred in the period in excess of related policy account balances and interest credited to policy account balances. Interest credit rates for universal life ranged from 4.6% to 6.5% and investment products ranged from 2.6% to 4.8% in 2003.
The Company’s accounting policies with respect to variable universal life and variable annuities are identical except that policy account balances (excluding account balances that earn a fixed rate) are valued at market and reported as components of assets and liabilities related to separate accounts.
INCOME TAXES
The Company uses the asset and liability method of accounting for income taxes. Income tax provisions are generally based on income reported for financial statement purposes. Deferred federal income taxes arise from the recognition of temporary differences between the basis of assets and liabilities determined for financial reporting purposes and the basis determined for income tax purposes. Such temporary differences are principally related to the deferral of policy acquisition costs and the provision for future policy benefits and expenses.
DISCONTINUED OPERATIONS
On December 31, 2001, PLC completed the sale to Fortis, Inc. of substantially all of its Dental Division, and discontinued certain other remaining Dental Division related operations, primarily other health insurance lines.
The operating results and charges related to the sale of the Dental division and discontinuance of other related operations at December 31 are as follows:
2003 2002 2001
- ---------------------------------------- ------------------ ----------------- -----------------
Total revenues $ 0 $ 0 $ 970,192
- ---------------------------------------- ------------------ ----------------- -----------------
Income before income taxes
from discontinued operations $ 0 $ 0 $ 240,377
Income tax (expense) benefit (81,488)
- ---------------------------------------- ------------------ ----------------- -----------------
Income from discontinued operations $ 0 $ 0 $ 158,889
- ---------------------------------------- ------------------ ----------------- -----------------
Gain from sale of discontinued
operations before income tax $ 2,500,000
Income tax expense related to sale 875,000
- ---------------------------------------- ------------------ ----------------- -----------------
Gain from sale of
discontinued operations $ 1,625,000
- ---------------------------------------- ------------------ ----------------- -----------------
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 2 —STATUTORY REPORTING PRACTICES
Financial statements prepared in conformity with accounting principles generally accepted in the United States of America differ in some respects from the statutory accounting practices prescribed or permitted by insurance regulatory authorities. The most significant differences are as follows: (a) acquisition costs of obtaining new business are deferred and amortized over the approximate life of the policies rather than charged to operations as incurred; (b) benefit liabilities are computed using a net level method and are based on realistic estimates of expected mortality, interest, and withdrawals as adjusted to provide for possible unfavorable deviation from such assumptions; (c) deferred income taxes are not subject to statutory limitations as to amounts recognized and are recognized through earnings as opposed to being charged to share-owners’ equity; (d) the Asset Valuation Reserve and Interest Maintenance Reserve are restored to share-owners’ equity; (e) agents’ debit balances and prepaid expenses are reported as assets rather than being charged directly to surplus (referred to as nonadmitted items); (f) certain items of interest income, such as mortgage and bond discounts, are amortized differently; and (g) bonds are recorded at their market values instead of amortized cost. The National Association of Insurance Commissioners (NAIC) has adopted the Codification of Statutory Accounting Principles (Codification). Codification changed statutory accounting rules in several areas and was effective January 1, 2001. The adoption of Codification did not have a material effect on the Company’s statutory capital.
The net income and share-owners’ equity prepared in conformity with statutory reporting practices as compared to that reported in the accompanying financial statements are as follows:
Net Income Share-Owners' Equity
---------------------------------------- --------------------------------------------
2003 2002 2001 2003 2002 2001
---- ---- ---- ---- ---- ----
In conformity with statutory reporting
practices........................... $23,154,434 $10,879,132 $13,895,381 $108,738,317 $102,550,549 $ 34,354,020
In conformity with generally accepted
accounting principles............... $15,117,367 $ 8,624,649 $ 9,620,184 $203,050,175 $192,738,052 $ 121,745,093
Note 3 — INVESTMENT OPERATIONS
Major categories of net investment income for the years ended December 31 are summarized as follows:
2003 2002 2001
---- ---- ----
Fixed maturities................................... $38,891,316 $33,778,487 $31,496,317
Mortgage loans..................................... 113,288 170,428 282,544
Policy loans....................................... 3,703,603 3,748,912 3,691,041
Other, principally short-term investments.......... 460,662 312,989 236,511
----------- ----------- -----------
43,168,869 38,010,816 35,706,413
Investment expenses................................ (1,873,383) (1,764,979) (1,830,004)
----------- ----------- -----------
$41,295,486 $36,245,837 $33,876,409
=========== =========== ===========
Realized investment gains (losses) for the years ended December 31 are summarized as follows:
2003 2002 2001
---- ---- ----
Fixed maturities.................................. $2,645,663 $(480,629) $(1,113,538)
Short-term investments............................ 701,646 (215,580) 0
----------- ----------- -----------
$3,347,309 $(696,209) $(1,113,538)
=========== =========== ===========
In 2003, gross gains on the sale of investments available for sale (fixed maturities and short-term investments) were approximately $3.6 million and gross losses were approximately $0.3 million. In 2002, gross gains were approximately $2.1 million and gross losses were approximately $2.8 million. In 2001, gross gains were approximately $1.1 million and gross losses were approximately $2.2 million.
Each quarter the Company reviews investments with material unrealized losses and tests for other-than-temporary impairments. The Company 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 incurred and the cost basis of the impaired asset is adjusted to its fair value. During 2003, 2002, and 2001, the Company recorded other-than-temporary impairments in its investments of $0.3 million, $4.3 million, and $1.9 million, respectively.
The amortized cost and estimated market values of the Company’s investments classified as available for sale at December 31 are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
2003 Cost Gains Losses Values
---- -------------- -------------- -------------- -----------------
Fixed maturities:
Bonds:
Mortgage-backed securities............ $ 42,286,991 $ 931,855 $ (130,262) $ 43,088,584
United States Government and
authorities........................... 7,702,497 155,328 (516) 7,857,309
Public utilities...................... 123,694,171 6,064,624 (2,018,769) 127,740,026
All other corporate bonds............. 425,258,254 34,228,100 (1,711,998) 457,774,356
------------- ------------ ------------ -------------
598,941,913 41,379,907 (3,861,545) 636,460,275
Short-term investments................... 1,200,413 0 0 1,200,413
------------- ------------ ------------ -------------
$600,142,326 $41,379,907 $(3,861,545) $637,660,688
============= ============ ============ =============
Gross Gross Estimated
Amortized Unrealized Unrealized Market
2002 Cost Gains Losses Values
---- -------------- -------------- -------------- -----------------
Fixed maturities:
Bonds:
Mortgage-backed securities............ $ 17,963,051 $ 995,934 $ 0 $ 18,958,985
United States Government and
authorities........................... 8,822,336 268,990 0 9,091,326
Public utilities...................... 76,359,211 2,799,099 (3,751,446) 75,406,864
All other corporate bonds............. 363,779,488 28,095,926 (6,630,782) 385,244,632
------------- ------------ ------------ -------------
466,924,086 32,159,949 (10,382,228) 488,701,807
Short-term investments................... 178,805,245 0 0 178,805,245
------------- ------------ ------------ -------------
$645,729,331 $32,159,949 $(10,382,228) $667,507,052
============= ============ ============ =============
The amortized cost and estimated market value of fixed maturities at December 31, by expected maturity, are shown below. Expected maturities are derived from rates of prepayment that may differ from actual rates of prepayment.
Estimated
Amortized Market
Cost Values
--------------- ----------------
2003
----
Due in one year or less.......................... $ 19,312,655 $ 19,753,878
Due after one year through five years............ 94,436,372 98,721,456
Due after five years through ten years........... 185,417,918 198,465,765
Due after ten years.............................. 299,774,968 319,519,176
------------ ------------
$598,941,913 $636,460,275
============ ============
The following table shows the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous loss position at December 31, 2003.
Less Than 12 Months 12 Months or More Total
------------------------- ------------------------ -----------------------
Market Unrealized Market Unrealized Market Unrealized
Value Loss Value Loss Value Loss
------------ ------------ ------------ ----------- ----------- ------------
Mortgage-backed securities............ $ 8,220,630 $ (130,262) $ 0 $ 0 $ 8,220,630 $ (130,262)
US Government......................... 113,281 (516) 0 0 113,281 (516)
Public Utilities...................... 40,721,844 (1,874,211) 3,807,500 (144,558) 44,529,344 (2,018,769)
Other Corporate bonds................. 30,843,862 (944,962) 6,250,000 (767,037) 37,093,862 (1,711,999)
----------- ------------ ------------ ----------- ----------- ------------
$79,899,617 $(2,949,951) $10,057,500 $(911,595) $89,957,117 $(3,861,546)
=========== ============ ============ =========== =========== ============
The Company considers the impairment of securities that have been in an unrealized loss position for less than 12 months to be temporary. The Company believes that it will collect all amounts contractually due and has the intent and the ability to hold these securities until maturity.
The corporate bonds category has gross unrealized losses, in an unrealized loss position for greater than 12 months, of $0.8 million at December 31, 2003. The aggregate decline in market value of these securities was deemed temporary due to positive factors supporting the recoverability of the respective investments. Positive factors considered included credit ratings, the financial health of the investee, the continued access of the investee to capital markets, and other pertinent information.
At December 31, 2003 and 2002, the Company had bonds which were rated less than investment grade of $33.4 million and $27.7 million, respectively, having an amortized cost of $31.8 million and $32.9 million, respectively. Approximately $89.5 million of bonds are not publicly traded.
The change in unrealized gains (losses), net of income tax, on fixed maturities for the years ended December 31 is summarized as follows:
2003 2002 2001
---- ---- ----
Fixed maturities $10,231,417 $12,109,764 $8,309,103
At December 31, 2003, 99% of the Company's mortgage loans were commercial loans of which 72% were retail, and 27% were office buildings. The Company specializes in making mortgage loans on either credit-oriented or credit-anchored commercial properties, most of which are strip shopping centers in smaller towns and cities. All of the mortgage loans are on properties located in the following states listed in decreasing order of significance: Tennessee, Florida, Arkansas and Texas.
At December 31, 2003, the average mortgage loan was $0.3 million, and the weighted average interest rate was 8.2%. The largest single mortgage loan was $1.0 million.
At December 31, 2002 and 2001, the Company had no problem mortgage loans (over ninety days past due) and foreclosed properties. Since the Company's mortgage loans are collateralized by real estate, any assessment of impairment is based upon the estimated fair value of the real estate. Based on the Company's evaluation of its mortgage loan portfolio, the Company does not expect any material losses on its mortgage loans.
Policy loan interest rates generally range from 4.5% to 8.0%.
Note 4-- FEDERAL INCOME TAXES
The Company's effective income tax rate varied from the maximum federal income tax rate as follows:
2003 2002 2001
---- ---- ----
Statutory federal income tax rate applied to pretax income......... 35.0% 35.0% 35.0%
Tax-exempt interest................................................ (0.1) (0.1)
Other adjustments.................................................. (1.1)
---- ---- ----
Effective income tax rate.......................................... 34.9% 34.9% 33.9%
==== ==== ====
The provision for federal income tax differs from amounts currently payable due to certain items reported for financial statement purposes in periods which differ from those in which they are reported for income tax purposes.
Details of the deferred income tax provision for the years ended December 31 are as follows:
2003 2002 2001
---- ---- ----
Deferred policy acquisition costs............................ $ 6,813,224 $(8,924,591) $ 10,448,277
Benefit and other policy liability changes................... 2,896,389 15,201,433 (6,335,100)
Temporary differences of investment income................... (1,503,693) (1,654,570) 51,888
Other ....................................................... (797,099)
----------- ----------- ------------
$ 7,408,821 $ 4,622,272 $ 4,165,065
=========== =========== ============
The components of the Company’s net deferred income tax liability as of December 31 were as follows:
2003 2002
---- ----
Deferred income tax assets:
Policy and policyholder liability reserves............... $ 3,364,248 $ 6,260,637
Unrealized (gains) losses on investments................. (6,041,629) (3,644,299)
------------ -----------
(2,677,381) 2,616,338
------------ -----------
Deferred income tax liabilities:
Deferred policy acquisition costs........................ 34,322,937 27,509,713
Other.................................................... (157,436) 639,663
------------ -----------
34,165,501 28,149,376
------------ -----------
Net deferred income tax liability........................ $36,842,882 $25,533,038
============ ===========
The Company’s income tax returns are included in the consolidated income tax returns of PLC. The allocation of income tax liabilities among affiliates is based upon separate income tax return calculations. At December 31, 2003, $702,883 was payable to PLC for income tax liabilities. At December 31, 2002 no amounts were payable to PLC for income tax liabilities.
Note 5 — COMMITMENTS AND CONTINGENT LIABILITIES
Under insurance guaranty fund laws, in most states insurance companies doing business therein can be assessed up to prescribed limits for policyholder losses incurred by insolvent companies. The Company does not believe such assessments will be materially different from amounts already provided for in the financial statements. Most of these laws do provide, however, that an assessment may be excused or deferred if it would threaten an insurer’s own financial strength.
A number of civil jury verdicts have been returned against insurers and other providers of financial services involving sales practices, alleged agent misconduct, failure to properly supervise representatives, relationships with agents or persons with whom the insurer does business, and other matters. Increasingly these lawsuits have resulted in the award of substantial judgments that are disproportionate to the actual damages, including material amounts of punitive and non-economic compensatory damages. In some states, juries, judges and arbitrators have substantial discretion in awarding punitive and non-economic compensatory damages which creates the potential for unpredictable material adverse judgments or awards in any given lawsuit or arbitration. Arbitration awards are subject to very little appellate review. In addition, in some class action and other lawsuits, companies have made material settlement payments. The Company, like other financial service 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 operations, or liquidity of the Company.
Note 6 — SHARE-OWNERS’ EQUITY AND RESTRICTIONS
Dividends on common stock are noncumulative and are paid as determined by the Board of Directors. At December 31, 2003, approximately $84.8 million of share-owners’ equity excluding net unrealized gains and losses represented net assets of the Company that cannot be transferred to Protective. In general, dividends up to specified levels are considered ordinary and may be paid thirty days after written notice to the insurance commissioner of the state of domicile unless such commissioner objects to the dividend prior to the expiration of such period. Dividends in larger amounts are considered extraordinary and are subject to affirmative prior approval by such commissioner. The maximum amount that would qualify as ordinary dividends to Protective by the Company in 2004 is estimated to be $23.1 million.
Note 7 — PREFERRED STOCK
The Company’s preferred stock pays, when and if declared, noncumulative participating dividends to the extent the Company’s statutory earnings for the immediately preceding year exceeded $1.0 million. No preferred dividends were paid in 2003. In 2002, the Company paid $50,000 of preferred dividends. In 2001, the Company paid $1.0 million of preferred dividends.
Note 8 — RELATED PARTY MATTERS
The Company has no employees; therefore, the Company purchases data processing, legal, investment, and other management services from PLC and other affiliates. The cost of such services was $9.6 million in 2003, $8.4 million in 2002, and $8.6 million in 2001.
Receivables from and payables to related parties consisted of receivables from and payables to affiliates under control of PLC in the amount of a $7.5 million payable at December 31, 2003 and a $6.5 million payable at December 31, 2002. The Company routinely receives from or pays to affiliates under the control of PLC reimbursements for expenses incurred on one another’s behalf. Receivables and payables among affiliates are generally settled monthly.
Protective and the Company entered into a guaranty agreement on October 27, 1993, whereby Protective guaranteed the payment of all insurance policy claims made by the holders or beneficiaries of any of the Company’s policies which were issued after the date of the guaranty agreement in accordance with the terms of said policies. Total liabilities for policies covered by this agreement were $100.4 million and $108.8 million at December 31, 2003 and 2002, respectively.
Protective and the Company also entered into a guaranty agreement on December 31, 1995, whereby Protective guaranteed that the Company will perform all of the obligations of Protective pursuant to the terms and conditions of an indemnity coinsurance agreement between Protective and an unaffiliated life insurance company. Total liabilities related to this coinsurance agreement were $9.4 million and $9.7 million at December 31, 2003 and 2002, respectively.
Note 9 — OPERATING SEGMENTS
PLC, through its subsidiaries, operates several business segments each having a strategic focus. An operating segment is generally distinguished by products and/or channels of distribution. A brief description of each segment follows.
| o | The Company became involved with PLC’s Life Marketing segment beginning in 2002. PLC’s Life Marketing segment markets level premium term and term-like insurance, universal life, and variable universal life products on a national basis primarily through networks of independent insurance agents and brokers, and in the “bank owned life insurance” market. |
| o | 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. |
| o | The Annuities segment manufactures, sells, and supports fixed annuity products. These products are primarily sold through stockbrokers, but are also sold through financial institutions and the Life Marketing segment’s sales force. Beginning in 2003, the Company no longer markets variable annuity products. |
| o | The Asset Protection segment markets extended service contracts and credit life and disability insurance to protect consumers’ investments in automobile and marine vehicles. |
| o | The Company has an additional segment herein referred to as Corporate and Other. The Corporate and Other segment primarily consists of net investment income and expenses not attributable to the segments above (including net investment income on unallocated capital). |
The Company uses the same accounting policies and procedures to measure operating segment income and assets as it uses to measure its 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 most appropriately reflects the operations of that 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 periods shown. Adjustments represent the recognition of income tax expense and income from discontinued operations and cumulative effect of change in accounting. Asset adjustments represent the inclusion of assets related to discontinued operations.
Corporate
Life Asset and
Operating Segment Income Marketing Acquisitions Protection Annuities Other Adjustments Total
- -----------------------------------------------------------------------------------------------------------------------------
2003
Premiums and policy fees......... $ 3,569,913 $ 39,619,941 $ 28,719,566 $ 286,547 $ 72,195,967
Reinsurance ceded................ (3,351,825) (18,675,274) (25,270,120) (47,297,219)
- -----------------------------------------------------------------------------------------------------------------------------
Net of reinsurance ceded......... 218,088 20,944,667 3,449,446 286,547 24,898,748
Net investment income............ 38,387 29,143,524 499,944 3,720,590 $7,893,041 41,295,486
Realized investment gains........ 262,490 3,084,819 3,347,309
Other income (loss).............. (5,045) 24,909 136,631 156,495
- -----------------------------------------------------------------------------------------------------------------------------
Total revenues............. 256,475 50,083,146 3,949,390 4,294,536 11,114,491 69,698,038
- -----------------------------------------------------------------------------------------------------------------------------
Benefits and settlement expenses. (4,920) 24,672,248 2,374,123 3,734,802 30,776,253
Amortization of deferred policy
acquisition costs.......... 335,099 6,461,913 778,226 315,107 7,890,345
Other operating expenses......... (844,963) 8,258,319 157,789 171,779 59,445 7,802,369
- -----------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses (514,784) 39,392,480 3,310,138 4,221,688 59,445 46,468,967
- -----------------------------------------------------------------------------------------------------------------------------
Income before income tax......... 771,259 10,690,666 639,252 72,848 11,055,046 23,229,071
Less: realized investment gains.. 262,490 3,084,819
- -----------------------------------------------------------------------------------------------------------------------------
Operating income 771,259 10,690,666 639,252 (189,642) 7,970,227
Income tax expense............... $8,111,704 8,111,704
--------------
Net Income ...................... $ 15,117,367
============
2002
Premiums and policy fees......... $ 1,026,426 $ 43,313,961 $ 6,799,480 $ 153,530 $ 51,293,397
Reinsurance ceded................ (883,972) (19,505,909) (3,344,520) (23,734,401)
- -----------------------------------------------------------------------------------------------------------------------------
Net of reinsurance ceded......... 142,454 23,808,052 3,454,960 153,530 27,558,996
Net investment income............ 8,123 30,989,460 571,275 3,729,514 $ 947,465 36,245,837
Realized investment gains(losses) 79,719 (775,928) (696,209)
Other income (loss).............. 5,072 6,015 11,087
- -----------------------------------------------------------------------------------------------------------------------------
Total revenues............. 150,577 54,802,584 4,026,235 3,968,778 171,537 63,119,711
- -----------------------------------------------------------------------------------------------------------------------------
Benefits and settlement expenses 186,800 27,513,318 2,087,070 3,511,858 171,537 33,299,046
Amortization of deferred policy
acquisition costs.......... 76,132 7,225,750 669,620 667,681 8,639,183
Other operating expenses......... (254,425) 8,330,634 (324,360) 246,104 (63,392) 7,934,561
- -----------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 8,507 43,069,702 2,432,330 4,425,643 (63,392) 49,872,790
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) before income tax.. 142,070 11,732,882 1,593,905 (456,865) 234,929 13,246,921
Less: realized investment gains
(losses) 79,719 (775,928)
- -----------------------------------------------------------------------------------------------------------------------------
Operating income 142,070 11,732,882 1,593,905 (536,584) 1,010,857
Income tax expense............... $4,622,272 4,622,272
--------------
Net Income ...................... $ 8,624,649
==============
2001
Premiums and policy fees......... $ 43,891,160 $3,661,007 $ 155,298 $ 47,707,465
Reinsurance ceded................ (18,681,820) 60,785 (18,621,035)
- ------------------------------------------------------------------------------------------------------------------------------
Net of reinsurance ceded......... 25,209,340 3,721,792 155,298 29,086,430
Net investment income............ 29,892,723 606,345 1,909,607 $1,467,734 33,876,409
Realized investment gains (losses) (1,113,538) (1,113,538)
Other income (loss).............. 244 5,487 5,731
- ------------------------------------------------------------------------------------------------------------------------------
Total revenues............. 55,102,307 4,328,137 2,070,392 354,196 61,855,032
- ------------------------------------------------------------------------------------------------------------------------------
Benefits and settlement expenses. 28,533,646 2,567,742 2,243,541 33,344,929
Amortization of deferred policy
acquisition costs.......... 6,092,729 694,491 247,260 7,034,480
Other operating expenses......... 8,937,528 89,248 226,297 (63,778) 9,189,295
- ------------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 43,563,903 3,351,481 2,717,098 (63,778) 49,568,704
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income tax.. 11,538,404 976,656 (646,706) 417,974 12,286,328
Less: realized investment gains
(losses) (1,113,538)
- ------------------------------------------------------------------------------------------------------------------------------
Operating income................. 11,538,404 976,656 (646,706) 1,531,512
Income tax expense............... $4,165,065 4,165,065
Discontinued operations, net of
income tax.................. 1,783,889 1,783,889
Change in accounting principle,
net of income tax........... (284,968) (284,968)
-------------
Net Income....................... $ 9,620,184
=============
Life Asset Corporate
Operating Segment Assets Marketing Acquisitions Protection Annuities and Other Adjustments Total
- ------------------------------------------------------------------------------------------------------------------------------
2003
Investments and other assets..... $3,114,579 $580,346,285 $43,040,563 $57,121,591 $106,236,317 $ 122,046 $789,981,381
Deferred policy acquisition costs. 2,114,680 89,265,855 1,495,557 2,292,570 95,168,662
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets..................... $5,229,259 $669,612,140 $44,536,120 $59,414,161 $106,236,317 $ 122,046 $885,150,043
=================================================================================================================================
2002
Investments and other assets......$ 689,662 $590,688,434 $81,335,035 $59,234,421 $100,048,550 $3,723,088 $835,719,190
Deferred policy acquisition costs. 583,131 100,007,935 1,607,207 2,581,309 104,779,582
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets................. $1,272,793 $690,696,369 $82,942,242 $61,815,730 $100,048,550 $3,723,088 $940,498,772
=================================================================================================================================
Note 10 — REINSURANCE
The Company reinsures certain of its risks with, and assumes risks from, other insurers under yearly renewable term, coinsurance, and modified coinsurance agreements. Under yearly renewable term agreements, the Company generally pays specific premiums to the reinsurer and receives specific amounts from the reinsurer as reimbursement for certain expenses. Coinsurance agreements are accounted for by passing a portion of the risk to the reinsurer. Generally, the reinsurer receives a proportionate part of the premiums less commissions and is liable for a corresponding part of all benefit payments. Modified coinsurance is accounted for similarly to coinsurance except that the liability for future policy benefits is held by the original company, and settlements are made on a net basis between the companies. A substantial portion of the Company’s new life insurance and credit insurance sales is being reinsured. The Company reviews the financial condition of its reinsurers.
During 2002, Protective sold one of its subsidiaries, Lyndon Life Insurance Company (Lyndon Life) to an unaffiliated insurance company. As part of the transaction, the Company assumed and subsequently ceded a portion of Lyndon Life’s business to Protective. The Company paid a ceding allowance of $31.2 million to Lyndon Life and received from Protective an allowance of $31.6 million. The total amount of reserves transferred in the transaction from Lyndon Life to the Company was $91.8 million. The same amount of reserves were ceded from the Company to Protective by structure of the treaty as funds withheld.
The Company has reinsured approximately $7.0 billion, $6.6 billion, and $4.9 billion in face amount of life insurance risks with other insurers representing $18.5 million, $18.1 million, and $17.6 million of premium income for 2003, 2002, and 2001, respectively. The Company has also reinsured accident and health risks representing $(2.8) million, $0.8 million, and $0.1 million of premium income for 2003, 2002, and 2001, respectively. In 2003 and 2002, policy and claim reserves relating to insurance ceded of $57.1 million and $89.9 million respectively are included in reinsurance receivables. Should any of the reinsurers be unable to meet its obligation at the time of the claim, obligation to pay such claim would remain with the Company. At December 31, 2003 and 2002, the Company had paid $4.6 million and $2.3 million, respectively, of ceded benefits which are recoverable from reinsurers.
Approximately 28% and 16% of the reinsurance receivable balances at December 31, 2003 and 2002, respectively, relate to one unaffiliated insurance company rated “A+” (Superior) by the A. M. Best Company, an independent rating organization. Another $34.7 million or 57% and $73.1 million or 70% of the reinsurance receivable balances at December 31, 2003 and 2002, respectively relates to Protective.
Note 11 — ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of the Company’s financial instruments at December 31 are as follows:
2003 2002
-------------------------------- -------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Values Amount Values
Assets (see Notes 1 and 3):
Investments:
Fixed maturities...................... $636,460,275 $636,460,275 $488,701,807 $488,701,807
Mortgage loans on real estate......... 1,393,720 1,428,543 1,793,590 1,863,134
Short-term investments................ 1,200,413 1,200,413 178,805,245 178,805,245
Cash 13,052,781 13,052,781 1,669,532 1,669,532
Liabilities (see Note 1):
Annuity account balances.............. 57,894,232 62,162,330 60,080,082 62,984,955
Except as noted below, fair values were estimated using quoted market prices.
The Company estimates the fair value of its mortgage loans using discounted cash flows from the next call date.
The Company believes the fair value of short-term investments approximates their book value due to their short-term nature.
The Company estimates the fair value of its annuities using surrender values.
The Company believes it is not practicable to determine the fair value of its policy loans since there is no stated maturity,
and policy loans are often repaid by reductions to policy benefits.
SCHEDULE III-- SUPPLEMENTARY INSURANCE INFORMATION
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
- ---------------------------- ------------- ------------ ----------- ------------- ----------- ----------- ------------ ------------ -------------
COL. A COL. B COL. C COL. D COL. E COL. F COL. G COL. H COL. I COL. J
- ---------------------------- ------------- ------------ ----------- ------------- ----------- ----------- ------------ ------------ -------------
Future Annuity Net Amortization
Deferred Policy Account Balances Premiums Benefits of Deferred
Policy Benefits and Other and Net and Policy Other
Acquisition and Unearned Policyholders' Policy Investment Settlement Acquisition Operating
Segment Costs Claims Premiums Funds Fees Income (1) Expenses Costs Expenses (1)
- -------------------------------------------------------------------------------------------------------------------------------------------------
Year Ended
December 31, 2003
Life Marketing........... $ 2,114,680 $ 3,110,738$ 0 $ 3,841 $ 218,088 $ 38,387 $ (4,920) $ 335,099 $ (844,963)
Acquisitions............. 89,265,855 462,928,399 39,188 4,931,676 20,944,667 29,143,524 24,672,248 6,461,913 8,258,319
Asset Protection......... 1,495,557 28,646,283 13,784,829 609,451 3,449,446 499,944 2,374,123 778,226 157,789
Annuities................ 2,292,570 2,077,258 0 55,044,334 286,547 3,720,590 3,734,802 315,107 171,779
Corporate and Other...... 0 0 0 0 0 7,893,041 0 0 59,445
Adjustments (2).......... 0 122,046 0 0 0 0 0 0 0
- -------------------------------------------------------------------------------------------------------------------------------------------------
TOTAL................. $95,168,662 $496,884,724 $13,824,017 $ 60,589,302 $ 24,898,748 $41,295,486 $30,776,253 $7,890,345 $7,802,369
=================================================================================================================================================
Year Ended
December 31, 2002
Life Marketing.......... $ 583,131 $ 689,662 $ 0 $ 0 $ 142,454 $ 8,123 $ 186,800 $ 76,132 $ (254,425)
Acquisitions............ 100,007,935 460,211,404 43,965 4,841,464 23,808,052 30,989,460 27,513,318 7,225,750 8,330,634
Asset Protection........ 1,607,207 54,415,603 26,305,063 614,369 3,454,960 571,275 2,087,070 669,620 (324,360)
Annuities............... 2,581,309 1,962,360 0 57,272,062 153,530 3,729,514 3,511,858 667,681 246,104
Corporate and Other..... 0 0 0 0 0 947,465 0 0 (63,392)
Adjustments (2)......... 0 345,835 0 3,377,253 0 0 0 0 0
- -------------------------------------------------------------------------------------------------------------------------------------------------
TOTAL............... $104,779,582 $517,624,864 $26,349,028 $66,105,148 $27,558,996 $36,245,837 $33,299,046 $8,639,183 $7,934,561
=================================================================================================================================================
Year Ended
December 31, 2001
Acquisitions............ $25,209,340 $29,892,723 $28,533,646 $6,092,729 $8,937,528
Asset Protection........ 3,721,792 606,345 2,567,742 694,491 89,248
Annuities............... 155,298 1,909,607 2,243,541 247,260 226,297
Corporate and Other..... 0 1,467,734 0 0 (63,778)
- -------------------------------------------------------------------------------------------------------------------------------------------------
TOTAL............... $29,086,430 $33,876,409 $33,344,929 $7,034,480 $9,189,295
=================================================================================================================================================
(1) Allocations of Net Investment Income and Other Operating Expenses are based on a number of
assumptions and estimates and results would change if different methods were applied.
(2) Adjustments represent the inclusion of assets related to discontinued operations.
SCHEDULE IV-- REINSURANCE
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
- ------------------------------------------------------------ -------------- -------------- --------------- ------------- -------------
COL. A COL. B COL. C COL. D COL. E COL. F
- ------------------------------------------------------------ -------------- -------------- --------------- ------------- -------------
Percentage
Ceded to Assumed of Amount
Gross Other from Other Net Assumed
Amount Companies Companies Amount to Net
Year Ended December 31, 2003:
Life insurance in force(1) ................... $ 2,448,523 $ 7,022,711 $ 6,147,583 $ 1,573,395 390.7%
====================================================================================================================================
Premiums and policy fees:
Life insurance................................ $ 7,116,906 $50,146,129 $ 66,002,444 $ 22,973,221 287.3%
Accident and health insurance................. 2,513,551 (2,848,910) (3,436,934) 1,925,527 -
- -----------------------------------------------------------------------------------------------------------------------
TOTAL...................................... $ 9,630,457 $47,297,219 $ 62,565,510 $ 24,898,748
=======================================================================================================================
Year Ended December 31, 2002:
Life insurance in force(1) ................... $ 1,045,749 $ 6,646,105 $ 7,207,124 $ 1,606,768 448.5%
===================================================================================================================================
Premiums and policy fees:
Life insurance................................ $ 6,379,102 $22,962,666 $ 42,221,864 $25,638,300 164.7%
Accident and health insurance................. 3,131,323 771,735 (438,892) 1,920,696 -
- -----------------------------------------------------------------------------------------------------------------------
TOTAL...................................... $ 9,510,425 $23,734,401 $ 41,782,972 $ 27,558,996
=======================================================================================================================
Year Ended December 31, 2001:
Life insurance in force(1) ..................... $ 337,079 $ 4,865,367 $ 6,087,816 $ 1,559,528 390.4%
====================================================================================================================================
Premiums and policy fees:
Life insurance.................................. $ 6,006,689 $18,481,015 $ 39,585,878 $ 27,111,552 146.0%
Accident and health insurance................... 2,106,881 140,020 8,017 1,974,878 0.4%
- -----------------------------------------------------------------------------------------------------------------------
TOTAL........................................ $ 8,113,570 $18,621,035 $ 39,593,895 $ 29,086,430
=======================================================================================================================
(1) Dollars in thousands
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
None
Item 9a. Controls and Procedures
Under the direction of our President (Principal Executive Officer) and Chief Financial Officer, we evaluated our disclosure controls and procedures and internal control over financial reporting and concluded that (i) our disclosure controls and procedures were effective as of December 31, 2003 and (ii) no change in internal control over financial reporting occurred during the quarter ended December 31, 2003 that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting.
PART III
Item 10. Directors and Executive Officers of the Registrant
Not required in accordance with General Instruction I(2)(c).
Item 11. Executive Compensation
Not required in accordance with General Instruction I(2)(c).
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Share Owner Matters
Not required in accordance with General Instruction I(2)(c).
Item 13. Certain Relationships and Related Transactions
Not required in accordance with General Instruction I(2)(c).
Item 14. Principal Accountant Fees and Services
The following table shows the aggregate fees billed by PricewaterhouseCoopers LLP for 2003 and 2002 with respect to various services provided to PLC and its subsidiaries.
2003 2002
--------------------------------------------------------------
Audit $1.8 Million $1.9 Million
Audit Related 0.1 Million 0.3 Million
Tax 1.3 Million 0.9 Million
All Other 0.0 Million 0.3 Million
--------------------------------------------------------------
Total $3.2 Million $3.4 Million
--------------------------------------------------------------
Audit fees were for professional services rendered for the audits of the consolidated financial statements of Protective, statutory audits of subsidiaries, issuance of comfort letters, consents, income tax provision audit procedures, and assistance with review of documents filed with the SEC and other regulatory authorities.
Audit Related fees were for assurance and related services related to employee benefit plan audits, due diligence and accounting consultations in connection with acquisitions, internal control reviews, attest services that are not required by statute or regulation, and consultations concerning financial accounting and reporting standards.
Tax fees were for services related to tax compliance (including the preparation of tax returns and claims for refund), tax planning and tax advice, including assistance with and representation in tax audits and appeals, advice related to acquisitions, tax services for employee benefit plans, and requests for rulings or technical advice from tax authorities.
All Other fees were primarily for internal audit services. No internal audit services were provided after June 30, 2003.
The engagement of PricewaterhouseCoopers LLP to render audit and non-audit services for PLC and its subsidiaries for the period ended March 2005 was approved by the Audit Committee of PLC’s Board of Directors on March 1, 2004. The Audit Committee’s policy is to pre-approve, generally for a twelve month period, the audit, audit-related, tax and other services provided by the independent accountants. Under the pre-approval process, the Committee reviews and approves specific services and categories of services and the maximum aggregate fee for each service or service category. Performance of any additional services or categories of services, or of services that would result in fees in excess of the established maximum, requires the separate pre-approval of the Committee or a member of the Committee who has been delegated pre-approval authority.
PART IV
Item 15. Exhibits, Financial
Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part
of this report:
1. Financial Statements (Item 8)
2. Financial Statement Schedules (see index annexed)
3. Exhibits:
| The exhibits listed in the Exhibit Index on page 39 of this Form 10-K are filed herewith or are incorporated herein by reference. No management contract or compensatory plan or arrangement is required to be filed as an exhibit to this form. The Registrant will furnish a copy of any of the exhibits listed upon the payment of $5.00 per exhibit to cover the cost of the Registrant in furnishing the exhibit. |
(b) Reports on Form 8-K:
None
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Birmingham, State of Alabama on March 29, 2004.
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
By: /s/ WAYNE E. STUENKEL
--------------------------
President
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, this report has been signed by the following
persons in the capacities and on the dates indicated:
Signature Title Date
------------ ----- ----
(i) Principal Executive Officer
/s/ WAYNE E. STUENKEL President and
Wayne E. Stuenkel Director March 29, 2004
(ii) Principal Financial Officer
/s/ ALLEN W. RITCHIE Chief Financial Officer
Allen W. Ritchie and Director March 29, 2004
(iii) Principal Accounting Officer
/s/ STEVEN G. WALKER Vice President, Controller March 29, 2004
Steven G. Walker and Chief Accounting Officer
(iv) Board of Directors:
* Director March 29, 2004
John D. Johns
* Director March 29, 2004
Richard J. Bielen
* Director March 29, 2004
R. Stephen Briggs
/s/ J. WILLIAM HAMER, JR. Director March 29, 2004
J. William Hamer, Jr.
* Director March 29, 2004
T. Davis Keyes
/s/ CAROLYN KING Director March 29, 2004
Carolyn King
/s/ DEBORAH J. LONG Director March 29, 2004
Deborah J. Long
* Director March 29, 2004
Allen W. Ritchie
*By: /s/ STEVEN G. WALKER
- -------------------------------
Steven G. Walker
Attorney-in-fact
EXHIBIT INDEX
Item
Number Document
- --------- --------
* 3 (a) (1) 1998 Amended and Restated Articles of Incorporation
* 3 (a) (2) Articles of Amendment to 1998 Amended and Restated Articles of Incorporation
***** 3(b) Amended and Restated Bylaws Effective August 1, 2000
** 4(a) Tax-Sheltered Annuity Endorsement
** 4(b) Qualified Retirement Plan Endorsement
** 4(c) Individual Retirement Annuity Endorsement
*** 4(d) Group Modified Guaranteed Annuity Contract
*** 4(e) Application for Group Modified Guaranteed Annuity Contract
*** 4(f) Individual Modified Guaranteed Annuity Certificate
**** 10 (a) Guaranty Agreement from Protective Life Insurance Company
**** 10 (a) (1) Amendment to Guaranty Agreement from Protective Life Insurance Company
****** 10 (b) Indemnity Reinsurance Agreement By and Between Protective Life &
Annuity Insurance Company and First Fortis Life Insurance
Company dated December 31, 2001
24 Power of Attorney
31(a) Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31(b) Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32(a) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32(b) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99 Safe Harbor for Forward-Looking Statements
* Incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31,
1998.
** Incorporated herein by reference to the Registrant's Form N-4 Registration Statement, Registration No. 333-41577,
filed on December 5, 1997.
*** Incorporated herein by reference to the Registrant's Pre-Effective Amendment No. 1 to Form S-1 Registration
Statement, Registration No. 333-42425, filed on April 16, 1998.
**** Incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31,
1999.
***** Incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31,
2000.
****** Incorporated herein by reference to the Registrant's Annual Report on form 10-K for the year ended December 31,
2001.