| ALABAMA | 63-0761690 | ||
|---|---|---|---|
| (State or other jurisdiction of | (IRS Employer | ||
| incorporation or organization) | Identificiation No.) |
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No[ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Number of shares of Common Stock, $10.00 par value, outstanding as of May 7, 2004: 250,000 shares.
The registrant meets the conditions set forth in General Instruction H(1)(a)and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format pursuant to General Instruction H(2).
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
INDEX
Part I. Financial Information:
Item 1. Financial Statements (unaudited):
Report of Independent Accountants..................................................................
Condensed Statements of Income for the Three Months
ended March 31, 2004 and 2003..................................................................
Condensed Balance Sheets as of March 31, 2004
and December 31, 2003..........................................................................
Condensed Statements of Cash Flows for the
Three Months ended March 31, 2004 and 2003.....................................................
Notes to Condensed Financial Statements............................................................
Item 2. Management's Narrative Analysis of the Results of Operations.................................
Item 4. Controls and Procedures......................................................................
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K.............................................................
Signature................................................................................................
To the Directors and
Share Owners
Protective Life and Annuity Insurance Company
We have reviewed the accompanying condensed balance sheet of Protective Life and Annuity Insurance Company as of March 31, 2004, and the related condensed statements of income for each of the three-month periods ended March 31, 2004 and 2003, and the condensed statements of cash flows for the three-month periods ended March 31, 2004 and 2003. These interim financial statements are the responsibility of the Company’s management.
We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We previously audited in accordance with auditing standards generally accepted in the United States of America, the balance sheet as of December 31, 2003, and the related statements of income, share-owners’ equity, and cash flows for the year then ended (not presented herein), and in our report dated March 11, 2004, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying condensed balance sheet as of December 31, 2003, is fairly stated in all material respects in relation to the balance sheet from which it has been derived.
/s/PricewaterhouseCoopers
LLP
PricewaterhouseCoopers
LLP
Birmingham, Alabama
May 14, 2004
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
CONDENSED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED
MARCH 31
2004 2003
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REVENUES
Premiums and policy fees $16,549,566 $19,870,307
Reinsurance ceded (10,350,957) (13,510,673)
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Premiums and policy fees, net of reinsurance ceded 6,198,609 6,359,634
Net investment income 9,933,930 10,132,301
Realized investment gains 240,458 733,557
Other income (loss) 13,054 (568)
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16,386,051 17,224,924
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BENEFITS AND EXPENSES
Benefits and settlement expenses
(net of reinsurance ceded:
2004 - $6,585,056; 2003 - $6,015,224) 7,356,998 7,837,609
Amortization of deferred policy acquisition costs 1,703,843 2,078,112
Other operating expenses (net of reinsurance ceded:
2004 - $(20,278); 2003 - $(879,203)) 2,286,626 2,123,828
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11,347,467 12,039,549
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INCOME BEFORE INCOME TAX 5,038,584 5,185,375
Income tax expense 1,758,494 1,805,331
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NET INCOME $ 3,280,090 $ 3,380,044
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See notes to condensed financial statements
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
CONDENSED BALANCE SHEETS
(Unaudited)
MARCH 31 DECEMBER 31
2004 2003
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ASSETS
Investments:
Fixed maturities, at market
(amortized cost: 2004 - $596,390,529; 2003 - $598,941,913) $651,344,211 $636,460,275
Mortgage loans on real estate 1,342,120 1,393,720
Policy loans 53,318,432 54,066,125
Short-term investments 1,202,496 1,200,413
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Total investments 707,207,259 693,120,533
Cash 15,462,411 13,052,781
Accrued investment income 10,028,362 11,116,301
Accounts and premiums receivable, net of allowance
for uncollectible amounts 552,259 530,133
Reinsurance receivables 54,913,168 61,159,477
Deferred policy acquisition costs 89,001,743 95,168,662
Other assets 13,518 14,897
Assets related to separate accounts
Variable Annuity 10,449,362 10,987,259
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$887,628,082 $885,150,043
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LIABILITIES
Policy liabilities and accruals:
Future policy benefits and claims $490,233,029 $496,884,724
Unearned premiums 11,570,610 13,824,017
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501,803,639 510,708,741
Annuity account balances 58,134,910 57,894,232
Other policyholders' funds 2,793,169 2,695,070
Funds held-coinsurance 39,980,963 46,762,354
Other liabilities 16,517,886 15,506,447
Accrued income taxes 2,556,443 702,883
Deferred income taxes 41,057,586 36,842,882
Liabilities related to separate accounts
Variable Annuity 10,449,362 10,987,259
- ----------------------------------------------------------------------------------------------------------------------------------
673,293,958 682,099,868
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COMMITMENTS AND CONTINGENT LIABILITIES - NOTE B
SHARE-OWNERS' EQUITY
Preferred Stock, $1.00 par value, shares authorized and issued: 2,000 2,000 2,000
Common Stock, $10.00 par value,
Shares authorized: 500,000
Shares issued and outstanding: 250,000 2,500,000 2,500,000
Additional paid-in capital 171,386,324 171,386,324
Retained earnings 15,690,623 12,410,533
Accumulated other comprehensive income:
Net unrealized gains on investments (net of income tax:
2004 - $13,329,711; 2003 - $9,019,940) 24,755,177 16,751,318
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214,334,124 203,050,175
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$887,628,082 $885,150,043
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See notes to condensed financial statements
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED
MARCH 31
2004 2003
- -------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,280,090 $ 3,380,044
Adjustments to reconcile net income to net cash used in
operating activities:
Realized investment (gains) losses (240,458) (733,557)
Amortization of deferred policy acquisition costs 1,703,843 2,078,112
Capitalization of deferred policy acquisition costs (739,930) (601,929)
Deferred income tax (95,066) 1,805,331
Interest credited to universal life and investment products 5,093,586 4,498,577
Policy fees assessed on universal life and investment products (8,423,342) (8,551,518)
Change in accrued investment income and other receivables 7,312,122 9,865,222
Change in policy liabilities and other policyholders' funds of traditional
life and health products (9,342,727) (13,803,879)
Change in funds held-coinsurance (6,781,391) (13,639,045)
Change in other liabilities 1,011,439 (1,614,179)
Other, net 1,378 (1,570)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (7,220,456) (17,318,391)
- --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investments available for sale, net of short-term investments:
Maturities and principal reductions of investments 13,497,992 21,888,068
Sale of investments 7,208,363 13,247,370
Cost of investments acquired (15,979,637) (157,388,197)
Decrease in mortgage loans, net 51,600 51,411
Decrease (increase) in policy loans, net 747,693 650,427
Decrease (increase) in short-term investments, net (2,083) 132,238,981
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 5,523,928 10,688,060
- --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Investment product deposits and change in universal life deposits 6,017,531 6,182,501
Investment product withdrawals (1,911,373) (1,221,702)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 4,106,158 4,960,799
- --------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH 2,409,630 (1,669,532)
CASH AT BEGINNING OF PERIOD 13,052,781 1,669,532
- --------------------------------------------------------------------------------------------------------------------------------
CASH AT END OF PERIOD $ 15,462,411 $ 0
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See notes to condensed financial statements
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of Protective Life and Annuity Insurance
Company ("the Company") have been prepared on the basis of accounting principles generally accepted in the United
States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the disclosures required by accounting principles
generally accepted in the United States of America for complete financial statements. In the opinion of
management, all adjustments (consisting only of normal recurring accruals) necessary for a fair statement have
been included. Operating results for the three-month period ended March 31, 2004 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2004. The year-end condensed balance sheet
data was derived from audited financial statements, but does not include all disclosures required by accounting
principles generally accepted in the United States of America. For further information, refer to the financial
statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31,
2003.
All outstanding shares of the Company's common stock are owned by Protective Life Insurance Company ("Protective"), which is a wholly owned subsidiary of Protective Life Corporation ("PLC"). All outstanding shares of the Company's preferred stock are owned by PLC.
NOTE B - COMMITMENTS AND CONTINGENT LIABILITIES
Under insurance guaranty fund laws, in most states insurance companies doing business therein can be assessed up to prescribed limits for policyholder losses incurred by insolvent companies. The Company does not currently believe such assessments will be materially different from amounts already provided for in the financial statements. Most of these laws do provide, however, that an assessment may be excused or deferred if it would threaten an insurer's own financial strength.
A number of civil jury verdicts have been returned against insurers and other providers of financial services involving sales practices, alleged agent misconduct, failure to properly supervise representatives' relationships with agents or other persons with whom the insurer does business, and other matters. Increasingly these lawsuits have resulted in the award of substantial judgments that are disproportionate to the actual damages, including material amounts of punitive and non-economic compensatory damages. In some states, juries, judges, and arbitrators have substantial discretion in awarding punitive and non-economic compensatory damages which creates the potential for unpredictable material adverse judgments or awards in any given lawsuit or arbitration. Arbitration awards are subject to very limited appellate review. In addition, in some class action and other lawsuits, companies have made material settlement payments. The Company, like other financial services companies, in the ordinary course of business, is involved in such litigation and in arbitration. Although the outcome of any such litigation or arbitration cannot be predicted, the Company believes that at the present time there are no pending or threatened lawsuits that are reasonably likely to have a material adverse effect on the financial position, results of operation, or liquidity of the Company.
NOTE C - OPERATING SEGMENTS
PLC, through its subsidiaries, operates several business segments. An operating segment is generally distinguished by products and/or channels of distribution. A brief description of each segment in which the Company operates follows:
| Life Marketing. The Life Marketing segment markets level premium term and term-like insurance, universal life, and variable universal life products on a national basis primarily through networks of independent insurance agents and brokers, and in the "bank owned life insurance" market. |
| Acquisitions. The Acquisitions segment focuses on acquiring, converting, and servicing policies acquired from other companies. The segment's primary focus is on life insurance policies sold to individuals. |
| Annuities. The Annuities segment manufactures, sells, and supports fixed annuity products. These products are primarily sold through stockbrokers, but are also sold through financial institutions and the Life Marketing segment's sales force. It also supports variable annuity products sold prior to 2003 when the Company ceased marketing those products. |
| Asset Protection. The Asset Protection segment primarily markets credit life and disability insurance products to protect consumers' investments in automobiles and watercraft. |
| Corporate and Other. 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. The measure used by the Company's chief operating decision maker to assess segment performance is operating income. Operating segment income is generally income before income tax, net of realized investment gains and losses. Premiums and policy fees, other income, benefits and settlement expenses, and amortization of deferred policy acquisition costs are attributed directly to each operating segment. Net investment income is allocated based on directly related assets required for transacting the business of that segment. Realized investment gains (losses) and other operating expenses are allocated to the segments in a manner which appropriately reflects the operations of that segment. Unallocated realized investment gains (losses) are deemed not to be associated with any specific segment.
Assets are allocated based on policy liabilities directly attributable to each segment and deferred policy acquisition costs are shown in the segments to which they are attributable.
There are no significant intersegment transactions.
The following table sets forth total operating segment income and assets for the period shown. Income adjustments represent the recognition of income tax expense. Asset adjustments represent the inclusion of assets related to discontinued operations.
Operating Segment Income for the
Three Months Ended March 31, 2004
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Life Acquisitions Annuities
Marketing
- -----------------------------------------------------------------------------------------------------------------------------------
Premiums and policy fees $1,465,708 $ 9,741,454 $ 76,453
Reinsurance ceded (1,344,666) (4,606,640)
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Net of reinsurance ceded 121,042 5,134,814 76,453
Net investment income 5,927 7,273,572 941,095
Realized investment gains 221,760
Other income 8,071
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Total revenue 126,969 12,408,386 1,247,379
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Benefits and settlement expenses 47,907 5,955,576 875,487
Amortization of deferred policy acquisition costs 87,929 1,312,294 99,619
Other operating expenses (242,255) 2,353,106 43,889
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Total benefits and expenses (106,419) 9,620,976 1,018,995
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Income before income tax 233,388 2,787,410 228,384
Less: realized investment gains 221,760
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Operating income 233,388 2,787,410 6,624
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Asset Corporate Total
Protection and Other Adjustments Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Premiums and policy fees $5,265,951 $ 16,549,566
Reinsurance ceded (4,399,651) (10,350,957)
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Net of reinsurance ceded 866,300 6,198,609
Net investment income 129,554 $1,583,782 9,933,930
Realized investment gains 18,698 240,458
Other income 4,983 13,054
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Total revenue 995,854 1,607,463 16,386,051
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Benefits and settlement expenses 478,028 7,356,998
Amortization of deferred policy acquisition costs 204,001 1,703,843
Other operating expenses 88,762 43,124 2,286,626
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Total benefits and expenses 770,791 43,124 11,347,467
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Income before income tax 225,063 1,564,339 5,038,584
Less: realized investment gains 18,698
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income 225,063 1,545,641
Income tax expense $1,758,494 1,758,494
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Net income $ 3,280,090
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Operating Segment Income for the
Three Months Ended March 31, 2003
- -----------------------------------------------------------------------------------------------------------------------------------
Life Acquisitions Annuities
Marketing
- -----------------------------------------------------------------------------------------------------------------------------------
Premiums and policy fees $710,912 $10,424,899 $ 54,312
Reinsurance ceded (652,625) (5,053,413)
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Net of reinsurance ceded 58,287 5,371,486 54,312
Net investment income 2,939 7,332,057 943,460
Realized investment gains
Other income (loss) (5,045) 4,477
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Total revenue 61,226 12,698,498 1,002,249
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Benefits and settlement expenses 12,862 6,456,153 904,489
Amortization of deferred policy acquisition costs 169,174 1,660,575 56,853
Other operating expenses 2,406 2,176,225 (43,556)
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Total benefits and expenses 184,442 10,292,953 917,786
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Income before income tax (123,216) 2,405,545 84,463
Less: realized investment gains
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Operating income (123,216) 2,405,545 84,463
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Asset Corporate Total
Protection and Other Adjustments Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Premiums and policy fees $8,680,184 $19,870,307
Reinsurance ceded (7,804,635) (13,510,673)
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Net of reinsurance ceded 875,549 6,359,634
Net investment income 99,378 $1,754,467 10,132,301
Realized investment gains 733,557 733,557
Other income (loss) (568)
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Total revenue 974,927 2,488,024 17,224,924
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Benefits and settlement expenses 464,105 7,837,609
Amortization of deferred policy acquisition costs 191,510 2,078,112
Other operating expenses 27,142 (38,389) 2,123,828
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Total benefits and expenses 682,757 (38,389) 12,039,549
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Income before income tax 292,170 2,526,413 5,185,375
Less: realized investment gains 733,557
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Operating income 292,170 1,792,856
Income tax expense $1,805,331 1,805,331
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Net income $ 3,380,044
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Operating Segment Assets
March 31, 2004
- -------------------------------------------------------------------------------------------------------------------------------
Life
Marketing Acquisitions Annuities
- -------------------------------------------------------------------------------------------------------------------------------
Investments and other assets $3,613,261 $587,336,558 $57,298,601
Deferred policy acquisition costs 2,617,310 82,790,885 2,195,842
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Total assets $6,230,571 $670,127,443 $59,494,443
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- -------------------------------------------------------------------------------------------------------------------------------
Asset Corporate Total
Protection and Other Adjustments Consolidated
- ------------------------------------------------------------------------------------------------------------------------------
Investments and other assets $37,004,057 $113,254,090 $119,772 $798,626,339
Deferred policy acquisition costs 1,397,706 89,001,743
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $38,401,763 $113,254,090 $119,772 $887,628,082
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Operating Segment Assets
December 31, 2003
- ------------------------------------------------------------------------------------------------------------------------------
Life
Marketing Acquisitions Annuities
- ------------------------------------------------------------------------------------------------------------------------------
Investments and other assets $3,114,579 $580,346,285 $57,121,591
Deferred policy acquisition costs 2,114,680 89,265,855 2,292,570
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Total assets $5,229,259 $669,612,140 $59,414,161
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- ------------------------------------------------------------------------------------------------------------------------------
Asset Corporate Total
Protection and Other Adjustments Consolidated
- ------------------------------------------------------------------------------------------------------------------------------
Investments and other assets $43,040,563 $106,236,317 $122,046 $789,981,381
Deferred policy acquisition costs 1,495,557 95,168,662
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Total assets $44,536,120 $106,236,317 $122,046 $885,150,043
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NOTE D – STATUTORY REPORTING PRACTICES
Financial statements prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) differ in some respects from the statutory accounting practices prescribed or permitted by insurance regulatory authorities. In accordance with statutory accounting reporting practices, at March 31, 2004, and for the three months then ended, the Company had share-owners’ equity of $113.3 million and net income of $4.0 million.
NOTE E – COMPREHENSIVE INCOME
The following table sets forth the Company’s comprehensive income for the periods shown:
- -------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31
2004 2003
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 3,280,090 $3,380,044
Change in net unrealized gains/losses on investments
(net of income tax: three months: 2004 - $4,393,931; 2003 - $3,258,368) 8,160,157 6,051,254
Reclassification adjustment for amounts included in net income
(net of income tax: 2004 - $(84,160); 2003 - $(256,745) (156,298) (476,812)
- -------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $ ll,283,949 $8,954,486
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NOTE F – RECLASSIFICATIONS
Certain reclassifications have been made in the previously reported financial statements and accompanying notes to make the prior year amounts comparable to those of the current year. Such reclassifications had no effect on previously reported net income, total assets, or share-owners’ equity.
NOTE G – RECENTLY ISSUED ACCOUNTING STANDARDS
In 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 establishment of reserves for benefit guarantees provided under certain long-duration contracts, as well as the accounting for mortality benefits in certain universal life products. In addition, it addresses the capitalization and amortization of sales inducements to contract holders. The adoption of SOP 03-1 had no impact on the Company’s financial position or results of operations.
ITEM 2.
MANAGEMENT’S NARRATIVE ANALYSIS OF THE
RESULTS OF OPERATIONS
Protective Life and Annuity Insurance Company (“the Company”), a stock life insurance company, was founded in 1978. Since 1983, all outstanding shares of the Company’s common stock have been owned by Protective Life Insurance Company (“Protective”), which is a wholly owned subsidiary of Protective Life Corporation (“PLC”), an insurance holding company whose common stock is traded on the New York Stock Exchange under the symbol “PL”. All outstanding shares of the Company’s preferred stock are owned by PLC. The Company is authorized to transact insurance business as an insurance company or a reinsurance company in 49 states, including New York.
In accordance with General Instruction H(2)(a), the Company includes the following analysis with the reduced disclosure format.
For a more complete understanding of the Company’s business and its current period results, please read the following Management’s Narrative Analysis of the Results of Operations in conjunction with the Company’s latest annual report on Form 10-K and other filings with the SEC.
PLC, through its subsidiaries, provides financial services through the production, distribution, and administration of insurance and investment products. PLC, through its subsidiaries, operates several business segments each having a strategic focus. An operating segment is generally distinguished by products and/or channels of distribution.
The Company, since it is licensed in the State of New York, is the entity through which PLC markets, distributes, and services insurance and annuity products in New York. As of March 31, 2004, the Company was involved in the businesses of four of PLC’s operating segments: Life Marketing, Acquisitions, Annuities, and Asset Protection. The Company has an additional segment which is described herein as Corporate and Other.
Protective has entered into an intercompany guaranty agreement, enforceable by the Company or its successors, whereby Protective has guaranteed the Company’s payment of claims made by the holders of Company policies according to the terms of such policies. The guarantee will remain in force until the earlier of (a) when the Company achieves a claims-paying rating equal to or better than Protective without the benefit of any intercompany guaranty agreement or (b) 90 days after the guaranty agreement is revoked by written instrument; provided, however, even after any revocation or termination by such notice, the guarantee shall remain effective as to policies issued during the existence of the guaranty agreement.
This report reviews the Company’s financial condition and results of operations including its liquidity and capital resources. Historical information is presented and discussed. Where appropriate, factors that may affect future financial performance are also identified and discussed. Certain statements made in this report include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include any statement that may predict, forecast, indicate or imply future results, performance or achievements instead of historical facts and may contain words like “believe,” “expect,” “estimate,” “project,” “budget,” “forecast,” “anticipate,” “plan,” “will,” “shall,” “may,” and other words, phrases, or expressions with similar meanings. Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from the results contained in the forward-looking statements, and the Company cannot give assurances that such statements will prove to be correct. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Please refer to Exhibit 99(a), incorporated by reference herein, for more information about factors which could affect future results.
The Company’s results may fluctuate from period to period due to fluctuations in mortality, persistency, claims, expenses, interest rates, and other factors. Therefore, it is management’s opinion that quarterly operating results for an insurance company are not necessarily indicative of results to be achieved in future periods, and that a review of operating results over a longer period is necessary to assess an insurance company’s performance.
Revenues
The following table sets forth revenues by source for the periods shown:
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THREE MONTHS ENDED
MARCH 31
2004 2003
- ----------------------------------------------------------------------------------------------------------------------------
Premiums and policy fees, net of reinsurance $ 6,198,609 $ 6,359,634
Net investment income 9,933,930 10,132,301
Realized investment gains 240,458 733,557
Other income (loss) 13,054 (568)
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$16,386,051 $ 17,224,924
---------------------------------------------------------------------------------------------------------------------------
Premiums and policy fees, net of reinsurance (“premiums and policy fees”) decreased $0.2 million or 2.5% in the first three months of 2004 from the first three months of 2003. Premiums and policy fees in the Acquisitions Division are expected to decline with time unless new acquisitions are made. No acquisitions were made in this Division in 2003 or the first three months of 2004, therefore decreases in older acquired policies resulted in a decrease of $0.2 million in the first three months of 2004 as compared with the first three months of 2003. Premiums and policy fees in both the Annuities and Asset Protection segments remained relatively flat in the first three months of 2004 as compared to 2003, while premiums and policy fees in the Life Marketing segment increased $0.1 million for the same period.
Net investment income in the first three months of 2004 decreased by $0.2 million as compared to the corresponding period of the preceding year primarily due to a decrease in the average amount of invested assets. The percentage earned on average cash and investments was 5.5% in the first three months of both 2004 and 2003.
The Company generally purchases its investments with the intent to hold to maturity by purchasing investments that match future cash-flow needs. The sales of investments that have occurred generally result from portfolio management decisions to maintain proper matching of assets and liabilities. Accordingly, the Company has classified its fixed maturities and certain other securities as “available for sale.”
Realized investment gains were approximately $0.2 million in the first three months of 2004 compared to $0.7 million in the first three months of 2003. During the first three months of 2004, the Company recorded no other-than-temporary impairments on its investments as compared to $0.3 million in the first three months of 2003.
Each quarter the Company reviews investments with material unrealized losses and tests for other-than-temporary impairments. Management analyzes various factors to determine if any specific other-than-temporary asset impairments exist. Once a determination has been made that a specific other-than-temporary impairment exists, a realized loss is recognized and the cost basis of the impaired asset is adjusted to its fair value. An other-than-temporary impairment loss is recognized based upon all relevant facts and circumstances for each investment. With respect to unrealized losses due to issuer-specific events, the Company considers the creditworthiness and financial performance of the issuer and other available information. With respect to unrealized losses that are not due to issuer-specific events, such as losses due to interest rate fluctuations, general market conditions or industry-related events, the Company considers its intent and ability to hold the investment to allow for a market recovery or to maturity together with an assessment of the likelihood of full recovery.
The Company reported an increase of less than $0.1 million in the amount of other income in the first three months of 2004 as compared to the first three months of 2003.
Income Before Income Tax and Operating Income
Consistent with the Company’s segment reporting in the Notes to Condensed Financial Statements, management evaluates the results of the Company’s segments on a before-income-tax basis as adjusted for certain items which management believes are not indicative of the segment’s core operations. Segment operating income (loss) excludes net realized investment gains and losses because fluctuations in these items are due to changes in interest rates and other financial market factors instead of mortality and morbidity. Also, segment operating income (loss) excludes discontinued operations, extraordinary items, and the cumulative effect of changes in accounting principles. Although the items excluded from segment operating income (loss) may be significant components in understanding and assessing the Company’s overall financial performance, management believes that segment operating income (loss) enhances an investor’s understanding of the Company’s results of operations by highlighting the income (loss) attributable to the normal, recurring operations of the insurance business (i.e., mortality and morbidity), consistent with industry practice. However, the Company’s segment income (loss) measures may not be comparable to similarly titled measures reported by other companies. Segment operating income (loss) should not be construed as a substitute for net income (loss) determined in accordance with accounting principles generally accepted in the United States of America (GAAP). “Total income before income tax” is a GAAP measure to which the non-GAAP measure “total operating income” may be compared. Unlike total operating income, total income before income tax includes net realized investment gains and losses. In the Life Marketing, Acquisitions, and Asset Protection segments, operating income equals segment income before income tax for all periods. In the Annuities and Corporate and Other segment, operating income excludes realized investment gains and losses.
The following table sets forth operating income or loss and income or loss before income tax by business segment for the periods shown:
OPERATING INCOME (LOSS) AND INCOME (LOSS) BEFORE INCOME TAX
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THREE MONTHS ENDED
MARCH 31
2004 2003
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Operating income (loss)1
Life Marketing $ 233,388 $ (123,216)
Acquisitions 2,787,410 2,405,545
Annuities 6,624 84,463
Asset Protection 225,063 292,170
Corporate and Other 1,545,641 1,792,856
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Realized Investment gains
Annuities 221,760
Corporate and Other 18,698 733,557
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Income (loss) before income tax
Life Marketing 233,388 (123,216)
Acquisitions 2,787,410 2,405,545
Annuities 228,384 84,463
Asset Protection 225,063 292,170
Corporate and Other 1,564,339 2,526,413
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Total income before income tax $5,038,584 $5,185,375
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1 Income (loss) before income tax excluding realized investment gains and losses.
The Life Marketing segment had pretax operating income of $0.2 million in the first three months of 2004 as compared to a pretax operating loss of $0.1 million in the same period of 2003. The Company began operations in the Life Marketing segment in 2002. The increase in income is primarily attributable to growth in business-in-force.
Pretax operating income from the Acquisitions segment was $2.8 million in the first three months of 2004 as compared to $2.4 million in the same period of 2003. The increase is primarily due to lower benefit and settlement expenses. Earnings from the Acquisitions segment are expected to decline over time (due to the lapsing of policies resulting from deaths of insureds or terminations of coverage) unless new acquisitions are made. There were no new acquisitions made in 2003 or in the first three months of 2004.
The Annuities segment had pretax operating income of less than $0.1 million in the first three months of 2004 and in the same period of 2003. The Annuities segment’s future results may be negatively affected by a slow economy. Volatile equity markets could negatively affect the fees the segment assesses on variable annuity contracts. Lower interest rates could negatively affect sales of fixed annuities. In this segment, equity market volatility may create uncertainty regarding the future results in the variable annuity business and the related rate of amortization of deferred policy acquisition costs. Also, beginning January 2003, the Company is no longer marketing variable annuity products.
The Asset Protection segment’s pretax operating income was $0.2 million in the first three months of 2004, as compared to $0.3 million in the first three months of 2003. The decrease is primarily due to an increase in various expenses.
The Corporate and Other segment consists of net investment income and expenses not identified with the preceding business segments. Pretax operating income from this segment was $1.5 million in the first three months of 2004 as compared to $1.8 million in the first three months of 2003, primarily due to lower net investment income and higher expenses allocated to this segment.
Income Taxes
The following table sets forth the effective tax rates for the periods shown:
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THREE MONTHS ENDED
MARCH 31
2004 2003
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Effective Income Tax Rates 34.9% 34.8%
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The effective income tax rate for the full year of 2003 was 34.9%. Management’s estimate of the effective income tax rate for the full year of 2004 is approximately 34.9%.
Net Income
The following table sets forth net income for the periods shown:
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THREE MONTHS ENDED
MARCH 31
2004 2003
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Net Income $3,280,090 $3,380,044
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Compared to the same period in 2003, net income in the first three months of 2004 decreased $0.1 million, reflecting increases in operating income in the Life Marketing and Acquisitions segments, which were offset by decreases in the Annuities, Asset Protection, and Corporate and Other segments and lower realized investment gains.
Review by Independent Accountants
With respect to the unaudited condensed financial information of Protective Life and Annuity Insurance Company for the three-month periods ended March 31, 2004 and 2003, PricewaterhouseCoopers LLP (“PricewaterhouseCoopers”) reported that they have applied limited procedures in accordance with professional standards for a review of such information. However, their separate report dated May 14, 2004, appearing herein, stated that they did not audit and they do not express an opinion on that unaudited condensed financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers is not subject to the liability provisions of Section 11 of the Securities Act of 1933 for their report on the unaudited condensed financial information because that report is not a “report” or a “part” of a registration statement prepared or certified by PricewaterhouseCoopers into which this Form 10-Q may be incorporated by reference within the meaning of Sections 7 and 11 of the Act.
Item 4. Controls and Procedures
Under the direction our President 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 March 31, 2004, and (ii) no change in internal control over financial reporting occurred during the quarter ended March 31, 2004 that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 31(a) - Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31(b) - Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32(a) - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 32(b) - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 99 - Safe Harbor for Forward-Looking Statements.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Protective Life and Annuity Insurance Company
Date: May 17, 2004 /s/Steven G. Walker
Steven G. Walker
Vice President, Controller
and Chief Accounting Officer
(Duly authorized officer)