| 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 November 12, 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).
INDEX
Page Number
Part I. Financial Information:
Item 1. Financial Statements (unaudited):
Report of Independent Registered Public Accounting Firm...........................................
Condensed Statements of Income for the Three and Nine Months
ended September 30, 2004 and 2003.............................................................
Condensed Balance Sheets as of September 30, 2004
and December 31, 2003.........................................................................
Condensed Statements of Cash Flows for the
Nine Months ended September 30, 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.....................................................................................
Signature................................................................................................
To Directors and Share
Owners
Protective Life and Annuity Insurance Company
We have reviewed the accompanying condensed balance sheet of Protective Life and Annuity Insurance Company as of September 30, 2004, and the related condensed statements of income for each of the three-month and nine-month periods ended September 30, 2004 and 2003 and the condensed statements of cash flows for the nine-month periods ended September 30, 2004 and 2003. These interim financial statements are the responsibility of the Company’s management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, 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 the standards of the Public Company Accounting Oversight Board (United States), 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.
PricewaterhouseCoopers LLP
Birmingham, Alabama
November 15, 2004
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2004 2003 2004 2003
- ----------------------------------------------------------------------------------------------------------------------------------------
REVENUES
Premiums and policy fees $15,131,853 $ 17,610,353 $ 47,056,839 $ 55,766,165
Reinsurance ceded (8,915,447) (11,180,601) (27,717,731) (35,866,491)
- ----------------------------------------------------------------------------------------------------------------------------------------
Premiums and policy fees, net of reinsurance ceded 6,216,406 6,429,752 19,339,108 19,899,674
Net investment income 9,871,369 9,840,689 30,221,274 30,698,992
Realized investment gains (losses) 367,756 1,106,032 418,215 3,384,562
Other income 17,303 6,545 37,926 149,199
- ----------------------------------------------------------------------------------------------------------------------------------------
16,472,834 17,383,018 50,016,523 54,132,427
- ----------------------------------------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Benefits and settlement expenses
(net of reinsurance ceded:
three months: 2004 - $6,530,338; 2003 - $8,319,739
nine months: 2004 - $19,277,582; 2003 - $22,851,317) 8,537,530 8,143,085 24,579,833 24,264,248
Amortization of deferred policy acquisition costs 1,793,515 1,956,536 5,166,729 6,040,291
Other operating expenses (net of reinsurance ceded:
three months: 2004 - $290,685; 2003 - $(168,669)
nine months: 2004 - $149,180; 2003 - $(1,566,318)) 1,971,461 1,752,609 6,163,704 6,093,527
- ----------------------------------------------------------------------------------------------------------------------------------------
12,302,506 11,852,230 35,910,266 36,398,066
- ----------------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX 4,170,328 5,530,788 14,106,257 17,734,361
Income tax expense 1,354,306 1,934,028 4,821,896 6,193,450
- ----------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 2,816,022 $ 3,596,760 $ 9,284,361 $ 11,540,911
========================================================================================================================================
See notes to condensed financial statements
SEPTEMBER 30 DECEMBER 31
2004 2003
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Investments:
Fixed maturities, at market
(amortized cost: 2004 - $578,262,605; 2003 - $598,941,913) $621,154,249 $636,460,275
Mortgage loans on real estate 1,234,936 1,393,720
Policy loans 53,274,385 54,066,125
Short-term investments 11,328,474 1,200,413
- -----------------------------------------------------------------------------------------------------------------------------------
Total investments 686,992,044 693,120,533
Cash 17,206,935 13,052,781
Accrued investment income 9,821,811 11,116,301
Accounts and premiums receivable, net of allowance
for uncollectible amounts 592,964 530,133
Reinsurance receivables 42,399,512 61,159,477
Deferred policy acquisition costs 94,521,081 95,168,662
Other assets 12,072 14,897
Assets related to separate accounts
Variable Annuity 9,930,735 10,987,259
- -----------------------------------------------------------------------------------------------------------------------------------
$861,477,154 $885,150,043
===================================================================================================================================
LIABILITIES
Policy liabilities and accruals:
Future policy benefits and claims $488,124,396 $496,884,724
Unearned premiums 8,612,091 13,824,017
- -----------------------------------------------------------------------------------------------------------------------------------
496,736,487 510,708,741
Annuity account balances 58,659,050 57,894,232
Other policyholders' funds 2,615,575 2,695,070
Funds held-coinsurance 27,792,805 46,762,354
Other liabilities 9,163,390 15,506,447
Accrued income taxes 1,052,378 702,883
Deferred income taxes 38,711,605 36,842,882
Liabilities related to separate accounts
Variable Annuity 9,930,735 10,987,259
- -----------------------------------------------------------------------------------------------------------------------------------
644,662,025 682,099,868
- -----------------------------------------------------------------------------------------------------------------------------------
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 21,694,894 12,410,533
Accumulated other comprehensive income:
Net unrealized gains on investments (net of income tax:
2004 - $11,432,567; 2003 - $9,019,940) 21,231,911 16,751,318
- -----------------------------------------------------------------------------------------------------------------------------------
216,815,129 203,050,175
- -----------------------------------------------------------------------------------------------------------------------------------
$861,477,154 $885,150,043
===================================================================================================================================
See notes to condensed financial statements
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30
2004 2003
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 9,284,361 $ 11,540,911
Adjustments to reconcile net income to net cash used in
operating activities:
Realized investment (gains) losses (418,215) (3,384,562)
Amortization of deferred policy acquisition costs 5,166,729 6,040,291
Capitalization of deferred policy acquisition costs (3,030,569) (2,093,465)
Deferred income tax (543,904) 6,193,450
Interest credited to universal life and investment products 15,559,193 16,227,425
Policy fees assessed on universal life and investment products (25,010,058) (25,560,549)
Change in accrued investment income and other receivables 19,991,624 25,650,067
Change in policy liabilities and other policyholders' funds of traditional
life and health products (16,173,848) (32,402,227)
Change in funds held-coinsurance (18,969,549) (33,630,580)
Change in other liabilities (5,993,562) 426,165
Other, net 2,825 7,771
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (20,134,973) (30,985,303)
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investments available for sale, net of short-term investments:
Maturities and principal reductions of investments 30,561,277 75,396,414
Sale of investments 15,736,724 81,324,718
Cost of investments acquired (25,169,119) (297,345,743)
Change in mortgage loans, net 158,784 149,972
Change in policy loans, net 791,740 960,906
Change in short-term investments, net (10,128,061) 176,171,941
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 11,951,345 36,658,208
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Investment product deposits and change in universal life deposits 20,040,279 18,948,427
Investment product withdrawals (7,702,497) (9,288,988)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 12,337,782 9,659,439
- ---------------------------------------------------------------------------------------------------------------------------------
CHANGE IN CASH 4,154,154 15,332,344
CASH AT BEGINNING OF PERIOD 13,052,781 1,669,532
- ---------------------------------------------------------------------------------------------------------------------------------
CASH AT END OF PERIOD $ 17,206,935 $ 17,001,876
=================================================================================================================================
See notes to condensed financial statements
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 (GAAP) 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 GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair statement have been included. Operating results for the nine-month period ended September 30, 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 GAAP. 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.
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.
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.
With respect to the unaudited condensed financial information of Protective Life and Annuity Insurance Company for the three-month and nine-month periods ended September 30, 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 November 15, 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.
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 and 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 segement operating income and assets as it uses to measure its net income and assets. Segment operating income is generally income before income tax, adjusted to exclude net realized investment gains and losses. Segment operating income represents the basis on which the performance of the Company’s business is assessed by management. 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.
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 segment operating 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.
Segment Operating Income for the
Nine Months Ended September 30, 2004
- -----------------------------------------------------------------------------------------------------------------------------------
Life
Marketing Acquisitions Annuities
- -----------------------------------------------------------------------------------------------------------------------------------
Premiums and policy fees $ 4,875,864 $ 28,435,586 $ 259,713
Reinsurance ceded (4,589,863) (12,159,673)
- -----------------------------------------------------------------------------------------------------------------------------------
Net of reinsurance ceded 286,001 16,275,913 259,713
Net investment income 17,542 21,669,852 2,830,978
Realized investment gains 248,743
Other income 9,488 23,455
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenue 313,031 37,945,765 3,362,889
- -----------------------------------------------------------------------------------------------------------------------------------
Benefits and settlement expenses (2,285) 20,492,911 2,666,484
Amortization of deferred policy acquisition costs 387,639 3,917,681 289,357
Other operating expenses (641,448) 6,161,941 134,309
- -----------------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses (256,094) 30,572,533 3,090,150
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income tax 569,125 7,373,232 272,739
Less: realized investment gains 248,743
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 569,125 7,373,232 23,996
- -----------------------------------------------------------------------------------------------------------------------------------
Asset Corporate Total
Protection and Other Adjustments Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Premiums and policy fees $ 13,485,676 $ 47,056,839
Reinsurance ceded (10,968,195) (27,717,731)
- -----------------------------------------------------------------------------------------------------------------------------------
Net of reinsurance ceded 2,517,481 19,339,108
Net investment income 375,390 $5,327,512 30,221,274
Realized investment gains (losses) 169,472 418,215
Other income 4,983 37,926
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenue 2,892,871 5,501,967 50,016,523
- -----------------------------------------------------------------------------------------------------------------------------------
Benefits and settlement expenses 1,422,723 24,579,833
Amortization of deferred policy acquisition costs 572,052 5,166,729
Other operating expenses 341,839 167,063 6,163,704
- -----------------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 2,336,614 167,063 35,910,266
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income tax 556,257 5,334,904 14,106,257
Less: realized investment gains (losses) 169,472
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income 556,257 5,165,432
Income tax expense $4,821,896 4,821,896
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 9,284,361
===================================================================================================================================
Segment Operating Income for the
Three Months Ended September 30, 2004
- -----------------------------------------------------------------------------------------------------------------------------------
Life
Marketing Acquisitions Annuities
- -----------------------------------------------------------------------------------------------------------------------------------
Premiums and policy fees $1,843,384 $ 9,305,944 $ 58,587
Reinsurance ceded (1,739,408) (4,087,420)
- -----------------------------------------------------------------------------------------------------------------------------------
Net of reinsurance ceded 103,976 5,218,524 58,587
Net investment income 6,260 7,162,370 950,885
Realized investment gains 26,982
Other income 9,487 7,816
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenue 119,723 12,380,894 1,044,270
- -----------------------------------------------------------------------------------------------------------------------------------
Benefits and settlement expenses (11,990) 7,348,857 773,844
Amortization of deferred policy acquisition costs 160,975 1,330,943 102,182
Other operating expenses (271,822) 1,979,078 64,423
- -----------------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses (122,837) 10,658,878 940,449
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income tax 242,560 1,722,016 103,821
Less: realized investment gains 26,982
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 242,560 1,722,016 76,839
- -----------------------------------------------------------------------------------------------------------------------------------
Asset Corporate Total
Protection and Other Adjustments Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Premiums and policy fees $ 3,923,938 $15,131,853
Reinsurance ceded (3,088,619) (8,915,447)
- -----------------------------------------------------------------------------------------------------------------------------------
Net of reinsurance ceded 835,319 6,216,406
Net investment income 120,802 $1,631,052 9,871,369
Realized investment gains (losses) 340,774 367,756
Other income 17,303
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenue 956,121 1,971,826 16,472,834
- -----------------------------------------------------------------------------------------------------------------------------------
Benefits and settlement expenses 426,819 8,537,530
Amortization of deferred policy acquisition costs 199,415 1,793,515
Other operating expenses 106,052 93,730 1,971,461
- -----------------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 732,286 93,730 12,302,506
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income tax 223,835 1,878,096 4,170,328
Less: realized investment gains (losses) 340,774
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income 223,835 1,537,322
Income tax expense $1,354,306 1,354,306
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 2,816,022
===================================================================================================================================
Segment Operating Income for the
Nine Months Ended September 30, 2003
- -----------------------------------------------------------------------------------------------------------------------------------
Life
Marketing Acquisitions Annuities
- -----------------------------------------------------------------------------------------------------------------------------------
Premiums and policy fees $2,507,808 $30,069,926 $ 237,924
Reinsurance ceded (2,449,295) (13,106,178)
- -----------------------------------------------------------------------------------------------------------------------------------
Net of reinsurance ceded 58,513 16,963,748 237,924
Net investment income 29,854 21,948,904 2,789,867
Realized investment gains (losses) 262,490
Other income (5,045) 17,613
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenue 88,367 38,907,607 3,307,894
- -----------------------------------------------------------------------------------------------------------------------------------
Benefits and settlement expenses (58,639) 19,543,055 3,010,433
Amortization of deferred policy acquisition costs 259,529 4,984,842 209,070
Other operating expenses (573,248) 6,394,212 134,135
- -----------------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses (372,358) 30,922,109 3,353,638
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income tax 460,725 7,985,498 (45,744)
Less: realized investment gains (losses) 262,490
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 460,725 7,985,498 (308,234)
- -----------------------------------------------------------------------------------------------------------------------------------
Asset Corporate Total
Protection and Other Adjustments Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Premiums and policy fees $22,950,507 $55,766,165
Reinsurance ceded (20,311,018) (35,866,491)
- -----------------------------------------------------------------------------------------------------------------------------------
Net of reinsurance ceded 2,639,489 19,899,674
Net investment income 370,711 $5,559,656 30,698,992
Realized investment gains (losses) 3,122,072 3,384,562
Other income 136,631 149,199
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenue 3,010,200 8,818,359 54,132,427
- -----------------------------------------------------------------------------------------------------------------------------------
Benefits and settlement expenses 1,769,399 24,264,248
Amortization of deferred policy acquisition costs 586,850 6,040,291
Other operating expenses 113,788 24,640 6,093,527
- -----------------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 2,470,037 24,640 36,398,066
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income tax 540,163 8,793,719 17,734,361
Less: realized investment gains (losses) 3,122,072
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income 540,163 5,671,647
Income tax expense $6,193,450 6,193,450
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $11,540,911
===================================================================================================================================
Segment Operating Income for the
Three Months Ended September 30, 2003
- -----------------------------------------------------------------------------------------------------------------------------------
Life
Marketing Acquisitions Annuities
- -----------------------------------------------------------------------------------------------------------------------------------
Premiums and policy fees $978,362 $ 9,806,651 $ 74,045
Reinsurance ceded (905,587) (4,404,257)
- -----------------------------------------------------------------------------------------------------------------------------------
Net of reinsurance ceded 72,775 5,402,394 74,045
Net investment income 6,730 7,064,121 919,847
Realized investment gains (losses) 112,670
Other income 6,545
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenue 79,505 12,466,515 1,113,107
- -----------------------------------------------------------------------------------------------------------------------------------
Benefits and settlement expenses 52,342 6,645,332 1,004,094
Amortization of deferred policy acquisition costs (3,423) 1,648,941 112,573
Other operating expenses (347,526) 1,973,992 48,459
- -----------------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses (298,607) 10,268,265 1,165,126
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income tax 378,112 2,198,250 (52,019)
Less: realized investment gains (losses) 112,670
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 378,112 2,198,250 (164,689)
- -----------------------------------------------------------------------------------------------------------------------------------
Asset Corporate Total
Protection and Other Adjustments Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Premiums and policy fees $6,751,295 $17,610,353
Reinsurance ceded (5,870,757) (11,180,601)
- -----------------------------------------------------------------------------------------------------------------------------------
Net of reinsurance ceded 880,538 6,429,752
Net investment income 127,556 $1,722,435 9,840,689
Realized investment gains (losses) 993,362 1,106,032
Other income 6,545
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenue 1,008,094 2,715,797 17,383,018
- -----------------------------------------------------------------------------------------------------------------------------------
Benefits and settlement expenses 441,317 8,143,085
Amortization of deferred policy acquisition costs 198,445 1,956,536
Other operating expenses 42,685 34,999 1,752,609
- -----------------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 682,447 34,999 11,852,230
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income tax 325,647 2,680,798 5,530,788
Less: realized investment gains (losses) 993,362
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income 325,647 1,687,436
Income tax expense $1,934,028 1,934,028
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 3,596,760
===================================================================================================================================
Operating Segment Assets
September 30, 2004
- -----------------------------------------------------------------------------------------------------------------------------------
Life
Marketing Acquisitions Annuities
- -----------------------------------------------------------------------------------------------------------------------------------
Investments and other assets $5,554,819 $556,673,045 $57,858,590
Deferred policy acquisition costs 3,619,888 87,480,079 2,112,432
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $9,174,707 $644,153,124 $59,971,022
===================================================================================================================================
- -----------------------------------------------------------------------------------------------------------------------------------
Asset Corporate Total
Protection and Other Adjustments Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Investments and other assets $26,970,757 $119,778,922 $119,940 $766,956,073
Deferred policy acquisition costs 1,308,682 94,521,081
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $28,279,439 $119,778,922 $119,940 $861,477,154
===================================================================================================================================
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
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $5,229,259 $669,612,140 $59,414,161
===================================================================================================================================
- -----------------------------------------------------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $44,536,120 $106,236,317 $122,046 $885,150,043
===================================================================================================================================
NOTE D – STATUTORY REPORTING PRACTICES
Financial statements prepared in conformity with GAAP differ in some respects from the statutory accounting practices prescribed or permitted by insurance regulatory authorities. In accordance with statutory reporting practices, at September 30, 2004, and for the nine months then ended, the Company had capital and surplus of $119.8 million and net income of $10.2 million. At September 30, 2004, the asset valuation reserve held by the Company was $5.9 million.
NOTE E – COMPREHENSIVE INCOME
The following table sets forth the Company’s comprehensive income for the periods shown:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2004 2003 2004 2003
- -------------------------------------------------------------------------------------------------------------------------------
Net Income $ 2,816,022 $ 3,596,760 $ 9,284,361 $11,540,911
Change in net unrealized gains/losses
on investments (net of income tax:
three months: 2004 - $6,964,464; 2003 - $(3,182,797)
nine months: 2004 - $2,559,002; 2003 - $6,092,176) 12,934,004 (5,910,909) 4,752,433 11,314,041
Reclassification adjustment for amounts
included in net income (net of income tax:
three months: 2004 - $(128,715); 2003 - $(387,111);
nine months: 2004 - $(146,375); 2003 - $(1,184,597)) (239,041) (718,920) (271,840) (2,199,965)
- -------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $15,510,985 $(3,033,069) $13,764,954 $20,654,987
===============================================================================================================================
NOTE F – 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.
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 September 30, 2004, the Company was involved in the businesses of four of PLC’s operating segments: Life Marketing, Acquisitions, Annuities, and Asset Protection. The Company also 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.
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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2004 2003 2004 2003
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Premiums and policy fees, net of reinsurance $ 6,216,406 $ 6,429,752 $19,339,108 $19,899,674
Net investment income 9,871,369 9,840,689 30,221,274 30,698,992
Realized investment gains 367,756 1,106,032 418,215 3,384,562
Other income 17,303 6,545 37,926 149,199
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$16,472,834 $17,383,018 $50,016,523 $54,132,427
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Premiums and policy fees, net of reinsurance (“premiums and policy fees”) decreased $0.6 million or 2.8% in the first nine months of 2004 from the first nine 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 nine months of 2004, therefore decreases in older acquired policies resulted in a decrease of $0.7 million in the first nine months of 2004 as compared with the first nine months of 2003. The Asset Protection segment had a decrease of $0.1 million in premiums and policy fees in the first nine months of 2004 compared to the same period of 2003. Premiums and policy fees in the Annuities segment remained relatively flat in the first nine months of 2004 as compared to 2003, while premiums and policy fees in the Life Marketing segment increased $0.2 million for the same period.
Net investment income in the first nine months of 2004 decreased by $0.5 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 6.0% in the first nine months of 2004 compared to 5.8% in the same period of 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 $0.4 million in the first nine months of 2004 compared to $3.4 million in the first nine months of 2003. During the first nine months of 2004, the Company recorded $0.2 million of other-than-temporary impairments on its investments as compared to $0.3 million in the first nine 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.
Income Before Income Tax and Segment 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. The Company’s segment operating income measures may not be comparable to similarly titled measures reported by other companies.
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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2004 2003 2004 2003
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Operating income (loss)
Life Marketing $ 242,560 $ 378,112 $ 569,125 $ 460,725
Acquisitions 1,722,016 2,198,250 7,373,232 7,985,498
Annuities 76,839 (164,689) 23,996 (308,234)
Asset Protection 223,835 325,647 556,257 540,163
Corporate and Other 1,537,322 1,687,436 5,165,432 5,671,647
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Realized investment gains (losses)
Annuities 26,982 112,670 248,743 262,490
Corporate and Other 340,774 993,362 169,472 3,122,072
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Income (loss) before income tax
Life Marketing 242,560 378,112 569,125 460,725
Acquisitions 1,722,016 2,198,250 7,373,232 7,985,498
Annuities 103,821 (52,019) 272,739 (45,744)
Asset Protection 223,835 325,647 556,257 540,163
Corporate and Other 1,878,096 2,680,798 5,334,904 8,793,719
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Total income before income tax $4,170,328 $5,530,788 $14,106,257 $17,734,361
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The Life Marketing segment had pretax operating income of $0.6 million in the first nine months of 2004 as compared to $0.5 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 of life insurance business-in-force.
Pretax operating income from the Acquisitions segment was $7.4 million in the first nine months of 2004 as compared to $8.0 million in the same period of 2003. 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 nine months of 2004.
The Annuities segment had a pretax operating gain of less than $0.1 million in the first nine months of 2004 as compared to a pretax operating loss of $0.3 million in the same period of 2003. 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 $0.6 million in the first nine months of 2004, as compared to $0.5 million in the first nine months of 2003. The increase is primarily due to lower benefit and settlement expenses partially offset by higher operating 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 $5.2 million in the first nine months of 2004 as compared to $5.7 million in the first nine months of 2003, primarily due to decreases in net investment income and other income and higher expenses not allocated to other segments.
Income Taxes
The following table sets forth the effective tax rates for the periods shown:
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2004 2003 2004 2003
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Effective Income Tax Rates 32.5% 35.0% 34.2% 34.9%
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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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2004 2003 2004 2003
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Net Income $2,816,022 $3,596,760 $9,284,361 $11,540,911
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Compared to the same period in 2003, net income in the first nine months of 2004 decreased $2.3 million, reflecting increases in operating income in the Life Marketing, Annuities, and Asset Protection segments, which were offset by decreases in the Acquisitions and Corporate and Other segments and lower realized investment gains.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures
Under the direction of our Chief Executive Officer and Chief Financial Officer, we evaluated our disclosure controls and procedures and internal control over financial reporting and concluded that our disclosure controls and procedures were effective as of September 30, 2004. It should be noted that any system of controls, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of any control system is based in part upon certain judgments, including the costs and benefits of controls and the likelihood of future events. Because of these and other inherent limitations of control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within the Company have been detected.
(b) Changes in internal control over financial reporting
No significant changes in our internal control over financial reporting occurred during the quarter ended September 30, 2004 that have materially affected, or is reasonably likely to materially affect, such internal control over financial reporting. Our internal controls exist within a dynamic environment and the Company continually strives to improve its internal controls and procedures to enhance the quality of its financial reporting.
Item 6. Exhibits
(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.
Date: November 15, 2004 /s/ Steven G. Walker
Steven G. Walker
Senior Vice President, Controller
and Chief Accounting Officer
(Duly authorized officer)