PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
MARCH 31 DECEMBER 31
2002 2001
----------- --------------
(UNAUDITED)
ASSETS
Investments:
Fixed maturities, at market $10,207,197 $ 9,812,091
Equity securities, at market 62,321 60,493
Mortgage loans on real estate 2,552,396 2,512,844
Investment in real estate, net of accumulated depreciation 24,028 24,173
Policy loans 515,412 521,840
Other long-term investments 88,430 100,686
Short-term investments 126,210 228,396
------------ ------------
Total investments 13,575,994 13,260,523
Cash 57,627 107,166
Accrued investment income 164,517 158,841
Accounts and premiums receivable, net 94,844 55,809
Reinsurance receivables 2,190,249 2,173,987
Deferred policy acquisition costs 1,589,281 1,532,683
Goodwill, net 35,143 35,992
Property and equipment, net 45,269 46,337
Other assets 236,910 219,355
Assets related to separate accounts
Variable Annuity 1,877,209 1,873,195
Variable Universal Life 121,233 114,618
Other 4,055 3,997
------------ ------------
$19,992,331 $19,582,503
============ ============
LIABILITIES
Policy liabilities and accruals $ 7,963,740 $ 7,876,338
Stable value investment contract deposits 4,082,431 3,716,530
Annuity deposits 3,363,364 3,248,218
Other policyholders' funds 129,762 132,124
Securities sold under repurchase agreements 44,500 117,000
Other liabilities 435,527 410,621
Accrued income taxes 9,353 125,835
Deferred income taxes 110,525 72,403
Debt:
Notes payable 2,284 2,291
Indebtedness to related parties 6,000 6,000
Liabilities related to separate accounts
Variable Annuity 1,877,209 1,873,195
Variable Universal Life 121,233 114,618
Other 4,055 3,997
------------ ------------
18,149,983 17,699,170
------------ ------------
COMMITMENTS AND CONTINGENT LIABILITIES - NOTE B
SHARE-OWNER'S EQUITY
Preferred Stock, $1.00 par value, shares
authorized and issued: 2,000, liquidation preference $2,000 2 2
Common Stock, $1.00 par value, shares
authorized and issued: 5,000,000 5,000 5,000
Additional paid-in capital 785,419 785,419
Note receivable from PLC Employee Stock Ownership Plan (3,838) (4,499)
Retained earnings 1,083,495 1,044,243
Accumulated other comprehensive income (loss):
Net unrealized gains (losses) on investments (net of income
tax: 2002 - $(14,932); 2001 - $28,629) (27,730) 53,168
------------ ------------
1,842,348 1,883,333
------------ ------------
$19,992,331 $19,582,503
============ ============
See notes to consolidated condensed financial statements
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
THREE MONTHS ENDED
MARCH 31
-----------------------------
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 39,253 $ 35,168
Adjustments to reconcile net income to net cash
provided by operating activities:
Realized investment losses(gains) 463 (6,683)
Amortization of deferred policy acquisition costs 47,939 29,383
Capitalization of deferred policy acquisition costs (84,225) (63,717)
Depreciation expense 2,662 2,809
Deferred income tax 18,940 (10,670)
Accrued income tax (56,973) 21,004
Amortization of goodwill 2,075
Interest credited to universal life and investment products 225,670 182,989
Policy fees assessed on universal life and investment products (94,773) (50,768)
Change in accrued investment income and other receivables (60,973) (48,895)
Change in policy liabilities and other policyholders' funds
of traditional life and health products 64,632 25,441
Change in other liabilities 23,775 52,461
Other (net) (15,143) 14,602
----------- ----------
Net cash provided by operating activities 111,247 185,199
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reductions of investments
Investments available for sale 2,133,427 4,142,786
Other 51,030 60,310
Sale of investments
Investments available for sale 2,567,683 249,286
Other
Cost of investments acquired
Investments available for sale (5,125,362) (4,793,751)
Other (85,056) (121,463)
Cost of acquisitions and bulk reinsurance assumptions 137,754
Purchase of property and equipment (1,698) (1,882)
Sale of property and equipment 43
----------- -----------
Net cash used in investing activities (459,933) (326,960)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings under line of credit arrangements and debt 1,180,472
Principal payments on line of credit arrangements and debt (1,252,979)
Capital contribution from PLC 91,000
Investment product deposits and change in universal life deposits 679,264 323,534
Investment product withdrawals (307,610) (259,501)
----------- -----------
Net cash provided by financing activities 299,147 155,033
----------- -----------
INCREASE (DECREASE) IN CASH (49,539) 13,272
CASH AT BEGINNING OF PERIOD 107,166 33,517
----------- -----------
CASH AT END OF PERIOD $ 57,627 $ 46,789
=========== ===========
See notes to consolidated condensed financial statements
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in tables are in thousands)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements of Protective Life Insurance Company and subsidiaries (“Protective Life”) have been prepared in accordance with 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 presentation have been included. Operating results for the three month period ended March 31, 2002, are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. The year-end consolidated 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 consolidated financial statements and notes thereto included in Protective Life’s annual report on Form 10-K for the year ended December 31, 2001.
Protective Life is a wholly-owned subsidiary of Protective Life Corporation ("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. Protective Life does not believe such assessments will be materially different from amounts already provided for in the financial statements. Most of these laws do provide, however, that an assessment may be excused or deferred if it would threaten an insurer’s own financial strength.
A number of civil jury verdicts have been returned against insurers and other providers of financial services involving sales practices, alleged agent misconduct, failure to properly supervise representatives, relationships with agents or 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 little appellate review. In addition, in some class action and other lawsuits, companies have made material settlement payments. Protective Life, like other financial services companies, in the ordinary course of business, is involved in such litigation or, alternatively, in arbitration. Although the outcome of any such litigation or arbitration cannot be predicted, Protective Life believes that at the present time there are no pending or threatened lawsuits that are reasonably likely to have a material adverse effect on the financial position, results of operations, or liquidity of Protective Life.
NOTE C - OPERATING SEGMENTS
Protective Life operates several business segments each having a strategic focus which can be grouped into three general product categories: life insurance, retirement savings and investment products, and specialty insurance products. An operating segment is generally distinguished by products and/or channels of distribution. A brief description of each segment follows:
Life Insurance
| | 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. |
| | 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. |
Retirement Savings and Investment Products
| | The Stable Value Contracts segment markets guaranteed investment contracts to 401(k) and other qualified retirement savings plans. The segment also markets fixed and floating rate funding agreements directly to the trustees of municipal bond proceeds, bank trust departments, and money market funds, and to institutional investors through the issuance of funding agreement backed notes. |
| | The Annuities segment manufactures, sells, and supports fixed and variable annuity products. These products are primarily sold through stockbrokers, but are also sold through financial institutions and the Life Marketing segment’s sales force. |
Specialty Insurance Products
| | The Credit Products segment markets credit life and disability insurance products through banks, consumer finance companies and automobile dealers, and markets vehicle and recreational marine extended service contracts. |
Corporate and Other
| | Protective Life has an additional business segment herein referred to as Corporate and Other. The Corporate and Other segment primarily consists of net investment income and expenses not attributable to the segments above (including net investment income on unallocated capital and interest on substantially all debt). This segment also includes earnings from several lines of business which the Company is not actively marketing (mostly cancer insurance and group annuities). |
| | Protective Life uses the same accounting policies and procedures to measure operating segment income and assets as it uses to measure its consolidated net income and assets. Operating segment income is generally income before income tax, adjusted to exclude any pretax minority interest in income of consolidated subsidiaries. Premiums and policy fees, other income, benefits and settlement expenses, and amortization of deferred policy acquisition costs are attributed directly to each operating segment. Net investment income is allocated based on directly related assets required for transacting the business of that segment. Realized investment gains (losses) and other operating expenses are allocated to the segments in a manner which most appropriately reflects the operations of that segment. Unallocated realized investment gains (losses) are deemed not to be associated with any specific segment. |
| | Assets are allocated based on policy liabilities and deferred policy acquisition costs directly attributable to each segment. |
| | There are no significant intersegment transactions. |
The following table sets forth total operating segment income and assets for the periods shown. Adjustments represent the inclusion of unallocated realized investment gains (losses), the recognition of income tax expense, income from discontinued operations, and cumulative effect of change in accounting principle. Asset adjustments represent the inclusion of assets related to discontinued operations.
In December 2001, Protective Life sold substantially all of its Dental Division and discontinued other Dental related operations (See Note K - “Discontinued Operations”). Additionally, other adjustments were made to combine its life marketing operations into a single segment, and to reclassify certain smaller businesses. Prior period segment results have been restated to reflect these changes.
OPERATING SEGMENT INCOME FOR THE
THREE MONTHS ENDED MARCH 31, 2002
---------------------------------------------------------------------------
RETIREMENT SAVINGS AND
LIFE INSURANCE INVESTMENT PRODUCTS
LIFE STABLE VALUE
MARKETING ACQUISITIONS CONTRACTS ANNUITIES
--------- ------------ ------------ ---------
Premiums and policy fees $149,422 $ 81,364 $ 6,609
Reinsurance ceded (100,015) (18,003)
--------- --------- ---------
Net of reinsurance ceded 49,407 63,361 6,609
Net investment income 50,268 58,710 $59,507 51,944
Realized investment gains (losses) 521 382
Other income 218 549 892
--------- --------- -------- ---------
Total revenues 99,893 122,620 60,028 59,827
--------- --------- -------- ---------
Benefits and settlement expenses 63,131 79,244 48,829 42,387
Amortization of deferred policy
acquisition costs 16,191 8,909 565 6,994
Other operating expenses (1,218) 10,878 885 5,768
--------- --------- -------- ---------
Total benefits and expenses 78,104 99,031 50,279 55,149
--------- --------- -------- ---------
Income from continuing operations
before income tax 21,789 23,589 9,749 4,678
SPECIALTY INSURANCE
PRODUCTS
CORPORATE
CREDIT AND TOTAL
PRODUCTS OTHER ADJUSTMENTS CONSOLIDATED
-------- -------- ----------- ------------
Premiums and policy fees $116,886 $12,854 $367,135
Reinsurance ceded (61,732) (3,617) (183,367)
--------- -------- ---------
Net of reinsurance ceded 55,154 9,237 183,768
Net investment income 11,095 948 232,472
Realized investment gains (losses) $ (1,366) (463)
Other income 6,917 38 8,614
--------- -------- --------- ---------
Total revenues 73,166 10,223 (1,366) 424,391
--------- -------- --------- ---------
Benefits and settlement expenses 32,008 8,005 273,604
Amortization of deferred policy
acquisition costs 14,839 441 47,939
Other operating expenses 17,653 12,908 46,874
--------- -------- ---------
Total benefits and expenses 64,500 21,354 368,417
--------- -------- ---------
Income from continuing operations
before income tax 8,666 (11,131) 55,974
Income tax expense 16,721 16,721
---------
Net income $ 39,253
=========
OPERATING SEGMENT INCOME FOR THE
THREE MONTHS ENDED MARCH 31, 2001
--------------------------------------------------------------------------
RETIREMENT SAVINGS AND
LIFE INSURANCE INVESTMENT PRODUCTS
LIFE STABLE VALUE
MARKETING ACQUISITIONS CONTRACTS ANNUITIES
--------- ------------ ------------ ---------
Premiums and policy fees $117,899 $50,945 $ 7,345
Reinsurance ceded (67,191) (8,046)
--------- -------- --------
Net of reinsurance ceded 50,708 42,899 7,345
Net investment income 40,773 40,872 $65,255 37,479
Realized investment gains (losses) 2,444 169
Other income 254 819
--------- -------- -------- --------
Total revenues 91,735 83,771 67,699 45,812
--------- -------- -------- --------
Benefits and settlement expenses 62,195 58,032 55,464 31,044
Amortization of deferred policy
acquisition costs and goodwill 7,494 4,565 245 5,888
Other operating expenses 3,462 6,000 996 5,815
--------- -------- -------- --------
Total benefits and expenses 73,151 68,597 56,705 42,747
--------- -------- -------- --------
Income from continuing operations
before income tax 18,584 15,174 10,994 3,065
SPECIALTY INSURANCE
PRODUCTS
CORPORATE
CREDIT AND TOTAL
PRODUCTS OTHER ADJUSTMENTS CONSOLIDATED
-------- ------- ----------- ------------
Premiums and policy fees $123,460 $11,896 $311,545
Reinsurance ceded (65,846) (2,633) (143,716)
--------- -------- ---------
Net of reinsurance ceded 57,614 9,263 167,829
Net investment income 11,906 (1,643) 194,642
Realized investment gains (losses) $ 4,070 6,683
Other income 8,136 250 9,459
--------- -------- -------- ---------
Total revenues 77,656 7,870 4,070 378,613
--------- -------- -------- ---------
Benefits and settlement expenses 38,758 7,190 252,683
Amortization of deferred policy
acquisition costs and goodwill 9,664 511 28,367
Other operating expenses 19,305 2,705 38,283
--------- -------- ---------
Total benefits and expenses 67,727 10,406 319,333
--------- -------- ---------
Income from continuing operations
before income tax 9,929 (2,536) 59,280
Income tax expense 19,307 19,307
Income from discontinued operations,
net of income tax 3,536 3,536
Change in accounting principle,
net of income tax (8,341) (8,341)
---------
Net income $ 35,168
=========
OPERATING SEGMENT ASSETS
MARCH 31, 2002
---------------------------------------------------------------------------
RETIREMENT SAVINGS AND
LIFE INSURANCE INVESTMENT PRODUCTS
LIFE STABLE VALUE
MARKETING ACQUISITIONS CONTRACTS ANNUITIES
----------- ------------ ------------ -----------
Investments and other assets $3,538,961 $4,102,669 $4,096,465 $4,810,619
Deferred policy acquisition costs
and goodwill 890,928 399,563 6,589 146,117
----------- ----------- ----------- -----------
Total assets $4,429,889 $4,502,232 $4,103,054 $4,956,736
=========== =========== =========== ===========
SPECIALTY INSURANCE
PRODUCTS
CORPORATE
CREDIT AND TOTAL
PRODUCTS OTHER ADJUSTMENTS CONSOLIDATED
---------- -------- ----------- ------------
Investments and other assets $1,022,610 $680,259 $116,324 $18,367,907
Deferred policy acquisition costs
and goodwill 173,218 8,009 1,624,424
----------- --------- --------- ------------
Total assets $1,195,828 $688,268 $116,324 $19,992,331
=========== ========= ========= ============
OPERATING SEGMENT ASSETS
DECEMBER 31, 2001
----------------------------------------------------------------------------
RETIREMENT SAVINGS AND
LIFE INSURANCE INVESTMENT PRODUCTS
LIFE STABLE VALUE
MARKETING ACQUISITIONS CONTRACTS ANNUITIES
Investments and other assets $3,431,441 $4,091,672 $3,872,637 $4,501,667
Deferred policy acquisition costs
and goodwill 829,021 418,268 6,374 128,488
----------- ----------- ----------- -----------
Total assets $4,260,462 $4,509,940 $3,879,011 $4,630,155
=========== =========== =========== ===========
SPECIALTY INSURANCE
PRODUCTS
CORPORATE
CREDIT AND TOTAL
PRODUCTS OTHER ADJUSTMENTS CONSOLIDATED
---------- -------- ----------- ------------
Investments and other assets $1,050,546 $955,984 $109,881 $18,013,828
Deferred policy acquisition costs
and goodwill 177,874 8,650 1,568,675
----------- --------- --------- ------------
Total assets $1,228,420 $964,634 $109,881 $19,582,503
=========== ========= ========= ============
NOTE D - STATUTORY REPORTING PRACTICES
Financial statements prepared in conformity with accounting principles generally accepted in the United States of America (i.e., GAAP) differ in some respects from the statutory accounting practices prescribed or permitted by insurance regulatory authorities. At March 31, 2002, and for the three months then ended, Protective Life and its life insurance subsidiaries had combined share-owner's equity and a net loss prepared in conformity with statutory reporting practices of $792.4 million and $5.5 million, respectively.
NOTE E - INVESTMENTS
As prescribed by Statement of Financial Accounting Standard ("SFAS") No. 115, certain investments are recorded at their market values with the resulting net unrealized gains and losses reduced by a related adjustment to deferred policy acquisition costs, net of income tax, recorded as a component of share-owner's equity. The market values of fixed maturities increase or decrease as interest rates fall or rise. Therefore, although the application of SFAS No. 115 does not affect Protective Life's operations, its reported share-owner's equity will fluctuate significantly as interest rates change.
Protective Life's balance sheets at March 31, 2002 and December 31, 2001, prepared on the basis of reporting investments at amortized cost rather than at market values, are as follows:
MARCH 31 DECEMBER 31
----------- -----------
Total investments $13,617,865 $13,157,623
Deferred policy acquisition costs 1,590,072 1,553,786
All other assets 4,827,056 4,789,297
----------- -----------
$20,034,993 $19,500,706
=========== ===========
Deferred income taxes $ 125,457 $ 43,774
All other liabilities 18,039,458 17,626,767
----------- -----------
18,164,915 17,670,541
Share-owner's equity 1,870,078 1,830,165
----------- -----------
$20,034,993 $19,500,706
=========== ===========
NOTE F - RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142 revises the standards for accounting for acquired goodwill and other intangible assets. Protective Life adopted SFAS No. 142 in the first quarter of 2002. Protective Life expects the adoption of SFAS No. 142 to result in the elimination of up to $3.5 million of goodwill amortization in 2002. Protective Life is in the process of performing an impairment test on goodwill that will be completed by June 30, 2002. At this time, Protective Life does not believe there will be an impairment loss in 2002.
In August 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations”. SFAS No. 143 requires that companies record the fair value of a liability for an asset retirement obligation in the period in which the liability is incurred. The Statement is effective for fiscal years beginning after June 15, 2002. Protective Life does not expect the adoption of SFAS No. 143 to have a material effect on Protective Life’s financial position or results of operations.
NOTE G - DERIVATIVES AND HEDGING ACTIVITIES
Fair-Value Hedges
Protective Life has designated, as a fair value hedge, callable interest rate swaps used to modify the interest characteristics of certain stable value contracts. In assessing hedge effectiveness, Protective Life excludes the embedded call option’s time value component from each derivative’s total gain or loss. For the three months ended March 31, 2002, total measured ineffectiveness for the fair value hedging relationships and the excluded time value component was insignificant. Both the measured ineffectiveness and the excluded time value component are reported in Realized Investment Gains (Losses) – Derivative Financial Instruments in Protective Life’s consolidated condensed statements of income.
Cash-Flow Hedges
Protective Life has not designated any hedging relationships as a cash flow hedge.
Other Derivatives
Protective Life uses certain interest rate swaps, caps, floors, options and futures contracts as economic hedges against the changes in value or cash flows of outstanding mortgage loan commitments and certain owned investments of Protective Life. For the three months ended March 31, 2002, Protective Life recognized total pre-tax gains of $1.3 million representing the change in fair value of these derivative instruments.
On its foreign currency swaps, Protective Life recognized a $9.3 million pre-tax loss for the first three months of fiscal 2002 while recognizing a $7.4 million foreign exchange pre-tax gain on the related foreign-currency-denominated stable value contracts. The net change primarily results from the difference in the forward and spot exchange rates used to revalue the currency swaps and the stable value contracts, respectively. This net change is reflected in Realized Investment Gains (Losses) – Derivative Financial Instruments in Protective Life’s consolidated condensed statements of income.
Protective Life has entered into asset swap arrangements to effectively sell the equity options embedded in owned convertible bonds in exchange for a interest rate swap that converts the remaining host bond to a variable rate instrument. For the three months ended March 31, 2002, Protective Life recognized a $3.8 million pre-tax gain for the change in the asset swaps’ fair value and recognized a $4.5 million pre-tax loss to separately record the embedded equity options at fair value.
NOTE H - COMPREHENSIVE INCOME
The following table sets forth Protective Life’s comprehensive income for the periods shown:
THREE MONTHS ENDED
MARCH 31
--------------------------
2002 2001
---- ----
Net income $ 39,253 $ 35,168
Change in net unrealized gains/losses
on investments (net of income tax: 2002 - $(43,261); 2001 - $45,790) (80,342) 85,038
Reclassification adjustment for amounts
included in net income (net of income tax: 2002 - $(299) 2001 -$(1,067)) (556) (1,981)
Transition adjustment on derivative financial
instruments (net of income tax: 2001 - $2,127) 3,951
--------- ---------
Comprehensive income $(41,645) $122,176
========= =========
NOTE I - SUPPLEMENTAL CASH FLOW INFORMATION
The following table sets forth supplemental cash flow information for the periods presented below:
THREE MONTHS ENDED
MARCH 31
--------------------------
2002 2001
---- ----
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Reduction of principal on note from ESOP $661 $ 342
Acquisitions and bulk reinsurance assumptions
Assets acquired, net of cash 658,200
Liabilities assumed (795,954)
Equity from subsidiary transfer
----------
Net $(137,754)
==========
NOTE J - 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-owner’s equity.
NOTE K - DISCONTINUED OPERATIONS
On December 31, 2001, PLC completed the sale to Fortis, Inc. of substantially all of its Dental Benefits Division (Dental Division), and discontinued certain other remaining Dental Division related operations, primarily other health insurance lines. The results of the operations of the Dental Division as related to Protective Life have been included herein as discontinued operations.
NOTE L - ACQUISITIONS
In October 2001, Protective Life completed the acquisition of Inter-State Assurance Company and First Variable Life Insurance Company. The transactions have been accounted for as purchases, and the results of the transactions have been included in the accompanying financial statements since their effective date.
Summarized below are the consolidated results of operations for the three months ended March 31, 2001, on an unaudited pro forma basis, as if the acquisitions had occurred as of January 1, 2001. The pro forma financial information does not purport to be indicative of results of operations that would have occurred had the transaction occurred on the basis assumed above nor are they indicative of results of the future operations of the combined enterprises.
THREE MONTHS ENDED
MARCH 31, 2001
------------------
(UNAUDITED)
Total revenues $401,719
Net income 38,093
NOTE M - SUBSEQUENT EVENT
On April 2, 2002, Protective Life announced that it had agreed to coinsure a block of traditional life and interest-sensitive policies from Conseco Variable Insurance Company. The agreement is subject to regulatory approval. In the transaction, Protective Life will receive approximately $470 million of reserves and pay a ceding allowance of approximately $49.5 million.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Protective Life Insurance Company (“Protective Life”) 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”. Founded in 1907, Protective Life provides financial services through the production, distribution, and administration of insurance and investment products. Unless the context otherwise requires, “Protective Life” refers to the consolidated group of Protective Life Insurance Company and its subsidiaries.
In accordance with General Instruction H(2)(a), Protective Life includes the following analysis with the reduced disclosure format.
Protective Life operates several business segments each having a strategic focus which can be grouped into three general product categories: life insurance, retirement savings and investment products, and specialty insurance products. Protective Life’s operating segments are Life Marketing, Acquisitions, Stable Value Contracts, Annuities and Credit Products. Protective Life also has an additional business segment referred to as Corporate and Other.
This report includes “forward-looking statements” which express expectations of future events and/or results. All statements based on future expectations rather than on historical facts are forward-looking statements that involve a number of risks and uncertainties, and Protective Life cannot give assurance that such statements will prove to be correct. Please refer to Exhibit 99 herein for more information about factors which could affect future results.
In the conduct of business, Protective Life makes certain assumptions regarding the mortality, persistency, expenses and interest rates (or other factors appropriate to the type of business) it expects to experience in future periods. Similar assumptions are also used to estimate the amounts of deferred policy acquisition costs, policy liabilities and accruals, and various other items. Protective Life’s actual experience, as well as changes in estimates, are components of Protective Life’s statements of income.
It is management’s opinion that quarterly operating results for insurance enterprises are not necessarily indicative of results to be achieved in succeeding quarters, and that a review of operating results over a longer period yields a better understanding of Protective Life’s performance.
RESULTS OF CONTINUING OPERATIONS
Revenues
The following table sets forth revenues by source for the period shown:
THREE MONTHS
ENDED
MARCH 31
-------------------------
(IN THOUSANDS)
2002 2001
---- ----
Premiums and policy fees $183,768 $167,829
Net investment income 232,472 194,642
Realized investment gains (losses)
Derivative financial instruments (1,318) 3,636
All other investments 855 3,047
Other income 8,614 9,459
--------- ---------
$424,391 $378,613
========= =========
Premiums and policy fees, net of reinsurance ceded, increased $15.9 million or 9.5% in the first three months of 2002 over the three months of 2001. Premiums and policy fees in the Life Marketing segment decreased $1.3 million in the first three months of 2002 as compared to the same period in 2001 due to a higher amount of reinsurance ceded. Premiums and policy fees in the Acquisitions segment are expected to decline with time unless new acquisitions are made. In October 2001, Protective Life acquired Inter-State Assurance Company and First Variable Life Insurance Company from ILona Financial Group, Inc., a subsidiary of Irish Life & Permanent plc. This acquisition resulted in a $19.8 million increase in premium and policy fees. Premiums and policy fees from older acquired blocks increased $0.7 million in the first three months of 2002 as compared to the same period last year. Premiums and policy fees from the Annuities segment decreased $0.7 million in the first three months of 2002 as compared to the same period last year. Premiums and policy fees from the Credit Products segment decreased $2.5 million in the first three months of 2002 as compared to the first three months of 2001. There was no material change in premiums and policy fees relating to the various insurance lines in the Corporate and Other segment.
Net investment income in the first three months of 2002 increased by $37.8 million over the corresponding period of the preceding year primarily due to an increase in the average amount of invested assets. The October 2001 acquisitions resulted in an increase in investment income of $9.8 million.
Protective Life generally purchases its investments with the intent to hold to maturity by purchasing investments that match future cash-flow needs. The sales of investment that have occurred have resulted principally from portfolio management decisions to maintain approximate matching of assets and liabilities. Accordingly, Protective Life has classified its fixed maturities and certain other securities as “available for sale.”
Realized investment losses related to derivative financial instruments were $1.3 million for the first three months of 2002 compared to gains of $3.6 million in the same period of 2001. The change is due to the general decline in interest rates. Realized investment gains related to all other investments were $0.9 million for the first three months of 2002 compared to a gain of $3.0 million for the corresponding period of 2001.
Other income consists primarily of revenues from Protective Life’s direct response business, service contract business, non-insurance subsidiaries and rental of space in its administrative building to PLC. In the first three months of 2002 as compared to the same period of 2001, revenues from Protective Life’s service contract business decreased $0.4 million. Income from other sources decreased $0.4 million.
Income Before Income Tax
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
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31
-------------------------
2002 2001
Operating Income (Loss)(1) ---- ----
Life Insurance
Life Marketing $ 21,789 $ 18,584
Acquisitions 23,589 15,174
Retirement Savings and Investment Products
Stable Value Contracts 9,228 8,550
Annuities 4,662 3,065
Specialty Insurance Products
Credit Products 8,666 9,929
Corporate and Other (11,131) (2,536)
-------- -------
Total operating income 56,803 52,766
-------- -------
Realized Investment Gains (Losses)
Stable Value Contracts 521 2,444
Annuities 382 169
Unallocated Realized Investment Gains (Losses) (1,366) 4,070
Related Amortization of Deferred Policy
Acquisition Costs
Investment Products (366) (169)
-------- -------
Total, net (829) 6,514
-------- -------
Income (Loss) Before Income Tax
Life Insurance
Life Marketing 21,789 18,584
Acquisitions 23,589 15,174
Retirement Savings and Investment Products
Stable Value Contracts 9,749 10,994
Annuities 4,678 3,065
Specialty Insurance Products
Credit Products 8,666 9,929
Corporate and Other (11,131) (2,536)
Unallocated Realized Investment Gains (Losses) (1,366) 4,070
-------- --------
Total income before income tax $55,974 $59,280
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(1) Income from continuing operations before income tax excluding realized investment gains and losses and
related amortization of deferred policy acquisition costs.
The Life Marketing segment’s pretax operating income was $21.8 million in the first three months of 2002 compared to $18.6 million in the same period of 2001. The increase is attributable to growth through sales.
Pretax operating income from the Acquisitions segment was $23.6 million in the first three months of 2002, an increase of $8.4 million from the first three months of 2001. Earnings from the Inter-State and First Variable acquisitions contributed $3.1 million in the first three months of 2002. Operating income related to a block of business coinsured in early 2001 increased $1.3 million in the first quarter of 2002 as compared to the same period in 2001. Mortality experience in the segment was approximately $0.7 million more favorable in the first three months of 2002 than in the first three months of 2001. The segment also benefited from increased investment income in the first quarter of 2002.
The Stable Value Contracts segment had pretax operating income of $9.2 million in the first quarter of 2002 as compared to $8.6 million in the corresponding period of 2001. The increase is due to an increase in account balances and a widening of operating spreads.
The Annuities segment’s pretax operating income for the first three months of 2002 was $4.7 million as compared to $3.1 million in the first three months of 2001. The increase reflects the segment’s growth through sales.
The Credit Products segment had pretax operating income of $8.7 million in the first quarter of 2002 as compared to $9.9 million for the same period in 2001. The decrease was attributable to slightly lower sales volume and negative claims experience in the current quarter. Included in the segment’s pretax income for the current quarter was $2.7 million of income related to the sale of the inactive charter of a small subsidiary. The segment’s future results are expected to continue to be negatively impacted by the general weakness in the overall economy.
The Corporate and Other segment consist primarily of net investment income on capital, interest expense on all debt, and various other items not associated with the other segments. The segment had a pretax operating loss of $11.1 million in the first quarter of 2002 as compared to a pretax operating loss of $2.5 million in the first quarter of 2001. The decline in income as compared to the same quarter last year is primarily due to a decline in participating mortgage income and an increase in expenses.
Income Taxes
The following table sets forth the effective tax rates for the periods shown:
THREE MONTHS ENDED
MARCH 31
---------------------
2002 2001
---- ----
Estimated Effective Income Tax Rates 29.9% 32.6%
The effective income tax rate for the full year of 2001 was 32.9%. Management's estimate of the effective income tax rate for 2002 is between 33% and 34%.
Net Income
The following table sets forth net income from continuing operations before cumulative effect of change in accounting principle for the periods shown:
THREE MONTHS ENDED
MARCH 31
-------------------------
2002 2001
---- ----
Total (in thousands) $39,253 $39,973
Compared to the same period in 2001, net income from continuing operations before cumulative effect of change in accounting principle in the first three months of 2002 decreased $0.7 million, reflecting improved operating earnings in the Life Marketing, Acquisitions, Stable Value Contracts, and Annuities segments offset by lower operating results in the Credit Products and Corporate and Other segments, as well as realized investment losses in 2002 as compared to gains in 2001.
Recently Issued Accounting Standards
In August 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations”. SFAS No. 143 requires that companies record the fair value of a liability for an asset retirement obligation in the period in which the liability is incurred. The Statement is effective for fiscal years beginning after June 15, 2002. Protective Life does not expect the adoption of SFAS No. 143 to have a material effect on Protective Life’s financial position or results of operations.
Contractual Obligations
The table below sets forth future maturities of debt and stable value contracts.
(IN THOUSANDS) 2002 2003-2004 2005-2006 AFTER 2006
-------------- ---- --------- --------- ----------
Stable Value Contracts $642,390 $1,890,434 $1,196,340 $353,267
Notes Payable 2,284
Securities sold under
repurchase agreements 44,500
PART II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 99 - Safe Harbor for Forward-Looking Statements
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| Date: | May 15, 2002 | | /s/ Jerry W. Defoor |
| | | Jerry W. DeFoor |
| | | Vice President and Controller |
| | | and Chief Accounting Officer |
| | | (Duly authrorized officer) |
