SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT
STATEMENTS OF INCOME
PROTECTIVE LIFE CORPORATION
(Parent Company)
Years Ended December 31
------------------------------------------------------
2003 2002 2001
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(in thousands)
Revenues
Dividends from subsidiaries* $ 8,917 $ 5,007 $ 3,701
Service fees from subsidiaries* 104,245 97,045 87,239
Net investment income 8,278 9,117 6,804
Realized investment gains (losses) (4,399) 21,612 (5,924)
Other income (loss) 682 (328) 0
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Total revenues 117,723 132,453 91,820
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Expenses
Operating and administrative 95,199 58,428 55,256
Interest - subsidiaries* 16,327 15,227 10,163
Interest - other 26,285 24,960 29,276
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Total expenses 137,811 98,615 94,695
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Income (loss) before income
tax and other items below (20,088) 33,838 (2,875)
Income tax expense (benefit) (10,866) 6,173 (2,150)
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Income before equity in undistributed income of subsidiaries (9,222) 27,665 (725)
Equity in undistributed income of subsidiaries* 226,272 149,690 141,783
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Net income from continuing operations before cumulative
effect of change in accounting principle 217,050 177,355 141,058
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Loss from discontinued operations, net of income tax 0 0 (9,977)
Loss from sale of discontinued operations, net of income tax 0 0 (20,545)
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Net income before cumulative effect of change in accounting
principle 217,050 177,355 110,536
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Cumulative effect of change in accounting principle, net of
income tax 0 0 (7,593)
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Net income $217,050 $177,355 $102,943
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SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT
BALANCE SHEETS
PROTECTIVE LIFE CORPORATION
(Parent Company)
December 31
------------------------------------------------
2003 2002
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(in thousands)
Assets
Investments:
Fixed maturities $ 1,433 $ 8,600
Other long-term investments 20,402 27,232
Short-term investments 651 1,105
Investments in subsidiaries (equity method)* 2,666,301 2,343,033
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Total investments 2,688,787 2,379,970
Cash 484 178
Receivables from subsidiaries* 10,604 8,985
Property and equipment, net 1,287 1,317
Other 43,198 41,286
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$2,744,360 $2,431,736
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Liabilities
Accrued expenses and other liabilities $ 63,766 $ 57,458
Accrued income taxes (41,913) (34,517)
Deferred income taxes 44,298 67,277
Long-term debt 454,415 399,166
Subordinated debt securities 221,650 221,650
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Total liabilities 742,216 711,034
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Share-owner's equity
Preferred stock
Junior participating cumulative preferred stock
Common stock 36,626 36,626
Additional paid-in capital 418,351 408,397
Treasury stock (15,275) (16,402)
Stock held in trust (2,788) (2,417)
Unallocated stock in employee stock ownership plan (2,367) (2,777)
Retained earnings (including undistributed
income of subsidiaries: 2003 - $1,440,150; 2002 - $1,213,878) 1,235,012 1,061,361
Accumulated other comprehensive income
Net unrealized gains (losses) on
investments (all from subsidiaries, net
of income tax: 2003 - $177,642; 2002 - $128,145) 329,907 237,983
Accumulated gain (loss) - hedging
(net of income tax: 2003 - $1,442; 2002 - $(1,114)) 2,678 (2,069)
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2,002,144 1,720,702
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$2,744,360 $2,431,736
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SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT
STATEMENTS OF CASH FLOWS
PROTECTIVE LIFE CORPORATION
(Parent Company)
Year Ended December 31
--------------------------------------------------------------
2003 2002 2001
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(dollars in thousands)
Cash flows from operating activities
Net income $217,050 $177,355 $ 102,943
Adjustments to reconcile net income
to net cash provided by operating
activities:
Realized investment (gains) losses 8,700 (11,403) (2,628)
Equity in undistributed net income
of subsidiaries* (226,272) (149,690) (105,418)
Deferred income taxes 3,029 31,127 (18,566)
Accrued income taxes (7,396) (17,180) 14,928
Accrued expenses 16,262 2,787 25,313
Accrued investment income 247
Receivables from subsidiaries (3,620) 5,187 (7,823)
Other (net) (5,661) (6,772) (16,995)
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Net cash provided by (used in) operating activities 2,092 31,411 (7,999)
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Cash flows from investing activities
Purchase of and/or additional investments
in subsidiaries* (23,437) (68,272) (133,406)
Purchase of fixed assets (222) (1,275) 0
Principal payments received on loan
to subsidiary* 2,000 4,000 4,000
Change in fixed maturities and long-term
investments 7,940 5,618 7,949
Change in short-term investments 454 (1,095) 3,990
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Net cash provided by (used in) investing activities (13,265) (61,024) (117,467)
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Cash flows from financing activities
Borrowings under line of
credit arrangements and long-term debt 442,700 69,000 159,160
Principal payments on line of credit
arrangements and long-term debt (387,451) (39,102) (93,729)
Issuance of guaranteed preferred
beneficial interests 0 115,000 100,000
Redemption of guaranteed preferred
beneficial interests 0 (75,000)
Purchase of common stock (371) (882) (217)
Purchase of treasury stock 0 (828) (3,405)
Dividends to share owners (43,399) (40,511) (37,187)
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Net cash provided by (used in) financing activities 11,479 27,677 124,622
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Increase (decrease) in cash 306 (1,936) (844)
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Cash at beginning of year 178 2,114 2,958
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Cash at end of year $ 484 $ 178 $ 2,114
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*Eliminated in consolidation.
The Company publishes consolidated financial statements that are its primary financial statements. Therefore, these parent company condensed financial statements are not intended to be the primary financial statements of the Company, and should be read in conjunction with the consolidated financial statements and notes thereto of Protective Life Corporation and subsidiaries.
NOTE 1 – RECENTLY ISSUED ACCOUNTING STANDARDS
On January 1, 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities”. SFAS No. 133, as amended by SFAS Nos. 137 and 138, requires the Company to record all derivative financial instruments at fair value on the balance sheet. Changes in fair value of a derivative instrument are reported in net income or other comprehensive income, depending on the designated use of the derivative instrument. The adoption of SFAS No. 133 resulted in a cumulative charge to net income, net of income tax, of $7.6 million on January 1, 2001. The charge to net income primarily resulted from the recognition of derivative instruments embedded in the Company’s corporate bond portfolio. In addition, the charge to net income includes the recognition of the ineffectiveness on existing hedging relationships including the difference in spot and forward exchange rates related to foreign currency swaps used as an economic hedge of foreign-currency-denominated stable value contracts. The adoption of SFAS No. 133 has introduced volatility into the Company’s reported net income and other comprehensive income depending on future market conditions and the Company’s hedging activities.
On January 1, 2003, the Company adopted SFAS No. 145, “Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of April 2002.” SFAS No. 145 rescinds SFAS No. 4, which required companies to treat the extinguishments of debt as an extraordinary item. SFAS No. 145 requires companies to apply APB Opinion No. 30 when determining the accounting for the extinguishments of debt. The statement also rescinds and amends other statements to make various technical corrections and clarifications. SFAS No. 145 requires the Company to restate previously issued financial statements to reclassify losses related to the early extinguishments of debt from extraordinary losses to operating expenses. The Company’s 2002 financial statements have been reclassified, in accordance with SFAS No. 145, to reflect the $2.2 million charge, which resulted from the redemption of subordinated debentures, in income from continuing operations.
NOTE 2 — DEBT
At December 31, 2003, the Company had $25.0 million of borrowings under its $200 million line of credit arrangements at an interest rate of 1.64%. The amounts outstanding under these credit arrangements are due in 2005. $75.0 million of 7.95% Senior Notes due 2004, $9.9 million of 7.45% Medium-Term Notes due 2011, $59.9 million of 7.50% Senior Notes due 2016, $34.7 million of 8.25% Senior Notes due 2030, $250.0 million of 4.30% Senior Notes due 2013, $103.1 million of subordinated debentures due 2031, and $118.6 million of subordinated debentures due 2032, were outstanding at December 31, 2002. The subordinated debentures were issued to affiliates in connection with the issuance by such affiliates of Trust Originated Preferred Securities.
On January 1, 2004, the Company redeemed the 7.5% Senior Notes. On January 27, 2004, the Company issued $103.1 million of subordinated debentures due 2034.
*Eliminated in consolidation.
NOTE 3 — SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
2003 2002 2001
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Cash paid (received) during the year for:
Interest paid to non-affiliates $28,006 $17,710 $22,693
Interest paid for subordinated debt securities* 16,327 15,227 10,163
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$44,333 $32,937 $32,856
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Income taxes (reduced by amounts received
from affiliates under a tax sharing agreement) $ 7,000 $ 3,000
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Noncash investing and financing activities
Reissuance of treasury stock to ESOP $ 877 $ 59 $ 879
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Change in unallocated stock in ESOP $ 410 $ 540 $ 369
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Stock-based compensation $10,204 $ 3,239 $ 3,589
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Redemption of FELINE PRIDES $113,414
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NOTE 4 — DISCONTINUED OPERATIONS
On December 31, 2001, the Company completed the sale to Fortis, Inc. of substantially all of its Dental Division, and discontinued other remaining Dental Division related operations, primarily other health insurance lines.
NOTE 5 – OPERATING EXPENSES
In 2003 the Company incurred $27.5 million of expenses related to the payment of claims in the Company’s Asset Protection segment.
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
PROTECTIVE LIFE CORPORATION AND SUBSIDIARIES
(in thousands)
COL. A COL. B COL. C COL. D COL. E COL. F COL. G COL. H COL. I COL. J
Stable Value
Products,
Annuity Amortization
Deferred Contracts and of Deferred
Policy Future Policy Other Net Premiums Net Benefits and Policy Other
Acquisition Benefits and Unearned Policyholders' and Policy Investment Settlement Acquisitions Operating
Segment Costs Claims Premiums Funds Fees Income(1) Expenses Costs Expenses(1)
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Year Ended
December 31, 2003:
Life Marketing $1,185,102 $4,846,032 $ 1,854 $ 62,641 $198,653 $ 231,238 $ 253,785 $66,078 $ 10,832
Acquisitions 385,042 3,185,708 354 917,401 213,912 246,143 291,768 32,690 43,087
Annuities 101,096 593,119 5,329 2,618,571 26,265 224,332 197,955 38,196 28,765
Stable Value Products 7,186 4,520,956 233,104 186,565 2,279 5,349
Asset Protection 171,863 187,044 732,093 6,255 244,769 36,652 142,166 80,320 80,980
Corporate and Other 10,731 89,067 44,860 189,969 52,278 59,283 79,335 5,544 86,419
Adjustments(2) 47,161 76 190
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Total $1,861,020 $8,948,131 $784,566 $8,315,983 $735,877 $1,030,752 $1,151,574 $225,107 $255,432
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Year Ended
December 31, 2002:
Life Marketing $ 973,631 $4,031,021 $ 318 $ 48,558 $220,184 $ 209,002 $ 228,224 $117,836 $ 13,948
Acquisitions 435,177 3,240,407 395 1,040,855 224,485 252,147 301,401 35,245 46,525
Annuities 93,140 571,109 2,742,643 25,826 220,447 186,107 24,669 30,660
Stable Value Products 4,908 3,930,668 246,098 196,576 2,304 4,946
Asset Protection 190,254 244,673 845,709 9,288 286,129 41,879 204,069 75,108 94,443
Corporate and Other 10,143 97,175 29,412 114,608 53,697 53,380 50,708 12,500 72,376
Adjustments(2) 63,797 122 3,567
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Total $1,707,253 $8,248,182 $875,956 $7,890,187 $810,321 $1,022,953 $1,167,085 $267,662 $262,898
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Year Ended
December 31, 2001:
Life Marketing $120,995 $ 179,346 $190,538 $ 41,399 $ 38,243
Acquisitions 182,433 187,535 238,877 20,501 43,232
Annuities 28,145 167,905 137,204 24,021 29,434
Stable Value Products 261,079 222,306 1,662 3,961
Asset Protection 236,266 47,286 141,789 53,749 94,886
Corporate and Other 50,830 36,990 41,910 5,726 67,014
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Total $618,669 $ 880,141 $972,624 $147,058 $276,770
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| (1) | Allocations of Net Investment Income and Other Operating Expenses are based on a number of assumptions and estimates and results would change if different methods were applied. |
| (2) | Balance Sheet adjustments represent the inclusion of assets related to discontinued operations. |
SCHEDULE IV - REINSURANCE
PROTECTIVE LIFE CORPORATION AND SUBSIDIARIES
(dollars in thousands)
COL. A COL. B COL. C COL. D COL. E COL. F
Percentage of
Ceded to Other Assumed from Amount Assumed
Gross Amount Companies Other Companies Net Amount to Net
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Year Ended
December 31, 2003:
Life insurance
in force $324,318,517 $292,740,795 $22,176,303 $53,754,025 41.3%
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Premiums and
policy fees:
Life insurance $ 1,028,053 $ 781,776 $ 247,592 $ 493,869 50.1%
Accident/health
insurance 99,023 61,644 59,633 97,012 61.5%
Property and liability
insurance 170,322 91,015 65,688 144,995 45.3%
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Total $ 1,297,398 $ 934,435 $ 372,913 $ 735,876
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Year Ended
December 31, 2002:
Life insurance
in force $248,994,479 $219,025,215 $21,523,110 $51,492,374 41.8%
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Premiums and
policy fees:
Life insurance $ 854,813 $ 545,976 $ 235,198 $ 544,035 43.2%
Accident/health
insurance 103,858 61,512 44,337 86,683 51.1%
Property and liability
insurance 194,601 143,908 110,543 161,236 68.6%
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Total $ 1,153,272 $ 751,396 $ 390,078 $ 791,954
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Year Ended
December 31, 2001:
Life insurance
in force $191,105,512 $171,449,182 $23,152,614 $42,808,944 54.1%
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Premiums and
policy fees:
Life insurance $ 774,294 $ 565,130 $ 198,832 $ 407,996 48.7%
Accident/health
insurance 181,509 122,747 58,762 0.0%
Property and liability
insurance 158,890 83,274 76,295 151,911 50.2%
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Total $ 1,114,693 $ 771,151 $ 275,127 $ 618,669
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SCHEDULE V - VALUATION ACCOUNTS
PROTECTIVE LIFE CORPORATION AND SUBSIDIARIES
(dollars in thousands)
COL. A COL. B COL. C COL. D COL. E
Additions
(1)
Balance at Charged to (2)
beginning of costs and Charges to Balance at end
Description period expenses other accounts Deductions of period
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2003
Allowance for Uncollected $24,833 $0 $ 0 $18,371 $ 6,462
Reinsurance Receivable
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2002
Allowance for Uncollected $ 0 $0 $24,833 $ 0 $24,833
Reinsurance Receivable
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