UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D. C. 20549
FORM
10-Q
x
Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended
March 31, 2008
or
o
Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from
to
Commission File Number
001-11339
Protective Life Corporation
(Exact name of registrant as specified in its charter)
Delaware
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95-2492236
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(State or other jurisdiction of
incorporation or organization)
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|
(IRS Employer Identification No.)
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2801 Highway 280 South
Birmingham, Alabama 35223
(Address of principal executive offices and zip code)
(205)
268-1000
(Registrants telephone number, including area code)
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
o
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of large accelerated filer, accelerated filer, and
smaller reporting company in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer
x
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|
Accelerated
filer
o
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|
Non-accelerated
filer
o
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|
Smaller
reporting company
o
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(Do
not check if a smaller reporting company)
|
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes
o
No
x
Number
of shares of Common Stock, $0.50 par value, outstanding as of May 5, 2008: 69,817,937
PROTECTIVE LIFE
CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED MARCH 31, 2008
TABLE OF CONTENTS
2
PROTECTIVE
LIFE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
|
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Three Months Ended
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March 31,
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|
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2008
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2007
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(Dollars In Thousands, Except Per Share Amounts)
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Revenues
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Premiums and policy fees
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$
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662,404
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$
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657,017
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Reinsurance ceded
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(371,072
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)
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(370,997
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)
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Net of reinsurance ceded
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291,332
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286,020
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Net investment income
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408,465
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415,682
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Realized investment (losses) gains:
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|
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Derivative financial instruments
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(1,657
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)
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(2,291
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)
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All other investments
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(28,045
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)
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13,294
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Other income
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45,509
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73,792
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Total revenues
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715,604
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786,497
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Benefits and expenses
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Benefits and settlement expenses, net of
reinsurance ceded:
(three months: 2008 - $371,733; 2007 - $292,899)
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494,676
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467,785
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Amortization of deferred policy acquisition
costs and value of business acquired
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68,370
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76,380
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|
Other operating expenses, net of
reinsurance ceded:
(three months: 2008 - $52,378; 2007 - $65,303)
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98,969
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109,004
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Total benefits and expenses
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662,015
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653,169
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Income before income tax
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53,589
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133,328
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Income tax expense
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17,707
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42,745
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Net income
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$
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35,882
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$
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90,583
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|
|
|
|
|
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Net income per share - basic
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$
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0.50
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$
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1.28
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Net income per share - diluted
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$
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0.50
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$
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1.27
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Cash dividends paid per share
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$
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0.225
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$
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0.215
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Average share outstanding - basic
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71,080,703
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70,017,662
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Average share outstanding - diluted
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71,453,824
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71,487,063
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See Notes to Consolidated Condensed Financial Statements
3
PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED BALANCE
SHEETS
(Unaudited)
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March 31,
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December 31,
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2008
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2007
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(Dollars In Thousands)
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Assets
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Investments:
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Fixed maturities, at fair market value (amortized
cost: 2008 - $23,755,428; 2007 - $23,448,784)
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$
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23,167,901
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$
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23,389,069
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Equity securities, at fair market value
(cost: 2008 - $292,248; 2007 - $112,406)
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289,307
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117,037
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Mortgage loans
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3,377,397
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3,284,326
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Investment real estate, net of accumulated
depreciation (2008 - $328; 2007 - $283)
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7,975
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8,026
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Policy loans
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813,107
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818,280
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Other long-term investments
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193,364
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185,892
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Short-term investments
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1,121,138
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1,236,443
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Total investments
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28,970,189
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29,039,073
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Cash
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117,933
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146,152
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Accrued investment income
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281,396
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291,734
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Accounts and premiums receivable, net of
allowance for uncollectible amounts (2008 - $3,194; 2007 - $3,587)
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118,533
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87,883
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Reinsurance receivables
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5,287,241
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5,089,100
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Deferred policy acquisition costs and value
of business acquired
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3,499,271
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3,400,493
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Goodwill
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116,481
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117,366
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Property and equipment, net of accumulated
depreciation (2008 - $112,079; 2007 - $111,213)
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42,027
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42,795
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Other assets
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156,486
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144,296
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Income tax receivable
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148,342
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165,741
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Assets related to separate accounts
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Variable annuity
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2,686,752
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2,910,606
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Variable universal life
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324,355
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350,802
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Total Assets
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$
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41,749,006
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$
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41,786,041
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Liabilities
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Policy liabilities and accruals
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$
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17,917,162
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$
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17,429,307
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Stable value product account balances
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5,207,936
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5,046,463
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Annuity account balances
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8,726,137
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8,708,383
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Other policyholders funds
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360,065
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307,950
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Other liabilities
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1,122,106
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1,204,018
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Deferred income taxes
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361,038
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512,156
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Non-recourse funding obligations
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1,375,000
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1,375,000
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Liabilities related to variable interest
entities
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400,000
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400,000
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Long-term debt
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579,852
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559,852
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Subordinated debt securities
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524,743
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524,743
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Liabilities related to separate accounts
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Variable annuity
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2,686,752
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2,910,606
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Variable universal life
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324,355
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350,802
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Total liabilities
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39,585,146
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39,329,280
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Commitments and contingent liabilities -
Note 3
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Shareowners equity
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Preferred Stock; $1 par value, shares
authorized: 4,000,000; Issued: None
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Common Stock, $.50 par value, shares
authorized: 2008 and 2007 - 160,000,000 shares issued: 2008 and 2007 -
73,251,960
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36,626
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36,626
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Additional paid-in-capital
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446,191
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444,765
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Treasury stock, at cost (2008 - 3,422,923
shares; 2007 - 3,102,898 shares)
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(27,998
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)
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(11,140
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)
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Unallocated stock in Employee Stock
Ownership Plan (2008 - 147,726 shares ; 2007 - 251,231 shares)
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(474
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)
|
(852
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)
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Retained earnings (includes FAS157
cumulative effect adjustment - $1,470)
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2,089,463
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2,067,891
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Accumulated other comprehensive income
(loss):
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|
|
|
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Net unrealized (losses) gains on
investments, net of income tax: (2008 - $(184,362); 2007 - ($26,675))
|
|
(333,630
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)
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(45,339
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)
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Accumulated gain (loss) - hedging, net of
income tax: (2008 - $(12,730); 2007 - $(6,185))
|
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(23,666
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)
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(12,222
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)
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Postretirement benefits liability
adjustment, net of income tax: (2008 - $(11,177); 2007 - $(11,622))
|
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(22,652
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)
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(22,968
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)
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Total shareowners equity
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2,163,860
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2,456,761
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Total liabilities and shareowners equity
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$
|
41,749,006
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$
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41,786,041
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See Notes to Consolidated Condensed Financial Statements
4
PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS
OF CASH FLOWS
(Unaudited)
|
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Three Months Ended
|
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|
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March 31,
|
|
|
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2008
|
|
2007
|
|
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(Dollars In Thousands)
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Cash flows from operating activities
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Net income
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$
|
35,882
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$
|
90,583
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Adjustments to reconcile net income to net
cash provided by operating activities:
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Realized investment (gains) losses
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29,702
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(11,003
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)
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Amortization of deferred policy acquisition
costs and value of business acquired
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68,370
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|
75,202
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|
Capitalization of deferred policy
acquisition costs
|
|
(85,095
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)
|
(120,762
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)
|
Depreciation expense
|
|
2,725
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|
3,023
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|
Deferred income tax
|
|
20,718
|
|
43,166
|
|
Accrued income tax
|
|
16,840
|
|
(179
|
)
|
Interest credited to universal life and
investment products
|
|
253,950
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|
254,930
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|
Policy fees assessed on universal life and
investment products
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|
(135,022
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)
|
(139,408
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)
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Change in reinsurance receivables
|
|
(198,141
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)
|
(162,834
|
)
|
Change in accrued investment income and
other receivables
|
|
(20,312
|
)
|
92,153
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|
Change in policy liabilities and other
policyholders funds of traditional life and health products
|
|
212,649
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|
73,525
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|
Trading securities:
|
|
|
|
|
|
Maturities and principal reductions of
investments
|
|
168,838
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|
104,301
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|
Sale of investments
|
|
441,775
|
|
406,347
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|
Cost of investments acquired
|
|
(440,279
|
)
|
(647,243
|
)
|
Other net change in trading securities
|
|
(69,855
|
)
|
85,820
|
|
Change in other liabilities
|
|
(13,271
|
)
|
78,413
|
|
Other, net
|
|
(90,009
|
)
|
5,451
|
|
Net cash provided by operating activities
|
|
199,465
|
|
231,485
|
|
Cash flows from investing activities
|
|
|
|
|
|
Investments available for sale:
|
|
|
|
|
|
Maturities and principal reductions of
investments
|
|
558,165
|
|
395,595
|
|
Sale of investments
|
|
1,372,938
|
|
1,050,320
|
|
Cost of investments acquired
|
|
(2,578,904
|
)
|
(1,380,416
|
)
|
Mortgage loans:
|
|
|
|
|
|
New borrowings
|
|
(178,922
|
)
|
(239,785
|
)
|
Repayments
|
|
85,723
|
|
94,635
|
|
Change in investment real estate, net
|
|
40
|
|
3,298
|
|
Change in policy loans, net
|
|
5,173
|
|
16,572
|
|
Change in other long-term investments, net
|
|
(7,324
|
)
|
(1,144
|
)
|
Change in short-term investments, net
|
|
140,151
|
|
164,799
|
|
Purchase of property and equipment
|
|
(2,403
|
)
|
(2,145
|
)
|
Sales of property and equipment
|
|
379
|
|
640
|
|
Other investing activities, net
|
|
|
|
161
|
|
Net cash (used in) provided by investing
activities
|
|
(604,984
|
)
|
102,530
|
|
Cash flows from financing activities
|
|
|
|
|
|
Borrowings under line of credit
arrangements and long-term debt
|
|
20,000
|
|
31,000
|
|
Principal payments on line of credit
arrangement and long-term debt
|
|
|
|
(43,600
|
)
|
Net proceeds from securities sold under
repurchase agreements
|
|
|
|
(14,105
|
)
|
Payments on liabilities related to variable
interest entities
|
|
|
|
1,289
|
|
Issuance of non-recourse funding
obligations
|
|
|
|
100,000
|
|
Dividends to share owners
|
|
(15,780
|
)
|
(15,044
|
)
|
Investments product deposits and change in universal
life deposits
|
|
1,398,113
|
|
543,512
|
|
Investment product withdrawals
|
|
(1,011,830
|
)
|
(837,199
|
)
|
Excess tax benefits on stock based
compensation
|
|
|
|
762
|
|
Other financing activities, net
|
|
(13,203
|
)
|
(49,956
|
)
|
Net cash provided by (used in) financing
activities
|
|
377,300
|
|
(283,341
|
)
|
Change in cash
|
|
(28,219
|
)
|
50,674
|
|
Cash at beginning of period
|
|
146,152
|
|
69,516
|
|
Cash at end of period
|
|
$
|
117,933
|
|
$
|
120,190
|
|
See Notes to Consolidated Condensed Financial Statements
5
PROTECTIVE LIFE CORPORATION
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1.
BASIS OF PRESENTATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated condensed financial statements
of Protective Life Corporation and subsidiaries (the Company) have
been prepared in accordance with accounting principles generally accepted in
the United States of America (U.S. 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 U.S. GAAP for complete
financial statements. In the opinion of
management, the accompanying financial statements reflect all adjustments (consisting
only of normal recurring items) necessary for a fair statement of the results
for the interim periods presented.
Operating results for the three-month period ended March 31, 2008
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2008. The
year-end consolidated condensed balance sheet data was derived from audited
financial statements, but does not include all disclosures required by
U.S. GAAP. For further information,
refer to the consolidated financial statements and notes thereto included in
the Companys Annual Report on Form 10-K for the year ended December 31,
2007.
Accounting Pronouncements Recently Adopted
Financial Accounting Standards Board (FASB)
Statement No. 157,
Fair Value Measurement
(SFAS No. 157)
.
In September 2006, the FASB issued SFAS No. 157.
On January 1, 2008, the Company adopted this standard, which
defines fair value, establishes a framework for measuring fair value,
establishes a fair value hierarchy based on the quality of inputs used to
measure fair value and enhances disclosure requirements for fair value
measurements. The adoption of SFAS No. 157
did not have a material impact on the Companys consolidated financial
statements. Additionally, on January 1,
2008, the Company elected the partial adoption of SFAS No. 157 under the
provisions of FASB Staff Position (FSP) FAS 157-2, which amends SFAS No. 157
to allow an entity to delay the application of this statement until periods
beginning January 1, 2009 for certain non-financial assets and
liabilities. Under the provisions of
this FSP, the Company will delay the application of SFAS No. 157 for fair
value measurements used in the impairment testing of goodwill and
indefinite-lived intangible assets and eligible non-financial assets and
liabilities included within a business combination. In January 2008, FASB also issued
proposed FSP FAS 157-c that would amend SFAS No. 157 to clarify the
principles on fair value measurement of liabilities. Management is monitoring the status of this
proposed FSP for any impact on the Companys consolidated financial statements.
SFAS No. 157 defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. In determining fair value, the Company uses
various methods including market, income and cost approaches. The Company utilizes valuation techniques
that maximize the use of observable inputs and minimizes the use of
unobservable inputs. For more
information, see Note 10,
Fair Value of Financial
Instruments
.
FASB Statement No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities (SFAS
No. 159)
.
In February 2007, the FASB issued SFAS No. 159. This standard provides entities the option to
measure certain financial assets and financial liabilities at fair value with
changes in fair value recognized in earnings each period. SFAS No. 159 permits the fair value
option election on an instrument-by-instrument basis at initial recognition of
an asset or liability or upon an event that gives rise to a new basis of
accounting for that instrument. The
Company adopted SFAS No. 159 as of January 1, 2008. The Company has elected not to apply the
provisions of SFAS No. 159 to its eligible financial assets and financial
liabilities on the date of adoption. Accordingly, the initial application of
SFAS No. 159 had no effect on the Companys consolidated results of
operations or financial position.
6
FASB Staff Position (FSP) FIN 39-1,
Amendment of FASB Interpretation No. 39 (FSP FIN39-1)
.
As of January 1, 2008, the Company
adopted FSP FIN39-1. This FSP amends FIN
No. 39, Offsetting of Amounts Related to Certain Contracts, to allow fair
value amounts recognized for collateral to be offset against fair value amounts
recognized for derivative instruments that are executed with the same
counterparty under certain circumstances. The FSP also requires an entity to
disclose the accounting policy decision to offset, or not to offset, fair value
amounts in accordance with FIN No. 39, as amended. The Company does not,
and has not previously, offset the fair value amounts recognized for
derivatives with the amounts recognized as collateral.
Accounting
Pronouncements Not Yet Adopted
FASB Statement No. 141(R),
Business Combinations (SFAS No. 141(R))
.
In December of
2007, the FASB issued SFAS No. 141(R).
This standard is a revision to the original standard and continues the
movement toward a greater use of fair values in financial reporting. It changes
how business acquisitions are accounted for and will impact financial
statements at the acquisition date and in subsequent periods. Further, certain
of the changes will introduce more volatility into earnings and thus may impact
a companys acquisition strategy. SFAS No. 141(R) will
also impact the annual goodwill impairment test associated with acquisitions
that close both before and after the effective date of this standard. Thus,
companies that have goodwill from an acquisition that closed prior to the
effective date of the Standard will need to understand the provisions of SFAS No. 141(R) regardless
of whether they intend to have future acquisitions. This standard applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after December 15,
2008.
FASB Statement No. 160,
Noncontrolling Interests in Consolidated Financial Statements, (SFAS No. 160)
. In December of 2007, the FASB issued
SFAS No. 160. This standard applies
to all entities that prepare consolidated financial statements, except
not-for-profit organizations, but will affect only those entities that have an
outstanding noncontrolling interest in one or more subsidiaries or that
deconsolidate a subsidiary. This
statement is effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2008 (that is, January 1,
2009, for entities with calendar year-ends). The Company does not expect this
standard to have a significant impact on its consolidated results of operations
or financial position.
FASB
Statement No. 161,
Disclosures about
Derivative Instruments and Hedging Activities, (SFAS No. 161)
. In March of 2008, the FASB issued SFAS No. 161.
This standard requires enhanced disclosures about how and why an entity uses
derivative instruments, how derivative instruments and related hedged items are
accounted for under FASB Statement No. 133,
Accounting
Derivative Instruments and Hedging Activities
(SFAS No. 133). SFAS No. 133 and its related
interpretations, and how derivative instruments and related hedged items affect
an entitys financial position, financial performance and cash flows. This
statement is effective for fiscal years and interim periods beginning after November 15,
2008. The standard will be effective for the Company beginning January 1,
2009. The Company is currently evaluating the impact, if any, that SFAS No. 161
will have on its consolidated results of operations or financial position.
FSP
No. 140-3,
Accounting for Transfers of Financial Assets
and Repurchase Financing Transactions (FAS No. 140-3)
.
In February of 2008, the FASB issued FAS
No. 140-3 to provide guidance on accounting for a transfer of a financial
asset and a repurchase financing, which is not directly addressed by SFAS No. 140. This FSP is effective for fiscal years
beginning after November 15, 2008, and interim periods within those fiscal
years. The FSP will be effective for the
Company beginning January 1, 2009.
The Company is currently evaluating the impact, if any, that this FSP
will have on its consolidated results of operations or financial position.
Reclassifications
Certain reclassifications have been made in the previously reported
financial statements and accompanying notes to make the prior period amounts
comparable to those of the current period.
Such reclassifications had no effect on previously reported net income
or shareowners equity.
7
Significant Accounting Policies
Valuation of investment securities
Determining whether a decline in
the current fair value of invested assets is an other than temporary decline in
value can involve a variety of assumptions and estimates, particularly for
investments that are not actively traded in established markets. For example, assessing the value of certain
investments requires that we perform an analysis of expected future cash flows
or rates of prepayments. Other
investments, such as collateralized mortgage or bond obligations, represent
selected tranches of a structured transaction, supported in the aggregate by
underlying investments in a wide variety of issuers. Management considers a number of factors when
determining the impairment status of individual securities. These include the economic condition of
various industry segments and geographic locations and other areas of
identified risks. Although it is possible
for the impairment of one investment to affect other investments, we engage in
ongoing risk management to safeguard against and limit any further risk to its
investment portfolio. Special attention
is given to correlative risks within specific industries, related parties, and
business markets. We generally consider a number of factors in determining
whether the impairment is other than temporary.
These include, but are not limited to: 1) actions taken by rating
agencies, 2) default by the issuer, 3) the significance of the
decline, 4) the intent and ability to hold the investment until recovery,
5) the time period during which the decline has occurred, 6) an
economic analysis of the issuers industry, and 7) the financial strength,
liquidity, and recoverability of the issuer.
Management performs a security-by-security review each quarter in
evaluating the need for any other-than-temporary impairments. Although no set formula is used in this
process, the investment performance, collateral position, and continued
viability of the issuer are significant measures considered.
The fair value for fixed maturity,
short term, and equity securities, is determined by management after
considering one of three primary sources of information: third party pricing
services, independent broker quotations, or pricing matrices. Security pricing is applied using a waterfall
approach whereby publicly available prices are first sought from third party
pricing services, the remaining unpriced securities are submitted to
independent brokers for prices, or lastly, securities are priced using a
pricing matrix. Typical inputs used by
these three pricing methods include, but are not limited to, reported trades,
benchmark yields, issuer spreads, bids, offers, and/or estimated cash flows and
prepayments speeds. Based on the typical
trading volumes and the lack of quoted market prices for fixed maturities,
third party pricing services will normally derive the security prices through
recent reported trades for identical or similar securities making adjustments
through the reporting date based upon available market observable information
as outlined above. If there are no
recent reported trades, the third party pricing services and brokers may use
matrix or model processes to develop a security price where future cash flow
expectations are developed based upon collateral performance and discounted at
an estimated market rate. Included in
the pricing of asset backed securities (ABS), collateralized mortgage
obligations (CMOs), and mortgage-backed securities (MBS) are estimates of
the rate of future prepayments of principal over the remaining life of the
securities. Such estimates are derived based on the characteristics of the
underlying structure and prepayment speeds previously experienced at the
interest rate levels projected for the underlying collateral.
Reinsurance
The Company uses reinsurance extensively in
certain of its segments. The following summarizes some of the key aspects of
the Companys accounting policies for reinsurance:
Reinsurance
Accounting Methodology
The Company accounts for reinsurance under the provisions of FASB
Statement No. 113,
Accounting and Reporting
for Reinsurance of Short-Duration and Long-Duration Contracts
(SFAS
No. 113). The methodology for
accounting for the impact of reinsurance on the Companys life insurance and
annuity products is determined by whether the specific products are subject to
FASB Statement No. 60,
Accounting and Reporting
by Insurance Enterprises
(SFAS No. 60) or FASB Statement No. 97,
Accounting and Reporting by Insurance Enterprises
for Certain Long-Duration Contracts and for Realized Gains and Losses from the
Sale of Investments
(SFAS No. 97).
8
The Companys traditional life insurance
products are subject to SFAS No. 60 and the recognition of the impact of
reinsurance costs on the Companys financial statements reflect the
requirements of that pronouncement. Ceded premiums are treated as an offset to
direct premium and policy fee revenue and are recognized when due to the
assuming company. Ceded claims are treated as an offset to direct benefits and
settlement expenses and are recognized when the claim is incurred on a direct
basis. Ceded policy reserve changes are also treated as an offset to benefits
and settlement expenses and are recognized during the applicable financial
reporting period. Expense allowances paid by the assuming companies are treated
as an offset to other operating expenses. Since reinsurance treaties typically
provide for allowance percentages that decrease over the lifetime of a policy,
allowances in excess of the ultimate or final level allowance are
capitalized. Amortization of capitalized reinsurance expense allowances is
treated as an offset to direct amortization of deferred policy acquisition
costs or value of business acquired (VOBA). Amortization of deferred expense
allowances is calculated as a level percentage of expected premiums in all
durations given expected future lapses and mortality and accretion due to
interest.
The Companys short duration insurance
contracts (primarily issued through the Asset Protection segment) are also
subject to SFAS No. 60 and the recognition of the impact of reinsurance
costs on the Companys financial statements also reflect the requirements of
that pronouncement.
Reinsurance
allowances include such acquisition costs as commissions and premium
taxes. A ceding fee is also collected to
cover other administrative costs and profits for the Company. Reinsurance allowances received are
capitalized and charged to expense in proportion to premiums earned. Ceded unamortized acquisition costs are
netted with direct unamortized acquisition costs in the balance sheet.
The Companys universal life, variable
universal life, bank-owned life insurance (BOLI), and annuity products are
subject to SFAS No. 97 and the recognition of the impact of reinsurance
costs on the Companys financial statements reflect the requirements of that
pronouncement. Ceded premiums and policy
fees on SFAS No. 97 products reduce premiums and policy fees recognized by
the Company. Ceded claims are treated as an offset to direct benefits and
settlement expenses and are recognized when the claim is incurred on a direct
basis. Ceded policy reserve changes are also treated as an offset to benefits
and settlement expenses and are recognized during the applicable valuation
period. Commission and expense allowances paid by the assuming companies are
treated as an offset to other operating expenses. Since reinsurance treaties
typically provide for allowance percentages that decrease over the lifetime of
a policy, allowances in excess of the ultimate or final level allowance are
capitalized. Amortization of
capitalized reinsurance expense allowances are amortized based on future
expected gross profits according to SFAS No. 97. Unlike with SFAS No. 60
products, assumptions for SFAS No. 97 regarding mortality, lapses and
interest are continuously reviewed and may be periodically changed. These
changes will result in unlocking which change the balance in the ceded
deferred amortization cost and can affect the amortization of deferred
acquisition cost and VOBA. Ceded unearned revenue liabilities are also
amortized based on expected gross profits. Assumptions for SFAS No. 97
products are based on the best current estimate of expected mortality, lapses
and interest spread. The Company complies with AICPA Statement of Position
03-1,
Accounting and Reporting by Insurance Enterprises
for Certain Nontraditional Long-Duration Contracts and for Separate Accounts
,
which impacts the timing of direct and ceded earnings on certain blocks of the
Companys SFAS No. 97 business.
Reinsurance Allowances -
The amount and timing of reinsurance
allowances (both first year and renewal allowances) are contractually
determined by the applicable reinsurance contract
and
may or may not bear a relationship to the amount and incidence of expenses
actually paid by the ceding company.
Many of the Companys reinsurance treaties do, in fact, have ultimate
renewal allowances that exceed the direct ultimate expenses. Additionally, allowances are intended to
reimburse the ceding company for some portion of the ceding companys
commissions, expenses, and taxes. As a
result, first year expenses paid by the Company may be higher than first year
allowances paid by the reinsurer, and reinsurance allowances may be higher in
later years than renewal expenses paid by the Company.
The Company recognizes allowances according
to the prescribed schedules in the reinsurance contracts, which may or may not
bear a relationship to actual expenses incurred by the Company. A portion of these allowances is deferred
while the non-deferrable allowances are recognized immediately as a reduction
of other operating expenses. The Companys
practice is to defer reinsurance allowances in excess of the ultimate
allowance. This practice is consistent
with the Companys practice of capitalizing direct expenses. While the recognition of reinsurance allowances
is consistent with U.S. GAAP, in some cases non-deferred reinsurance
allowances may exceed non-deferred direct costs, which may cause net other
operating expenses to be negative.
9
Ultimate reinsurance allowances are defined
as the lowest allowance percentage paid by the reinsurer in any policy duration
over the lifetime of a universal life policy (or through the end of the level
term period for a traditional life policy).
The Company determines ultimate allowances as the final amount to be
paid over the life of a contract after higher acquisition related expenses
(whether first year or renewal) are completed.
Ultimate reinsurance allowances are determined by the reinsurer and set
by the individual contract of each treaty during the initial negotiation of
each such contract. Ultimate reinsurance
allowances and other treaty provisions are listed within each treaty and will
differ between agreements since each reinsurance contract is a separately negotiated
agreement. The Company uses the ultimate
reinsurance allowances set by the reinsurers and contained within each treaty
agreement to complete its accounting responsibilities.
Amortization of Reinsurance Allowances -
Reinsurance allowances do not affect the
methodology used to amortize DAC and VOBA, or the period over which such DAC
and VOBA are amortized. Reinsurance
allowances offset the direct expenses capitalized, reducing the net amount that
is capitalized. The amortization pattern
varies with changes in estimated gross profits arising from the
allowances. DAC and VOBA on SFAS No. 60
policies are amortized based on the pattern of estimated gross premiums of the
policies in force. Reinsurance
allowances do not affect the gross premiums, so therefore they do not impact
SFAS No. 60 amortization patterns.
DAC and VOBA on SFAS No. 97 products are amortized based on the
pattern of estimated gross profits of the policies in force. Reinsurance allowances are considered in the
determination of estimated gross profits, and therefore do impact SFAS No. 97
amortization patterns.
Reinsurance Liabilities -
Claim liabilities and policy benefits are
calculated consistently for all policies in accordance with U.S. GAAP,
regardless of whether or not the policy is reinsured. Once the claim liabilities and policy
benefits for the underlying policies are estimated, the amounts recoverable
from the reinsurers are estimated based on a number of factors including the
terms of the reinsurance contracts, historical payment patterns of reinsurance
partners, and the financial strength and credit worthiness of reinsurance
partners. Liabilities for unpaid
reinsurance claims are produced from claims and reinsurance system records,
which contain the relevant terms of the individual reinsurance contracts. The
Company monitors claims due from reinsurers to ensure that balances are settled
on a timely basis. Incurred but not reported claims are reviewed by the Companys
actuarial staff to ensure that appropriate amounts are ceded.
The Company analyzes and monitors the credit
worthiness of each of its reinsurance partners to minimize collection issues.
For newly executed reinsurance contracts with reinsurance companies that do not
meet predetermined standards, the Company requires collateral such as assets
held in trusts or letters of credit.
Components of Reinsurance Cost -
The following income statement lines are
affected by reinsurance cost:
Premiums and policy fees (reinsurance
ceded on the Companys financial statements)
represent consideration paid to the assuming
company for accepting the ceding companys risks. Ceded premiums and policy
fees increase reinsurance cost.
Benefits and settlement
expenses
include incurred claim amounts ceded and changes in policy reserves. Ceded
benefits and settlement expenses decrease reinsurance cost.
Amortization of deferred policy
acquisition cost and VOBA
reflects the amortization of capitalized reinsurance allowances. Ceded amortization decreases reinsurance
cost.
Other expenses
include reinsurance allowances paid by
assuming companies to the Company less amounts capitalized. Non-deferred reinsurance allowances decrease
reinsurance cost.
The Companys reinsurance programs do not
materially impact the other income line of the Companys income statement. In
addition, net investment income generally has no direct impact on the Companys
reinsurance cost. However, it should be noted that by ceding business to the
assuming companies, the Company forgoes investment income on the reserves ceded
to the assuming companies. Conversely, the assuming companies will receive
investment income on the reserves assumed which will increase the assuming
companies profitability on business assumed from the Company.
10
Insurance liabilities and reserves
Establishing an adequate liability for the Companys obligations to
policyholders requires the use of assumptions.
Estimating liabilities for future policy benefits on life and health
insurance products requires the use of assumptions relative to future
investment yields, mortality, morbidity, persistency and other assumptions
based on the Companys historical experience, modified as necessary to reflect
anticipated trends and to include provisions for possible adverse
deviation. Determining liabilities for
the Companys property and casualty insurance products also requires the use of
assumptions, including the projected levels of used vehicle prices, the
frequency and severity of claims, and the effectiveness of internal processes
designed to reduce the level of claims.
The Companys results depend significantly upon the extent to which its
actual claims experience is consistent with the assumptions the Company used in
determining its reserves and pricing its products. The Companys reserve assumptions and
estimates require significant judgment and, therefore, are inherently
uncertain. The Company cannot determine
with precision the ultimate amounts that it will pay for actual claims or the timing
of those payments. In addition, effective January 1, 2007, the
Company adopted FASB Statement No. 155,
Accounting
for Certain Hybrid Financial Instruments an amendment of FASB Statements No. 133
and 140
(SFAS No. 155)
,
related to
its equity indexed annuity product. SFAS No. 155 requires that the Company
determine a fair value for the liability related to this block of business at
each balance sheet date, with changes in the fair value recorded through
earnings. Changes in this liability may
be significantly affected by interest rate fluctuations.
As a result
of the adoption of SFAS No. 157 at January 1, 2008, the Company made
certain modifications to the method used to determine fair value for its
liability related to equity indexed annuities to take into consideration
factors such as policyholder behavior, the Companys credit rating and other
market considerations. The impact of
adopting SFAS No. 157 is discussed further in Note 10,
Fair Value of Financial Instruments
.
Guaranteed minimum withdrawal benefits
The Company also establishes liabilities for guaranteed minimum
withdrawal benefits (GMWB) on its variable annuity products. The GMWB is valued in accordance with SFAS No. 133
which requires the liability to be marked-to-market using current implied
volatilities for the equity indices. The
methods used to estimate the liabilities employ assumptions, primarily about
mortality and lapses, equity market and interest returns, market volatility and
the Companys credit rating. The Company
assumes mortality of 65% of the National Association of Insurance Commissioners
1994 Variable Annuity GMDB Mortality Table. Differences between the actual experience and
the assumptions used result in variances in profit and could result in losses.
As a result of the adoption of SFAS
No. 157 at January 1, 2008, the Company made certain modifications to
the method used to determine fair value for its liability related embedded
derivatives related to annuities with guaranteed minimum withdrawal benefits to
take into consideration factors such as policyholder behavior, the Companys
credit rating and other market considerations.
See Note 10,
Fair Value of Financial
Instruments
for more information related to the impact of adopting
SFAS No. 157.
11
2. NON-RECOURSE
FUNDING OBLIGATIONS
The
following table shows the non-recourse funding obligations outstanding as of March 31,
2008, listed by issuer:
|
|
|
|
|
|
Year-to-Date
|
|
|
|
|
|
|
|
Weighted-Avg
|
|
Issuer
|
|
Balance
|
|
Maturity Year
|
|
Interest Rate
|
|
|
|
(Dollars In Thousands)
|
|
|
|
|
|
Golden Gate Captive Insurance Company
|
|
$
|
800,000
|
|
2037
|
|
5.33
|
%
|
Golden Gate II Captive Insurance Company
|
|
575,000
|
|
2052
|
|
4.48
|
%
|
Total
|
|
$
|
1,375,000
|
|
|
|
|
|
3.
COMMITMENTS AND
CONTINGENT LIABILITIES
The Company is contingently liable to obtain a $20 million letter
of credit under indemnity agreements with directors. Such agreements provide insurance protection
in excess of the directors and officers liability insurance in force at the
time up to $20 million. Should
certain events occur constituting a change in control, the Company must obtain
the letter of credit upon which directors may draw for defense or settlement of
any claim relating to performance of their duties as directors. The Company has similar agreements with
certain of its officers providing up to $10 million in indemnification
that are not secured by the obligation to obtain a letter of credit. These obligations are in addition to the customary
obligation to indemnify officers and directors contained in our bylaws.
Under insurance guaranty fund laws, in most states insurance companies
doing business therein can be assessed up to prescribed limits for policyholder
losses incurred by insolvent companies.
The Company does not believe such assessments will be materially
different from amounts already provided for in the financial statements. Most of these laws do provide, however, that
an assessment may be excused or deferred if it would threaten an insurers own
financial strength.
A number of
civil jury verdicts have been returned against insurers, broker dealers and
other providers of financial services involving sales, refund or claims
practices, alleged agent misconduct, failure to properly supervise
representatives, relationships with agents or persons with whom the insurer
does business, and other matters. Often
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 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 service
companies, in the ordinary course of business, is involved in such litigation
and arbitration. Although the Company
cannot predict the outcome of any such litigation or arbitration, the Company
does not believe that any such outcome will have a material impact on the financial
condition or results of the operations of the Company.
4.
STOCK-BASED COMPENSATION
Performance shares awarded during the first three months of 2008 and
2007, and their estimated fair value at grant date are as follows:
Year
|
|
Performance
|
|
Estimated
|
|
Year
|
|
Performance
|
|
Estimated
|
|
Awarded
|
|
Shares
|
|
Fair Value
|
|
Awarded
|
|
Shares
|
|
Fair Value
|
|
|
|
|
|
(Dollars In Thousands, Except Share Amounts)
|
|
|
|
|
|
2008
|
|
75,900
|
|
$
|
2,900
|
|
2007
|
|
64,700
|
|
$
|
2,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
The criteria for payment of performance awards is based primarily upon
a comparison of the Companys average return on average equity (earlier upon
the death, disability, or retirement of the executive, or in certain
circumstances, upon a change in control of the Company) to that of a comparison
group of publicly held life and multi-line insurance companies. If the Companys results are below the median
of the comparison group (25
th
percentile
for 2008 awards), no portion of the award is earned. If the Companys results are at or above the
90
th
percentile,
the award maximum is earned. Awards are
paid in shares of the Companys Common Stock.
During the first three months of 2008, stock appreciation rights (SARs)
were granted to certain officers of the Company to provide long-term incentive
compensation based solely on the performance of the Companys Common
Stock. The SARs are exercisable in four
equal annual installments beginning one year after the date of grant (earlier
upon the death, disability, or retirement of the officer, or in certain
circumstances, upon a change in control of the Company) and expire after ten
years or upon termination of employment.
The SARs activity as well as weighted average base price for the first
three months of 2008 is as follows:
|
|
Weighted-Average
|
|
Number of
|
|
|
|
Base Price
|
|
SARs
|
|
Balance at December 31, 2007
|
|
$
|
31.98
|
|
1,262,704
|
|
SARs granted
|
|
38.59
|
|
329,800
|
|
SARs exercised
|
|
22.31
|
|
(2,731
|
)
|
Balance at March 31, 2008
|
|
$
|
33.37
|
|
1,589,773
|
|
The SARs issued in 2008 had estimated fair values at grant date of
$2.2 million. The fair value of the
2008 SARs was estimated using a Black-Scholes option pricing model. Assumptions used in the model for the 2008
SARs were as follows: expected
volatility ranged from 16.4% to 22.1%, the risk-free interest rate ranged from
2.7% to 3.3%, a dividend rate of 2.1%, a 4.0% forfeiture rate, and the expected
exercise date ranged from 2013 to 2016.
The Company will pay an amount in stock equal to the difference between
the specified base price of the Companys Common Stock and the market value at
the exercise date for each SAR.
Additionally during 2008, the Company issued 13,100 restricted stock
units at an average fair value of $39.07 per unit. These awards, with a total fair value of
$0.5 million, vest ten years after the date of grant.
5.
DEFINED
BENEFIT PENSION PLAN AND UNFUNDED EXCESS BENEFITS PLAN
Components of the net periodic benefit cost of the Companys defined
benefit pension plan and unfunded excess benefits plan are as follows:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Dollars In Thousands)
|
|
|
|
|
|
|
|
Service cost - Benefits earned during the
period
|
|
$
|
2,907
|
|
$
|
2,625
|
|
Interest cost on projected benefit
obligations
|
|
3,125
|
|
2,540
|
|
Expected return on plan assets
|
|
(3,469
|
)
|
(2,893
|
)
|
Amortization of prior service cost
|
|
66
|
|
53
|
|
Amortization of actuarial losses
|
|
1,009
|
|
849
|
|
Net periodic benefit cost
|
|
$
|
3,638
|
|
$
|
3,174
|
|
The Company has not yet determined the amount, if any, that it will
contribute to its defined benefit pension plan during 2008. As of March 31, 2008, no contributions
have been made to the defined benefit pension plan.
In addition to pension benefits, the Company provides limited
healthcare benefits and life insurance benefits to eligible retirees who are
not yet eligible for Medicare. The cost
of these plans for the three months ended March 31, 2008 and 2007 was
immaterial to the Companys financial position.
13
6.
EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the
weighted-average number of common shares outstanding during the period,
including shares issuable under various deferred compensation plans. Diluted earnings per share is computed
by dividing net income by the weighted-average number of common shares and
dilutive potential common shares outstanding during the period, including
shares issuable under various stock-based compensation plans and stock purchase
contracts.
A reconciliation of the numerators and denominators of the basic and
diluted earnings per share is presented below:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Dollars In Thousands, Except Per Share Amounts)
|
|
Calculation
of basic earnings per share:
|
|
|
|
|
|
Net income
|
|
$
|
35,882
|
|
$
|
90,583
|
|
|
|
|
|
|
|
Average share issued and outstanding
|
|
70,100,334
|
|
69,996,445
|
|
Issuable under various deferred
compensation plans
|
|
980,369
|
|
1,021,217
|
|
Weighted shares outstanding - Basic
|
|
71,080,703
|
|
71,017,662
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.50
|
|
$
|
1.28
|
|
|
|
|
|
|
|
Calculation
of diluted earnings per share:
|
|
|
|
|
|
Net income
|
|
$
|
35,882
|
|
$
|
90,583
|
|
|
|
|
|
|
|
Weighted shares outstanding - Basic
|
|
71,080,703
|
|
71,017,662
|
|
Stock appreciation rights (SARs)
(a)
|
|
178,618
|
|
264,585
|
|
Issuable under various other stock-based
compensation plans
|
|
194,503
|
|
204,816
|
|
Weighted shares outstanding - Diluted
|
|
71,453,824
|
|
71,487,063
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.50
|
|
$
|
1.27
|
|
(a)
Excludes 717,845 and 385,720 SARs as
of March 31, 2008 and 2007, respectively, that are antidilutive. In the
event the average market price exceeds the issue price of the SARs, such right
would be dilutive to the Companys earnings per share and will be included in
the Companys calculation of the diluted average shares outstanding.
14
7.
COMPREHENSIVE INCOME
The following table sets forth the Companys comprehensive income
(loss) for the periods presented below:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Dollars In Thousands)
|
|
Net income
|
|
$
|
35,882
|
|
$
|
90,583
|
|
Change in net unrealized gains on
investments, net of income tax:
|
|
|
|
|
|
(three months: 2008 - ($155,582); 2007 -
$16,330)
|
|
(282,781
|
)
|
29,782
|
|
Change in accumulated gain-hedging, net of
income tax:
|
|
|
|
|
|
(three months: 2008 - ($5,945); 2007 -
$1,247)
|
|
(10,708
|
)
|
2,254
|
|
Reclassification adjustment for amounts
included in net income, net of income tax:
|
|
|
|
|
|
(three months: 2008 - ($3,031); 2007 -
$(3,571))
|
|
(5,510
|
)
|
(6,513
|
)
|
Reclassification adjustment for hedging
amounts included in net income, net of income tax:
|
|
|
|
|
|
(three months: 2008 - $263; 2007 - $0)
|
|
(736
|
)
|
|
|
Comprehensive income (loss)
|
|
$
|
(263,853
|
)
|
$
|
116,106
|
|
8.
OPERATING SEGMENTS
The Company operates several business segments each having a strategic
focus. An operating segment is generally
distinguished by products and/or channels of distribution. A brief description of each segment follows.
·
The Life Marketing segment markets level premium
term insurance (traditional), universal life (UL), variable universal life
and BOLI products on a national basis primarily through networks of independent
insurance agents and brokers, stockbrokers, and independent marketing
organizations.
·
The Acquisitions segment focuses on acquiring,
converting, and servicing policies acquired from other companies. The segments primary focus is on life
insurance policies and annuity products that were sold to individuals.
·
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 independent agents and brokers.
·
The Stable Value Products segment sells guaranteed
funding agreements to special purpose entities that in turn issue notes or
certificates in smaller, transferable denominations. The segment also markets fixed and floating
rate funding agreements directly to the trustees of municipal bond proceeds,
institutional investors, bank trust departments, and money market funds. Additionally, the segment markets guaranteed
investment contracts (GICs) to 401(k) and other qualified retirement
savings plans.
·
The Asset Protection segment primarily markets
extended service contracts and credit life and disability insurance to protect
consumers investments in automobiles, watercraft, and recreational
vehicles. In addition, the segment
markets a guaranteed asset protection product and an inventory protection
product.
·
The Corporate and Other segment primarily consists
of net investment income and expenses not attributable to the segments above
(including net investment income on capital and interest on debt). This segment also includes earnings from
several non-strategic lines of business (primarily cancer insurance, residual
value insurance, surety insurance, and group annuities), various
investment-related transactions, and the operations of several small subsidiaries.
15
The Company
uses the same accounting policies and procedures to measure segment operating
income and assets as it uses to measure consolidated net income and
assets. Segment operating income is
generally income before income tax excluding net realized investment gains and
losses (net of the related amortization of DAC/VOBA and participating income
from real estate ventures), and the cumulative effect of change in accounting
principle. Periodic settlements of
derivatives associated with corporate debt and certain investments and annuity
products are included in realized gains and losses but are considered part of
operating income because the derivatives are used to mitigate risk in items
affecting consolidated and segment operating income. Segment operating income represents the basis
on which the performance of the Companys business is internally assessed by
management. Premiums and policy fees,
other income, benefits and settlement expenses, and amortization of DAC/VOBA
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
that most appropriately reflects the operations of that segment. Investments and other assets are allocated
based on statutory policy liabilities, while DAC/VOBA and goodwill are shown in
the segments to which they are attributable.
There were no
significant intersegment transactions.
The following
tables summarize financial information for the Companys segments. Asset adjustments represent the inclusion of
assets related to discontinued operations:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Dollars In Thousands)
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
Life Marketing
|
|
$
|
260,919
|
|
$
|
270,539
|
|
Acquisitions
|
|
205,635
|
|
231,704
|
|
Annuities
|
|
82,260
|
|
73,754
|
|
Stable Value Products
|
|
83,794
|
|
80,526
|
|
Asset Protection
|
|
72,933
|
|
80,023
|
|
Corporate and Other
|
|
10,063
|
|
49,951
|
|
Total revenues
|
|
$
|
715,604
|
|
$
|
786,497
|
|
|
|
|
|
|
|
Segment Operating Income
|
|
|
|
|
|
Life Marketing
|
|
$
|
46,449
|
|
$
|
65,280
|
|
Acquisitions
|
|
33,576
|
|
32,249
|
|
Annuities
|
|
2,489
|
|
5,606
|
|
Stable Value Products
|
|
16,216
|
|
12,186
|
|
Asset Protection
|
|
9,852
|
|
10,084
|
|
Corporate and Other
|
|
(29,973
|
)
|
1,777
|
|
Total segment operating income
|
|
78,609
|
|
127,182
|
|
|
|
|
|
|
|
Realized investment gains (losses) -
investments
(1)
|
|
(29,119
|
)
|
8,948
|
|
Realized investment gains (losses) -
derivatives
(2)
|
|
4,099
|
|
(2,802
|
)
|
Income tax expense
|
|
(17,707
|
)
|
(42,745
|
)
|
Net income
|
|
$
|
35,882
|
|
$
|
90,583
|
|
(1)
Realized investment gains (losses) - investments
|
|
$
|
(28,045
|
)
|
$
|
13,294
|
|
Less:
participating income from real estate ventures
|
|
|
|
3,150
|
|
Less: related amortization of DAC
|
|
1,074
|
|
1,196
|
|
|
|
$
|
(29,119
|
)
|
$
|
8,948
|
|
|
|
|
|
|
|
(2)
Realized investment gains (losses) - derivatives
|
|
$
|
(1,657
|
)
|
$
|
(2,291
|
)
|
Less: settlements on certain interest
rate swaps
|
|
484
|
|
257
|
|
Less:
derivative activity related to certain annuities
|
|
(6,240
|
)
|
254
|
|
|
|
$
|
4,099
|
|
$
|
(2,802
|
)
|
16
|
|
Operating Segment Assets
|
|
|
|
March 31, 2008
|
|
|
|
(Dollars In Thousands)
|
|
|
|
Life
|
|
|
|
|
|
Stable Value
|
|
|
|
Marketing
|
|
Acquisitions
|
|
Annuities
|
|
Products
|
|
|
|
|
|
|
|
|
|
|
|
Investments and other assets
|
|
$
|
10,228,632
|
|
$
|
11,046,126
|
|
$
|
7,786,736
|
|
$
|
5,193,945
|
|
Deferred policy acquisition costs and value
of business acquired
|
|
2,146,665
|
|
959,841
|
|
250,465
|
|
17,047
|
|
Goodwill
|
|
10,192
|
|
44,147
|
|
|
|
|
|
Total assets
|
|
$
|
12,385,489
|
|
$
|
12,050,114
|
|
$
|
8,037,201
|
|
$
|
5,210,992
|
|
|
|
Asset
|
|
Corporate
|
|
|
|
Total
|
|
|
|
Protection
|
|
and Other
|
|
Adjustments
|
|
Consolidated
|
|
Investments and other assets
|
|
$
|
1,325,372
|
|
$
|
2,522,877
|
|
$
|
29,566
|
|
$
|
38,133,254
|
|
Deferred policy acquisition costs and value
of business acquired
|
|
119,701
|
|
5,552
|
|
|
|
3,499,271
|
|
Goodwill
|
|
62,059
|
|
83
|
|
|
|
116,481
|
|
Total assets
|
|
$
|
1,507,132
|
|
$
|
2,528,512
|
|
$
|
29,566
|
|
$
|
41,749,006
|
|
|
|
Operating Segment Assets
|
|
|
|
December 31, 2007
|
|
|
|
(Dollars In Thousands)
|
|
|
|
Life
|
|
|
|
|
|
Stable Value
|
|
|
|
Marketing
|
|
Acquisitions
|
|
Annuities
|
|
Products
|
|
Investments and other assets
|
|
$
|
9,830,156
|
|
$
|
11,218,519
|
|
$
|
7,732,288
|
|
$
|
5,035,479
|
|
Deferred policy acquisition costs and value
of business acquired
|
|
2,071,508
|
|
950,174
|
|
221,516
|
|
16,359
|
|
Goodwill
|
|
10,192
|
|
44,741
|
|
|
|
|
|
Total assets
|
|
$
|
11,911,856
|
|
$
|
12,213,434
|
|
$
|
7,953,804
|
|
$
|
5,051,838
|
|
|
|
Asset
|
|
Corporate
|
|
|
|
Total
|
|
|
|
Protection
|
|
and Other
|
|
Adjustments
|
|
Consolidated
|
|
Investments and other assets
|
|
$
|
1,360,218
|
|
$
|
3,063,927
|
|
$
|
27,595
|
|
$
|
38,268,182
|
|
Deferred policy acquisition costs and value
of business acquired
|
|
140,568
|
|
368
|
|
|
|
3,400,493
|
|
Goodwill
|
|
62,350
|
|
83
|
|
|
|
117,366
|
|
Total assets
|
|
$
|
1,563,136
|
|
$
|
3,064,378
|
|
$
|
27,595
|
|
$
|
41,786,041
|
|
9.
GOODWILL
During the
three months ended March 31, 2008, the Company decreased its goodwill
balance by approximately $0.9 million. The decrease was due to a $0.6 million
decrease in the Acquisitions segment related to tax benefits realized during
the first three months of 2008 on the portion of tax goodwill in excess of GAAP
basis goodwill, and a $0.3 million decrease in the Asset Protection segment
related to the sale of a small insurance subsidiary. As of March 31, 2008, the Company had an
aggregate goodwill balance of $116.5 million.
17
10.
FAIR VALUE OF FINANCIAL
INSTRUMENTS
Effective January 1,
2008, the Company determined the fair value of its financial instruments based
on the fair value hierarchy established in SFAS No. 157 which requires an
entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value.
In compliance
with SFAS No. 157, the Company has categorized its financial instruments,
based on the priority of the inputs to the valuation technique, into a three
level hierarchy. The fair value hierarchy gives the highest priority to quoted
prices in active markets for identical assets or liabilities (Level 1) and the
lowest priority to unobservable inputs (Level 3). If the inputs used to measure
fair value fall within different levels of the hierarchy, the category level is
based on the lowest priority level input that is significant to the fair value
measurement of the instrument.
Financial
assets and liabilities recorded at fair value on the Consolidated Balance
Sheets are categorized as follows:
·
Level 1.
Unadjusted quoted prices for identical assets or liabilities in an active
market.
·
Level 2.
Quoted
prices in markets that are not active or significant inputs that are observable
either directly or indirectly. Level 2 inputs include the following:
a)
Quoted
prices for similar assets or liabilities in active markets
b)
Quoted
prices for identical or similar assets or liabilities in non-active markets
c)
Inputs
other than quoted market prices that are observable
d)
Inputs
that are derived principally from or corroborated by observable market data
through correlation or other means.
·
Level 3.
Prices
or valuation techniques that require inputs that are both unobservable and
significant to the overall fair value measurement. They reflect managements
own assumptions about the assumptions a market participant would use in pricing
the asset or liability.
As a result of
the adoption of SFAS No. 157, the Company recognized the following
adjustment to opening retained earnings for its Equity Indexed Annuities that
were previously accounted for under SFAS No. 155:
|
|
Carrying
|
|
Carrying
|
|
|
|
|
|
Value
|
|
Value
|
|
Transition
|
|
|
|
Prior to
|
|
After
|
|
Adjustment to
|
|
|
|
Adoption
|
|
Adoption
|
|
Retained Earnings
|
|
|
|
January 1, 2008
|
|
January 1, 2008
|
|
gain (loss)
|
|
|
|
(Dollars In Thousands)
|
|
|
|
|
|
|
|
|
|
Equity-indexed annuity reserves, net
|
|
$
|
145,912
|
|
$
|
143,634
|
|
$
|
2,278
|
|
Pre-tax cumulative effect of adoption of SFAS
No. 157
|
|
|
|
|
|
2,278
|
|
Change in deferred income taxes
|
|
|
|
|
|
(808
|
)
|
Cumulative effect of adoption of SFAS
No. 157
|
|
|
|
|
|
$
|
1,470
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition,
the Company recognized a transition adjustment for the embedded derivative
liability related to annuities with guaranteed minimum withdrawal
benefits. The impact of this adjustment,
net of DAC amortization, reduced income before income taxes by $0.4 million for
the three months ended March 31, 2008.
18
The following
table presents the Companys hierarchy for its assets and liabilities measured
at fair value on a recurring basis as of March 31, 2008:
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
(Dollars In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities - available for
sale
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
|
|
$
|
6,462,318
|
|
$
|
1,177,436
|
|
$
|
7,639,754
|
|
US government and authorities
|
|
85,215
|
|
|
|
|
|
85,215
|
|
State, municipalities and political subdivisions
|
|
|
|
53,409
|
|
9,285
|
|
62,694
|
|
Public utilities
|
|
|
|
1,476,244
|
|
176,531
|
|
1,652,775
|
|
All other corporate bonds
|
|
|
|
7,646,938
|
|
2,287,735
|
|
9,934,673
|
|
Redeemable preferred stocks
|
|
|
|
83
|
|
|
|
83
|
|
Convertible bonds with warrants
|
|
|
|
|
|
38
|
|
38
|
|
Total fixed maturity securities - available
for sale
|
|
85,215
|
|
15,638,992
|
|
3,651,025
|
|
19,375,232
|
|
Fixed maturity securities - trading
|
|
232,525
|
|
3,000,360
|
|
559,784
|
|
3,792,669
|
|
Total fixed maturity securities
|
|
317,740
|
|
18,639,352
|
|
4,210,809
|
|
23,167,901
|
|
Equity securities
|
|
280,873
|
|
|
|
8,434
|
|
289,307
|
|
Other long-term investments
(1)
|
|
|
|
18,445
|
|
8,460
|
|
26,905
|
|
Short-term investments
|
|
775,725
|
|
345,413
|
|
|
|
1,121,138
|
|
Total investments
|
|
1,374,338
|
|
19,003,210
|
|
4,227,703
|
|
24,605,251
|
|
Cash
|
|
117,933
|
|
|
|
|
|
117,933
|
|
Other assets
|
|
5,580
|
|
|
|
|
|
5,580
|
|
Assets related to separate acccounts
|
|
|
|
|
|
|
|
|
|
Variable annuity
|
|
2,686,752
|
|
|
|
|
|
2,686,752
|
|
Variable universal life
|
|
324,355
|
|
|
|
|
|
324,355
|
|
Total assets measured at fair value on a
recurring basis
|
|
$
|
4,508,958
|
|
$
|
19,003,210
|
|
$
|
4,227,703
|
|
$
|
27,739,871
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annuity account balances
(2)
|
|
$
|
|
|
$
|
|
|
$
|
146,017
|
|
$
|
146,017
|
|
Other liabilities
(1)(3)
|
|
14,176
|
|
414,888
|
|
18,091
|
|
447,155
|
|
Total liabilities measured at fair value on
a recurring basis
|
|
$
|
14,176
|
|
$
|
414,888
|
|
$
|
164,108
|
|
$
|
593,172
|
|
(1)
Includes
certain freestanding and embedded derivatives
(2)
Represents
liabilities related to equity indexed annuities
(3)
Includes
liabilities under our securities lending program
19
The following
table presents a reconciliation of the beginning and ending balances for fair
value measurements for which we have used significant unobservable inputs
(Level 3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included in
|
|
|
|
|
|
Total Realized and Unrealized
|
|
|
|
|
|
|
|
Earnings
|
|
|
|
|
|
Gains (losses)
|
|
|
|
|
|
|
|
related to
|
|
|
|
|
|
|
|
Included in
|
|
Purchases,
|
|
|
|
|
|
Instruments
|
|
|
|
|
|
|
|
Other
|
|
Issuances, and
|
|
Transfers in
|
|
|
|
still held at
|
|
|
|
Beginning
|
|
Included in
|
|
Comprehensive
|
|
Settlements
|
|
and/or out of
|
|
Ending
|
|
the Reporting
|
|
|
|
Balance
|
|
Earnings
|
|
Income
|
|
(net)
|
|
Level 3
|
|
Balance
|
|
Date
|
|
|
|
(Dollars In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities - available for
sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
1,240,268
|
|
|
|
(97,018
|
)
|
34,186
|
|
|
|
1,177,436
|
|
|
|
State, municipalities and political subdivisions
|
|
9,118
|
|
|
|
168
|
|
(1
|
)
|
|
|
9,285
|
|
|
|
Public utilities
|
|
176,473
|
|
|
|
210
|
|
(152
|
)
|
|
|
176,531
|
|
|
|
All other corporate bonds
|
|
2,213,739
|
|
|
|
(43,074
|
)
|
117,070
|
|
|
|
2,287,735
|
|
|
|
Convertible bonds with warrants
|
|
227
|
|
|
|
(47
|
)
|
(142
|
)
|
|
|
38
|
|
|
|
Total fixed maturity securities - available
for sale
|
|
3,639,825
|
|
|
|
(139,761
|
)
|
150,961
|
|
|
|
3,651,025
|
|
|
|
Fixed maturity securities - trading
|
|
711,399
|
|
(13,505
|
)
|
|
|
(138,110
|
)
|
|
|
559,784
|
|
(11,450
|
)
|
Total fixed maturity securities
|
|
4,351,224
|
|
(13,505
|
)
|
(139,761
|
)
|
12,851
|
|
|
|
4,210,809
|
|
(11,450
|
)
|
Equity securities
|
|
8,506
|
|
|
|
(72
|
)
|
|
|
|
|
8,434
|
|
|
|
Other long-term investments
(1)
|
|
2,862
|
|
5,598
|
|
|
|
|
|
|
|
8,460
|
|
5,598
|
|
Total investments
|
|
4,362,592
|
|
(7,907
|
)
|
(139,833
|
)
|
12,851
|
|
|
|
4,227,703
|
|
(5,852
|
)
|
Total assets measured at fair value on a
recurring basis
|
|
$
|
4,362,592
|
|
$
|
(7,907
|
)
|
$
|
(139,833
|
)
|
$
|
12,851
|
|
$
|
|
|
$
|
4,227,703
|
|
$
|
(5,852
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annuity account balances
(2)
|
|
$
|
143,634
|
|
$
|
(1,726
|
)
|
$
|
|
|
$
|
(657
|
)
|
$
|
|
|
146,017
|
|
$
|
(1,726
|
)
|
Other liabilities
(1)
|
|
39,675
|
|
21,584
|
|
|
|
|
|
|
|
18,091
|
|
21,584
|
|
Total liabilities measured at fair value on
a recurring basis
|
|
$
|
183,309
|
|
$
|
19,858
|
|
$
|
|
|
$
|
(657
|
)
|
$
|
|
|
$
|
164,108
|
|
$
|
19,858
|
|
(1)
Represents certain freestanding
and embedded derivatives
(2)
Represents liabilities related to
equity indexed annuities
Total realized
and unrealized gains (losses) on Level 3 assets and liabilities are primarily
reported in either realized investment gains (losses) within the consolidated
statements of income or other comprehensive income (loss) within shareowners
equity based on the appropriate accounting treatment for the item.
Purchases,
sales, issuances and settlements, net, represent the activity that occurred
during the period that results in a change of the asset or liability but does
not represent changes in fair value for the instruments held at the beginning
of the period. Such activity primarily relates to purchases and sales of fixed
maturity securities, and issuances and settlements of equity indexed annuities
accounted for under SFAS No. 155.
The Company
reviews the fair value hierarchy classifications each reporting period. Changes
in the observability of the valuation attributes may result in a
reclassification of certain financial assets or liabilities. Such reclassifications are reported as
transfers in and out of Level 3 at the beginning fair value for the reporting
period in which the changes occur.
The amount of
total gains (losses) for assets and liabilities still held as of the reporting
date primarily represents changes in fair value of trading securities and
certain derivatives that exist as of the reporting date, and the change in fair
value of equity indexed annuities accounted for under SFAS No. 155.
20
11.
SUBSEQUENT
EVENT
On April 16,
2008, the Company entered into a Second Amended and Restated Credit Agreement
(the Credit Agreement) among the Company, Protective Life Insurance Company (PLICO),
the Several Lenders from time to time party thereto, and Regions Bank, as
Administrative Agent, to increase the commitment to a maximum principal amount
of $500 million (the New Credit Facility). The Company and PLICO have the
right in certain circumstances to request that the commitment under the New
Credit Facility be increased up to a maximum principal amount of $600 million.
Balances outstanding under the New Credit Facility will accrue interest at a
rate equal to (i) either the prime rate or the London Interbank Offered
Rate (LIBOR), plus (ii) a spread based on the ratings of the Companys
senior unsecured long-term debt. The Credit Agreement provides that the Company
is liable for the full amount of any obligations for borrowings or letters of
credit, including those of PLICO, under the New Credit Facility. The maturity
date on the New Credit Facility is April 16, 2013. On March 31, 2008,
the Company had $20 million outstanding under its existing $200 million
revolving line of credit due July 30, 2009 (the Existing Credit Facility).
The Company paid the outstanding balance under the Existing Credit Facility in
full on April 16, 2008. There is currently no balance outstanding under
the New Credit Facility. In addition, the Company was in compliance with all
financial debt covenants as of March 31, 2008.
12.
INCOME
TAXES
There have
been no material changes to the balance of unrecognized income tax benefits
which impacted earnings for the first three months ended March 31, 2008.
The Company expects that the IRS will soon complete its examination of the
Companys 2004 and 2005 federal income tax returns. The Company does not expect
to have any material adjustments, within the next twelve months, to its balance
of unrecognized income tax benefits in any of the tax jurisdictions in which it
conducts its business operations.
21
Item 2.
Managements Discussion and Analysis of Financial Condition and Results
of Operations
The following
Managements Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) should be read in conjunction with our consolidated
condensed financial statements included under Part I, Item 1,
Financial Statements (Unaudited)
, of this Quarterly
Report on Form 10-Q and our audited consolidated financial statements for
the year ended December 31, 2007 included in our Annual Report on Form
10-K.
FORWARD-LOOKING
STATEMENTS CAUTIONARY LANGUAGE
This report
reviews our financial condition and results of operations including our
liquidity and capital resources.
Historical information is presented and discussed and where appropriate,
factors that may affect future financial performance are also identified and
discussed. Certain statements made in
this report include forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements include any
statement that may predict, forecast, indicate or imply future results,
performance or achievements instead of historical facts and may contain words
like believe, expect, estimate, project, budget, forecast,
anticipate, plan, will, shall, may, and other words, phrases, or
expressions with similar meaning.
Forward-looking statements involve risks and uncertainties, which may
cause actual results to differ materially from the results contained in the
forward-looking statements, and we 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.
For a more
complete understanding of our business and current period results, please read
the following Managements Discussion and Analysis of Financial Condition and
Results of Operations in conjunction with our latest Annual Report on
Form 10-K and other filings with the United States Securities and Exchange
Commission (the SEC).
OVERVIEW
Our business
We are a holding company headquartered in Birmingham, Alabama, whose
subsidiaries provide financial services through the production, distribution,
and administration of insurance and investment products. Founded in 1907, Protective Life Insurance
Company is our largest operating subsidiary.
Unless the context otherwise requires, we, us, or our refers to
the consolidated group of Protective Life Corporation and our subsidiaries.
We operate several business segments, each having a strategic
focus. An operating segment is
generally distinguished by products and/or channels of distribution. We periodically evaluate our operating
segments in light of the segment reporting requirements prescribed by the
Financial Accounting Standards Board (FASB) Statement No. 131,
Disclosures about Segments of an Enterprise and Related Information
(SFAS No. 131)
, and makes adjustments to our segment reporting as
needed.
Our operating segments are Life Marketing, Acquisitions, Annuities,
Stable Value Products, Asset Protection, and Corporate and Other.
·
Life Marketing
-
We market level premium term insurance
(traditional life), universal life (UL), variable universal life, and
bank owned life insurance (BOLI) products on a national basis primarily
through networks of independent insurance agents and brokers, stockbrokers, and
independent marketing organizations.
·
Acquisitions
- We focus on
acquiring, converting, and servicing policies acquired from other
companies. The segment's primary focus
is on life insurance policies and annuity products sold to individuals. In the ordinary course of business, the
Acquisitions segment regularly considers acquisitions of blocks of policies or
smaller insurance companies. The level
of the segments acquisition activity is predicated upon many factors,
including available capital, operating capacity, and market dynamics. Policies acquired through the Acquisition
segment are typically closed blocks of business (no new policies are being
marketed). Therefore, earnings and
account values are expected
22
to
decline as the result of lapses, deaths, and other terminations of coverage
unless new acquisitions are made.
·
Annuities
- We manufacture, sell,
and support fixed and variable annuity products. These products are primarily sold through
broker-dealers, but are also sold through financial institutions and
independent agents and brokers.
·
Stable Value Products
- We sell
guaranteed funding agreement (GFAs) to special purpose entities that in
turn issue notes or certificates in smaller, transferable denominations. The segment also markets fixed and floating
rate funding agreements directly to the trustees of municipal bond proceeds,
institutional investors, bank trust departments, and money market funds. Additionally, the segment markets guaranteed
investment contracts (GICs) to 401(k) and other qualified retirement savings plans.
·
Asset Protection
- We primarily
market extended service contracts and credit life and disability insurance to
protect consumers investments in automobiles, watercraft, and recreational
vehicles. In addition, the segment
markets a guaranteed asset protection (GAP) product and an inventory
protection product (IPP).
·
Corporate and Other
- This segment
primarily consists of net investment income and expenses not attributable to
the segments above (including net investment income on capital and interest on
debt). This segment also includes
earnings from several non-strategic lines of business (primarily cancer
insurance, residual value insurance, surety insurance, and group annuities),
various investment-related transactions, and the operations of several small
subsidiaries.
EXECUTIVE
SUMMARY
Operating
earnings were lower for the first three months of 2008 compared to the first
three months of 2007, primarily due to mark-to-market losses on a trading
portfolio of approximately $19.4 million resulting primarily from the current
volatility and depressed credit and equity markets. However, due to our assessment and the nature
of the investments, we do not expect to experience significant long term losses
related to these financial instruments.
Additionally, the Annuities segments operating earnings decline was
primarily due to $5.7 million of mark-to-market losses, net of DAC
amortization, on the equity indexed annuity product line and on embedded
derivatives associated with the variable annuity Guaranteed Minimum Withdrawal
Benefit (GMWB) rider.
We experienced
realized losses of $29.1 million during the first three months of 2008, versus
realized gains of $11.0 million in the first three months of 2007. The losses
recognized during the first three months of 2008 were caused primarily by
current volatility and depressed credit and equity markets. A significant
portion of the losses were due to mark-to-market adjustments related to various
derivative instruments.
The interest
rate and credit environment continues to present a significant challenge.
Historically low interest rates and market illiquidity continued to create
challenges for our products that generate investment spread profits, such as
fixed annuities and stable value contracts.
However, active management of crediting rates on these products allowed
us to minimize spread compression effects and strong sales allowed us to take
advantage of wider credit spreads on investments.
Despite tightened capital
market conditions, we were able to enter into an amended and restated credit
agreement on April 16, 2008, which increased our access to short term borrowing
funds to $500 million from $200 million.
See Note 11,
Subsequent Event,
to
the Consolidated Condensed Financial Statements for additional information.
Strong
competitive pressures on pricing, particularly in our life insurance business,
continued to present a challenge from a new sales perspective. However, our continued focus on delivering
value to consumers and broadening our base of distribution allowed for solid
product sales during the quarter.
Additionally, as a result of current market conditions and to optimize
profit emergence and returns on capital, we expect to place a greater strategic
emphasis on universal life sales.
23
Current costs
of reinsurance continue to present challenges from both a new product pricing
and capital management perspective. In
response to these challenges, during 2005 we reduced our reliance on reinsurance
by changing from coinsurance to yearly renewable term reinsurance and increased
the maximum amount retained on any one life from $500,000 to $1,000,000 on
certain of our newly written traditional life products. During the first three months of 2008, we
increased our retention limit to $2,000,000 on certain newly written
traditional life products.
Significant financial information related to each of our segments is
included in
Results of Operations
.
KNOWN
TRENDS AND UNCERTAINTIES
The factors which
could affect our future results include, but are not limited to, general
economic conditions and the following known trends and uncertainties:
General
·
exposure to the
risks of natural disasters, pandemics, malicious and terrorist acts could
adversely affect our operations;
·
computer viruses
or network security breaches could affect our data processing systems or those
of our business partners and could damage our business and adversely affect our
financial condition and results of operations;
·
actual
experience may differ from management's assumptions and estimates and
negatively affect our results;
·
we may not
realize our anticipated financial results from our acquisitions strategy;
·
we
may not be able to achieve the expected results from our recent
acquisitions;
·
we are dependent
on the performance of others;
·
our risk
management policies and procedures may leave us exposed to unidentified or
unanticipated risk, which could negatively affect our business or result in
losses;
Financial
environment
·
interest rate
fluctuations could negatively affect our spread income or otherwise impact our
business;
·
our investments
are subject to market and credit risks;
·
equity market
volatility could negatively impact our business;
·
credit market
volatility or the inability to access financing solutions could adversely
impact our financial condition or results from operations;
·
our ability to
grow depends in large part upon the continued availability of capital;
·
we could be
forced to sell investments at a loss to cover policyholder withdrawals;
Industry
·
insurance
companies are highly regulated and subject to numerous legal restrictions and
regulations;
·
changes to tax
law or interpretations of existing tax law could adversely affect our ability
to compete with non-insurance products or reduce the demand for certain
insurance products;
·
financial
services companies are frequently the targets of litigation, including class
action litigation, which could result in substantial judgments;
·
publicly held
companies in general and the financial services industry in particular are
sometimes the target of law enforcement investigations and the focus of
increased regulatory scrutiny;
·
new accounting
rules or changes to existing accounting rules could negatively impact us;
·
reinsurance
introduces variability in our statements of income;
·
our reinsurers
could fail to meet assumed obligations, increase rates or be subject to adverse
developments that could affect us;
·
fluctuating
policy claims from period to period resulting in earnings volatility;
24
Competition
·
operating in a
mature, highly competitive industry could limit our ability to gain or maintain
our position in the industry and negatively affect profitability;
·
our ability to
maintain competitive unit costs is dependent upon the level of new sales and
persistency of existing business; and
·
a ratings
downgrade could adversely affect our ability to compete.
RESULTS
OF OPERATIONS
In the following discussion, segment operating income is defined as
income before income tax excluding net realized investment gains and losses
(net of the related amortization of deferred policy acquisition
costs (DAC) and value of business acquired (VOBA) and participating
income from real estate ventures), and the cumulative effect of change in
accounting principle. Periodic
settlements of derivatives associated with corporate debt and certain
investments and annuity products are included in realized gains and losses but
are considered part of segment operating income because the derivatives are
used to mitigate risk in items affecting segment operating income. Management believes that segment operating
income provides relevant and useful information to investors, as it represents
the basis on which the performance of our business is internally assessed. Although the items excluded from segment
operating income may be significant components in understanding and assessing
our overall financial performance, management believes that segment operating
income enhances an investors understanding of our results of operations by
highlighting the income (loss) attributable to the normal, recurring operations
of our business. However, segment
operating income should not be viewed as a substitute for accounting principles
generally accepted in the United States of America (U.S. GAAP) net
income. In addition, our segment
operating income measures may not be comparable to similarly titled measures
reported by other companies.
The following
table presents a summary of results and reconciles segment operating income to
consolidated net income:
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
(Dollars In Thousands)
|
|
|
|
Segment Operating Income
|
|
|
|
|
|
|
|
Life Marketing
|
|
$
|
46,449
|
|
$
|
65,280
|
|
(28.8
|
)%
|
Acquisitions
|
|
33,576
|
|
32,249
|
|
4.1
|
|
Annuities
|
|
2,489
|
|
5,606
|
|
(55.6
|
)
|
Stable Value Products
|
|
16,216
|
|
12,186
|
|
33.1
|
|
Asset Protection
|
|
9,852
|
|
10,084
|
|
(2.3
|
)
|
Corporate and Other
|
|
(29,973
|
)
|
1,777
|
|
|
|
Total segment operating income
|
|
78,609
|
|
127,182
|
|
(38.2
|
)
|
Realized investment gains (losses) -
investments
(1)
|
|
(29,119
|
)
|
8,948
|
|
|
|
Realized investment gains (losses) -
derivatives
(2)
|
|
4,099
|
|
(2,802
|
)
|
|
|
Income tax expense
|
|
(17,707
|
)
|
(42,745
|
)
|
|
|
Net income
|
|
$
|
35,882
|
|
$
|
90,583
|
|
(60.4
|
)
|
(1)
Realized investment
gains (losses) - investments
|
|
$
|
(28,045
|
)
|
$
|
13,294
|
|
|
|
Less:
participating income from real estate ventures
|
|
|
|
3,150
|
|
|
|
Less:
related amortization of DAC
|
|
1,074
|
|
1,196
|
|
|
|
|
|
$
|
(29,119
|
)
|
$
|
8,948
|
|
|
|
|
|
|
|
|
|
|
|
(2)
Realized investment gains (losses) - derivatives
|
|
$
|
(1,657
|
)
|
$
|
(2,291
|
)
|
|
|
Less:
settlements on certain interest rate swaps
|
|
484
|
|
257
|
|
|
|
Less:
derivative activity related to certain annuities
|
|
(6,240
|
)
|
254
|
|
|
|
|
|
$
|
4,099
|
|
$
|
(2,802
|
)
|
|
|
25
Three Months Ended March 31,
2008 compared to Three Months Ended March 31, 2007
Net income for
the three months ended March 31, 2008 reflects a $48.6 million, or 38.2%,
decrease in segment operating income. The decrease was primarily related to a
$31.8 million decrease in operating earnings in the Corporate and Other segment
and an $18.8 million decrease in the Life Marketing segment. Changes in fair value related to the Corporate
and Other trading portfolio and the Annuities segment reduced operating
earnings by $26.0 million in the first three months of 2008. We experienced realized losses of $29.7
million during the first three months of 2008, versus realized gains of $11.0
million in the first three months of 2007. The losses recognized during the
first three months of 2008 were caused primarily by current volatility and
depressed credit and equity markets. A significant portion of the losses
related to mark-to-market adjustments related to various derivative
instruments.
·
Life Marketing
segment operating income was $46.5 million for the three months ended
March 31, 2008, representing a decrease of $18.8 million, or 28.8%, from the
three months ended March 31, 2007. The
decrease was primarily due to a $15.7 million gain recognized during the first
quarter of 2007 on the sale of the segments direct marketing subsidiary
combined with less favorable mortality results, partly offset by lower
insurance company operating expenses.
·
Acquisitions
segment operating income was $33.6 million and increased $1.3 million, or
4.1%, for the three months ended March 31, 2008 compared to the three months
ended March 31, 2007. The increase was
due primarily to lower operating expenses, partially offset by the expected
runoff of the acquired closed blocks.
·
Annuities
segment operating income was $2.5 million for the three months ended March 31,
2008, representing a decrease of $3.1 million, or 55.6%, compared to the three
months ended March 31, 2007. This
decline was primarily due to $5.7 million of mark-to-market losses, net of DAC
amortization, on the equity indexed annuity product line and on embedded
derivatives associated with the variable annuity GMWB rider.
·
Stable Value
Products segment operating income was $16.2 million and increased
$4.0 million, or 33.1%, for the three months ended March 31, 2008 compared
to the three months ended March 31, 2007.
The increase was the result of higher operating spreads, partially
offset by a decline in average account values.
·
Asset Protection segment operating
income was $9.9 million, representing a decrease of $0.2 million, or 2.3%,
for the three months ended March 31, 2008 compared to the three months ended
March 31, 2007. The decrease was
primarily the result of $1.5 million of lower IPP earnings in 2008 due to the
loss of a significant customer during the second quarter of 2007, and partially
offset by a $0.6 million gain from the sale of a small insurance subsidiary.
·
Corporate and Other segment operating
income declined $31.8 million for the three months ended March 31, 2008,
compared to the three months ended March 31, 2007, due primarily to
mark-to-market adjustments on a $419 million portfolio of securities designated
for trading. This trading portfolio negatively impacted the first three months
of 2008 by approximately $19.4 million, a $20.1 million less favorable impact
than in the first three months of 2007.
In addition, the segment experienced lower participating income and higher
interest expense. The overall
performance of our investment portfolio continued to operate within our
expectations, with no significant credit issues in either the securities or
mortgage portfolio.
26
Life
Marketing
Segment results of operations
Segment results were as follows:
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
(Dollars In Thousands)
|
|
|
|
REVENUES
|
|
|
|
|
|
|
|
Gross premiums and policy fees
|
|
$
|
358,783
|
|
$
|
345,685
|
|
3.8
|
%
|
Reinsurance ceded
|
|
(207,865
|
)
|
(207,614
|
)
|
0.1
|
|
Net premiums and policy fees
|
|
150,918
|
|
138,071
|
|
9.3
|
|
Net investment income
|
|
84,956
|
|
81,103
|
|
4.8
|
|
Other income
|
|
25,045
|
|
51,365
|
|
(51.2
|
)
|
Total operating revenues
|
|
260,919
|
|
270,539
|
|
(3.6
|
)
|
BENEFITS AND EXPENSES
|
|
|
|
|
|
|
|
Benefits and settlement expenses
|
|
177,778
|
|
149,329
|
|
19.1
|
|
Amortization of deferred policy acquisition
costs
|
|
26,923
|
|
28,698
|
|
(6.2
|
)
|
Other operating expenses
|
|
9,769
|
|
27,232
|
|
(64.1
|
)
|
Total benefits and expenses
|
|
214,470
|
|
205,259
|
|
4.5
|
|
OPERATING INCOME
|
|
46,449
|
|
65,280
|
|
(28.8
|
)
|
INCOME BEFORE INCOME TAX
|
|
$
|
46,449
|
|
$
|
65,280
|
|
(28.8
|
)
|
27
The following
table summarizes key data for the Life Marketing segment:
|
|
Three Months Ended March 31,
|
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
(Dollars In Thousands)
|
|
|
|
Sales By Product
|
|
|
|
|
|
|
|
Traditional
|
|
$
|
27,008
|
|
$
|
33,492
|
|
(19.4
|
)%
|
Universal life
|
|
14,663
|
|
14,197
|
|
3.3
|
|
Variable universal life
|
|
1,604
|
|
1,828
|
|
(12.3
|
)
|
|
|
$
|
43,275
|
|
$
|
49,517
|
|
(12.6
|
)
|
Sales By Distribution Channel
|
|
|
|
|
|
|
|
Brokerage general agents
|
|
$
|
24,396
|
|
$
|
29,879
|
|
(18.4
|
)
|
Independent agents
|
|
8,852
|
|
8,328
|
|
6.3
|
|
Stockbrokers / banks
|
|
8,447
|
|
8,493
|
|
(0.5
|
)
|
BOLI / other
|
|
1,580
|
|
2,817
|
|
(43.9
|
)
|
|
|
$
|
43,275
|
|
$
|
49,517
|
|
(12.6
|
)
|
Average Life Insurance In-force
(1)
|
|
|
|
|
|
|
|
Traditional
|
|
$
|
464,731,437
|
|
$
|
409,159,975
|
|
13.6
|
|
Universal life
|
|
52,808,052
|
|
51,478,248
|
|
2.6
|
|
|
|
$
|
517,539,489
|
|
$
|
460,638,223
|
|
12.4
|
|
Average Account Values
|
|
|
|
|
|
|
|
Universal life
|
|
$
|
5,202,790
|
|
$
|
4,860,730
|
|
7.0
|
|
Variable universal life
|
|
337,578
|
|
313,917
|
|
7.5
|
|
|
|
$
|
5,540,368
|
|
$
|
5,174,647
|
|
7.1
|
|
|
|
|
|
|
|
|
|
Traditional Life Mortality Experience
(2)
|
|
$
|
2,210
|
|
$
|
5,154
|
|
|
|
Universal Life Mortality Experience
(2)
|
|
$
|
567
|
|
$
|
669
|
|
|
|
(1)
Amounts are
not adjusted for reinsurance ceded.
(2)
Represents the
estimated pretax earnings impact resulting from mortality variances. Excludes
results related to the Chase Insurance Group which was acquired in the third
quarter of 2006 and excludes results related to the BOLI product line.
28
Operating expenses detail
Certain reclassifications have been made in the previously reported
amounts to make the prior period amounts comparable to those of the current
period. Such reclassifications had no
effect on previously reported total operating expenses. Other operating expenses for the segment were
as follows:
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
(Dollars In Thousands)
|
|
|
|
Insurance Companies:
|
|
|
|
|
|
|
|
First year commissions
|
|
$
|
53,512
|
|
$
|
58,505
|
|
(8.5
|
)%
|
Renewal commissions
|
|
9,151
|
|
8,719
|
|
5.0
|
|
First year ceding allowances
|
|
(5,529
|
)
|
(4,015
|
)
|
37.7
|
|
Renewal ceding allowances
|
|
(54,134
|
)
|
(53,748
|
)
|
0.7
|
|
General & administrative
|
|
40,533
|
|
45,158
|
|
(10.2
|
)
|
Taxes, licenses, and fees
|
|
7,063
|
|
7,896
|
|
(10.5
|
)
|
Other operating expenses incurred
|
|
50,596
|
|
62,515
|
|
(19.1
|
)
|
Less commissions, allowances & expenses
capitalized
|
|
(64,867
|
)
|
(70,131
|
)
|
(7.5
|
)
|
Other operating expenses
|
|
(14,271
|
)
|
(7,616
|
)
|
87.4
|
|
Marketing Companies:
|
|
|
|
|
|
|
|
Commissions
|
|
20,008
|
|
24,572
|
|
(18.6
|
)
|
Other operating expenses
|
|
4,032
|
|
10,276
|
|
(60.8
|
)
|
Other operating expenses
|
|
24,040
|
|
34,848
|
|
(31.0
|
)
|
Other operating expenses
|
|
$
|
9,769
|
|
$
|
27,232
|
|
(64.1
|
)
|
Three Months Ended March 31,
2008 compared to Three Months Ended March 31, 2007
Segment
operating income
Operating
income decreased $18.8 million, or 28.8%, for the three months ended March 31,
2008 compared to the three months ended March 31, 2007, primarily the result of
a $15.7 million gain recognized during the first quarter of 2007 on the sale of
the segments direct marketing subsidiary combined with less favorable
mortality results, partly offset by lower insurance company operating expenses.
Operating
revenues
Excluding the
$15.7 million gain on the sale of a subsidiary which is included in other
income, total revenues for the three months ended March 31, 2008 increased $6.1
million, or 2.4%, compared to the three months ended March 31, 2007. This increase was the result of growth of
life insurance in-force and growth in our traditional block leading to higher
net premiums and policy fees, offset by reduced other income due to the sales
of two non-insurance subsidiaries in 2007.
Net premiums
and policy fees
Net premiums
and policy fees increased by $12.8 million, or 9.3%, for the three months
ended March 31, 2008 compared to the three months ended March 31, 2007, due in
part to the growth in both traditional and universal life insurance in-force
achieved over the last several quarters combined with an increase in retention
levels on certain traditional life products.
Beginning in the third quarter of 2005, we reduced our reliance on
reinsurance by changing from coinsurance to yearly renewable term reinsurance
agreements and increased the maximum amount retained on any one life from
$500,000 to $1,000,000 on certain of our newly written traditional life
products (products written during the third quarter of 2005 and later.) In addition to increasing net premiums, this
change results in higher benefits and settlement expenses, and causes greater
variability in financial results due to fluctuations in mortality results. Our maximum retention level for newly issued
universal life products is generally $1,000,000. During 2008, we increased our retention limit
to $2,000,000 on certain of our traditional life products.
29
Net
investment income
Net investment
income in the segment increased $3.9 million, or 4.8%, for the three
months ended March 31, 2008 compared to the three months ended March 31,
2007. The increase reflects the growth
of the segment assets caused by growth related to traditional and universal
life products, partly offset by a decrease due to the funding of statutory
reserves required by Regulation XXX, as clarified by Actuarial
Guideline 38 (commonly known as AXXX). Our AXXX securitization transaction on
universal life products was effective in the third quarter of 2007. See the Recent Developments section for
additional information concerning AXXX requirements.
Other
income
Other income
decreased $26.3 million, or 51.2%, for the three months ended March 31,
2008 compared to the three months ended March 31, 2007. The decrease relates primarily to a
$15.7 million gain recognized on the sale of the segments direct
marketing subsidiary in the first quarter of 2007 and reduction of marketing
revenue after the sale of that subsidiary and another subsidiary in the fourth quarter
of 2007.
Benefits
and settlement expenses
Benefits and
settlement expenses were $28.4 million, or 19.1%, higher for the three months
ended March 31, 2008 than for the three months ended March 31, 2007, due to
growth in life insurance in-force, increased retention levels on certain newly
written traditional life products and higher credited interest on UL products
resulting from increases in account values. The estimated mortality impact on
earnings for the first quarter of 2008 related to traditional and universal
life products was a favorable $2.8 million, which was approximately
$3.0 million less favorable than the estimated mortality impact on
earnings for the first three months of 2007.
Amortization
of DAC
DAC
amortization decreased $1.8 million or 6.2% for the three months ended March
31, 2008 compared to the three months ending March 31, 2007. Increases in
amortization due to growth in the traditional block were offset by decreases in
universal life and BOLI amortization, mainly due to more favorable
retrospective DAC unlocking in 2008, as compared to the same period in 2007.
Other
operating expenses
Other
operating expenses decreased for the three months ended March 31, 2008 compared
to the three months ended March 31, 2007.
This decrease related to the impact of the sales of two marketing
subsidiaries during 2007. The impact of these sales contributed approximately
$8 million to the decrease in the first three months of 2008 compared to
the first three months of 2007. In addition, reduced operating expenses in the
insurance companies contributed to the overall decrease.
Sales
Sales for the segment decreased $6.2 million, or 12.6%, for the three
months ended March 31, 2008 compared to the three months ended March 31, 2007,
primarily due to a decrease in traditional product sales. Strong competition on
certain traditional products sold in early 2008 has led to lower sales in this
product.
Reinsurance
Currently, the Life Marketing segment
reinsures significant amounts of its life insurance in-force. Pursuant to the underlying reinsurance
contracts, reinsurers pay allowances to the segment as a percentage of both
first year and renewal premiums.
Reinsurance allowances represent the amount the reinsurer is willing to
pay for reimbursement of acquisition costs incurred by the direct writer of the
business. A more detailed discussion of
the accounting for reinsurance allowances can be found in the Reinsurance
section of Note 1,
Basis of Presentation and
Summary of Significant Accounting Policies.
30
The following table summarizes reinsurance
allowances paid for each period presented, including the portion deferred as a
part of DAC and the portion recognized immediately as a reduction of other
operating expenses. As the non-deferred
portion of reinsurance allowances reduces operating expenses in the period
received, these amounts represent a net increase to operating income during
that period. The amounts capitalized and
earned are quantified below:
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
(Dollars In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Allowances received
|
|
$
|
59,663
|
|
$
|
57,763
|
|
3.3
|
%
|
Less: Amount deferred
|
|
26,016
|
|
25,837
|
|
0.7
|
|
Allowances recognized (reduction in other
operating expenses)
|
|
$
|
33,647
|
|
$
|
31,926
|
|
5.4
|
|
Non-deferred
reinsurance allowances of $33.6 million and $31.9 million were recognized
in the first quarters of 2008 and 2007, respectively, resulting in reductions
in operating expenses by these amounts in the same periods. Non-deferred reinsurance allowances increased
5.4% in the first three months of 2008 compared to the same quarter of 2007,
primarily as the result of growth in the universal life block and resulting
increase in earned allowances. In general, allowances negotiated with
reinsurers have been declining over time as a result of the consolidating
reinsurance market.
Reinsurance
allowances do not affect the methodology used to amortize DAC or the period
over which such DAC is amortized.
However, they do affect the amounts recognized as DAC amortization. DAC on FASB Statement No. 97,
Accounting and Reporting by Insurance Enterprises for Certain
Long-Duration Contracts and for Realized Gains and Losses from the Sale of
Investments
(SFAS No. 97) products is amortized based on the
estimated gross profits of the policies in force. Reinsurance allowances are considered in the
determination of estimated gross profits, and therefore impact SFAS No. 97
DAC amortization. Deferred reinsurance
allowances on FASB Statement No. 60,
Accounting
and Reporting by Insurance Enterprises
(SFAS No. 60) policies are
recorded as ceded DAC, which is amortized over estimated ceded premiums of the
policies in force. Thus, deferred
reinsurance allowances on SFAS No. 60 policies impact
SFAS No. 60 DAC amortization.
Ceded premiums and allowances
The amounts of
ceded premium paid and allowances reimbursed by the reinsurer are reflected in
the table below:
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
(Dollars In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Ceded premiums
|
|
$
|
207,865
|
|
$
|
207,614
|
|
0.1
|
%
|
Less: Allowances received
|
|
59,663
|
|
57,763
|
|
3.3
|
|
Net ceded premiums
|
|
$
|
148,202
|
|
$
|
149,851
|
|
(1.1
|
)
|
The net ceded
premium decreased 1.1% in the first three months of 2008 compared to the same
period in the prior year, primarily due to growth in the universal life block
offsetting decreases in traditional products
resulting from
small amounts of reinsurance on new business. The move during 2005 to reduce
our reliance on reinsurance by entering into a securitization structure to fund
certain statutory reserves will ultimately result in a reduction in both ceded
premiums and reinsurance allowances received in the traditional line.
The Life
Marketing segments reinsurance programs do not materially impact the other
income line of our income statement.
31
Impact of reinsurance
Reinsurance impacted the Life Marketing segment line items as shown in
the following table:
Life
Marketing Segment
Line Item
Impact of Reinsurance
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Dollars In Thousands)
|
|
REVENUES
|
|
|
|
|
|
Reinsurance ceded
|
|
$
|
(207,865
|
)
|
$
|
(207,614
|
)
|
BENEFITS AND EXPENSES
|
|
|
|
|
|
Benefit and settlement expenses
|
|
(240,943
|
)
|
(196,051
|
)
|
Amortization of deferred policy acquisition
costs
|
|
(8,378
|
)
|
(17,801
|
)
|
Other operating expenses
|
|
(33,647
|
)
|
(31,926
|
)
|
|
|
|
|
|
|
|
|
The table above does not reflect the impact
of reinsurance on our net investment income.
By ceding business to the assuming companies, we forgo investment income
on the reserves ceded. Conversely, the
assuming companies will receive investment income on the reserves assumed which
will increase the assuming companies profitability on the business we
cede. The net investment income impact
to us and the assuming companies has not been quantified.
Premiums and policy fees ceded had been rising over a number of years
with increases in our in force blocks of traditional and universal life
business. Beginning in mid-2005, we changed our reinsurance approach in its
traditional life products lines. Instead of ceding 90% of premiums on new
business issued before that date, we began purchasing yearly renewable term on
risks in excess of $1 million (now increased to $2 million). This had the
effect of dramatically reducing reinsurance on new policies issued and led to
relatively flat ceded premiums in the three months ended March 31, 2008
compared to the three months ended March 31, 2007.
Benefits and settlement expenses ceded increased largely due to growth
in the claims on our 2005 and prior traditional block. Ceded amortization of
deferred policy acquisition costs decreased due to changes in unlocking in the
universal life line of business in 2007. Other operating expenses ceded
increased due to growth in the universal life block of business.
32
Acquisitions
Segment results of operations
Segment results were as follows:
|
|
Three Months Ended
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
(Dollars In Thousands)
|
|
|
|
REVENUES
|
|
|
|
|
|
|
|
Gross premiums and policy fees
|
|
$
|
191,492
|
|
$
|
194,481
|
|
(1.5
|
)%
|
Reinsurance ceded
|
|
(115,763
|
)
|
(118,241
|
)
|
(2.1
|
)
|
Net premiums and policy fees
|
|
75,729
|
|
76,240
|
|
(0.7
|
)
|
Net investment income
|
|
136,213
|
|
148,986
|
|
(8.6
|
)
|
Other income
|
|
1,421
|
|
2,248
|
|
(36.8
|
)
|
Total operating revenues
|
|
213,363
|
|
227,474
|
|
(6.2
|
)
|
Realized gains (losses) - investments
|
|
(36,318
|
)
|
7,933
|
|
|
|
Realized gains (losses) - derivatives
|
|
28,590
|
|
(3,703
|
)
|
|
|
Total revenues
|
|
205,635
|
|
231,704
|
|
|
|
BENEFITS AND EXPENSES
|
|
|
|
|
|
|
|
Benefits and settlement expenses
|
|
154,420
|
|
161,904
|
|
(4.6
|
)
|
Amortization of deferred policy acquisition
cost and value of business acquired
|
|
18,502
|
|
19,948
|
|
(7.2
|
)
|
Other operating expenses
|
|
6,865
|
|
13,373
|
|
(48.7
|
)
|
Operating benefits and expenses
|
|
179,787
|
|
195,225
|
|
(7.9
|
)
|
Amortization of DAC / VOBA related to
realized gains (losses) - investments
|
|
1,094
|
|
606
|
|
|
|
Total benefits and expenses
|
|
180,881
|
|
195,831
|
|
|
|
INCOME BEFORE INCOME TAX
|
|
24,754
|
|
35,873
|
|
(31.0
|
)
|
Less: realized gains (losses)
|
|
(7,728
|
)
|
4,230
|
|
|
|
Less: related amortization of DAC
|
|
(1,094
|
)
|
(606
|
)
|
|
|
OPERATING INCOME
|
|
$
|
33,576
|
|
$
|
32,249
|
|
4.1
|
|
33
The following table summarizes key data for the Acquisitions segment:
|
|
Three Months Ended
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
(Dollars In Thousands)
|
|
|
|
Average Life Insurance In-Force
(1)
|
|
|
|
|
|
|
|
Traditional
|
|
$
|
215,226,812
|
|
$
|
229,810,031
|
|
(6.3
|
)%
|
Universal life
|
|
30,833,910
|
|
31,262,387
|
|
(1.4
|
)
|
|
|
$
|
246,060,722
|
|
$
|
261,072,418
|
|
(5.8
|
)
|
Average Account Values
|
|
|
|
|
|
|
|
Universal life
|
|
$
|
2,976,419
|
|
$
|
3,076,331
|
|
(3.2
|
)
|
Fixed annuity
(2)
|
|
4,690,136
|
|
5,650,139
|
|
(17.0
|
)
|
Variable annuity
|
|
194,185
|
|
195,840
|
|
(0.8
|
)
|
|
|
$
|
7,860,740
|
|
$
|
8,922,310
|
|
(11.9
|
)
|
Interest Spread - UL & Fixed
Annuities
|
|
|
|
|
|
|
|
Net investment income yield
(4)
|
|
6.01
|
%
|
6.35
|
%
|
|
|
Interest credited to policyholders
|
|
4.08
|
|
4.13
|
|
|
|
Interest spread
|
|
1.93
|
%
|
2.22
|
%
|
|
|
|
|
|
|
|
|
|
|
Mortality Experience
(3)
|
|
$
|
(148
|
)
|
$
|
(343
|
)
|
|
|
(1)
Amounts are not adjusted for
reinsurance ceded.
(2)
Includes general account balances held within variable annuity products and is
net of reinsurance ceded.
(3)
Represents the estimated pretax earnings
impact resulting from mortality variance to pricing. Excludes results related
to the
Chase
Insurance
Group which was acquired in the third quarter of 2006.
(4)
Includes
available-for-sale and trading portfolios. Available-for-sale portfolio yields
were 6.29% and 6.22% for the three months ended March 31, 2008 and 2007,
respectively.
Three Months Ended March 31, 2008
compared to Three Months Ended March 31, 2007
Segment operating income
Operating income increased $1.3 million, or 4.1%, for the three months
ended March 31, 2008 compared to the three months ended March 31,
2007, primarily due to lower operating expenses on the Chase Insurance Group block,
partially offset by the expected runoff of the remaining acquired closed
blocks.
Revenues
Net premiums and policy fees decreased $0.5 million, or 0.7%, for
the three months ended March 31, 2008 compared to the three months ended March 31,
2007. Investment income decreased $12.8 million, or 8.6%, for the three
months ended March 31, 2008 compared to the three months ended March 31,
2007, primarily due to the runoff of the remaining acquired closed blocks.
Benefits and expenses
Benefits and settlement expenses decreased $7.5 million, or 4.6%, for
the three months ended March 31, 2008 compared to the three months ended March 31,
2007. The decrease related primarily to
the runoff of the acquired closed blocks and fluctuations in mortality.
34
Reinsurance
The Acquisitions segment currently reinsures
portions of both its life and annuity in-force.
The cost of reinsurance to the segment is reflected in the chart shown
below. A more detailed discussion of the
components of reinsurance can be found in the Reinsurance section of Note 1,
Basis of Presentation and Summary of Significant Accounting Policies.
Impact of
reinsurance
Reinsurance
impacted the Acquisitions segment line items as shown in the following table:
Acquisitions
Segment
Line Item
Impact of Reinsurance
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Dollars In Thousands)
|
|
REVENUES
|
|
|
|
|
|
Reinsurance ceded
|
|
$
|
(115,763
|
)
|
$
|
(118,241
|
)
|
BENEFITS AND EXPENSES
|
|
|
|
|
|
Benefit and settlement expenses
|
|
(109,264
|
)
|
(175,118
|
)
|
Amortization of deferred policy acquisition
costs
|
|
(7,584
|
)
|
(1,503
|
)
|
Other operating expenses
|
|
(17,394
|
)
|
(25,558
|
)
|
|
|
|
|
|
|
|
|
The segments reinsurance programs do not materially impact the other
income line of the income statement. In addition, net investment income
generally has no direct impact on reinsurance cost. However, it should be noted
that by ceding business to the assuming companies, we forgo investment income
on the reserves ceded to the assuming companies. Conversely, the assuming
companies will receive investment income on the reserves assumed which will
increase the assuming companies profitability on business assumed from the
Company. For business ceded under modified coinsurance arrangements, the amount
of investment income attributable to the assuming company is included as part
of the overall change in policy reserves and, as such, is reflected in benefit
and settlement expenses. The net investment income impact to the Company and
the assuming companies has not been quantified as it is not fully reflected in
our consolidated financial statements.
35
Annuities
Segment results of operations
Segment results were as follows:
|
|
Three Months Ended
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
(Dollars In Thousands)
|
|
|
|
REVENUES
|
|
|
|
|
|
|
|
Gross premiums and policy fees
|
|
$
|
8,191
|
|
$
|
8,262
|
|
(0.9
|
)%
|
Reinsurance ceded
|
|
|
|
|
|
|
|
Net premiums and policy fees
|
|
8,191
|
|
8,262
|
|
(0.9
|
)
|
Net investment income
|
|
77,286
|
|
60,861
|
|
27.0
|
|
Realized gains (losses) - derivatives
|
|
(6,240
|
)
|
254
|
|
|
|
Other income
|
|
3,003
|
|
2,713
|
|
10.7
|
|
Total operating revenues
|
|
82,240
|
|
72,090
|
|
14.1
|
|
Realized gains (losses) - investments
|
|
20
|
|
1,664
|
|
|
|
Total revenues
|
|
82,260
|
|
73,754
|
|
|
|
BENEFITS AND EXPENSES
|
|
|
|
|
|
|
|
Benefits and settlement expenses
|
|
67,416
|
|
55,949
|
|
20.5
|
|
Amortization of deferred policy acquisition
cost and value of businesses acquired
|
|
5,921
|
|
4,538
|
|
30.5
|
|
Other operating expenses
|
|
6,414
|
|
5,997
|
|
7.0
|
|
Operating benefits and expenses
|
|
79,751
|
|
66,484
|
|
20.0
|
|
Amortization of DAC / VOBA related to
realized gains (losses) - investments
|
|
(20
|
)
|
590
|
|
|
|
Total benefits and expenses
|
|
79,731
|
|
67,074
|
|
|
|
INCOME BEFORE INCOME TAX
|
|
2,529
|
|
6,680
|
|
(62.1
|
)
|
Less: realized gains (losses)
|
|
20
|
|
1,664
|
|
|
|
Less: related amortization of DAC
|
|
20
|
|
(590
|
)
|
|
|
OPERATING INCOME
|
|
$
|
2,489
|
|
$
|
5,606
|
|
(55.6
|
)
|
36
The following table summarizes key data for the Annuities segment:
|
|
Three Months Ended
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
(Dollars In Thousands)
|
|
|
|
Sales
|
|
|
|
|
|
|
|
Fixed annuity
|
|
$
|
519,248
|
|
$
|
236,191
|
|
119.8
|
%
|
Variable annuity
|
|
92,792
|
|
78,982
|
|
17.5
|
|
|
|
$
|
612,040
|
|
$
|
315,173
|
|
94.2
|
|
Average Account Values
|
|
|
|
|
|
|
|
Fixed annuity
(1)
|
|
$
|
5,064,052
|
|
$
|
4,045,331
|
|
25.2
|
|
Variable annuity
|
|
2,566,985
|
|
2,580,211
|
|
(0.5
|
)
|
|
|
$
|
7,631,037
|
|
$
|
6,625,542
|
|
15.2
|
|
Interest Spread - Fixed Annuities
(2)
|
|
|
|
|
|
|
|
Net investment income yield
|
|
6.06
|
%
|
5.92
|
%
|
|
|
Interest credited to policyholders
|
|
4.97
|
|
5.24
|
|
|
|
Interest spread
|
|
1.09
|
%
|
0.68
|
%
|
|
|
|
|
As of
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
GMDB - Net amount at risk
(3)
|
|
$
|
247,107
|
|
$
|
90,614
|
|
172.7
|
%
|
GMDB - Reserves
|
|
|
|
2,615
|
|
(100.0
|
)
|
S&P 500® Index
|
|
1,323
|
|
1,421
|
|
(6.9
|
)
|
|
|
|
|
|
|
|
|
|
|
(1)
Includes
general account balances held within variable annuity products.
(2)
Interest
spread on average general account values.
(3)
Guaranteed
death benefits in excess of contract holder account balance.
Three Months Ended March 31, 2008
compared to Three Months Ended March 31, 2007
Segment operating income
Operating income declined $3.1 million, or 55.6%, for the three
months ended March 31, 2008 compared to the three months ended March 31,
2007, which included $5.7 million of mark-to-market losses, net of DAC
amortization, on the equity indexed annuity product and on embedded derivatives
associated with the variable annuity GMWB rider. Included in the mark-to-market adjustment is
a SFAS No. 157 transition adjustment loss for the embedded derivative
related to the variable annuity GMWB rider of $0.4 million before income taxes.
Operating revenues
Segment operating revenues increased $10.2 million, or 14.1%, for
the three months ended March 31, 2008 compared to the three months ended March 31,
2007, primarily due to an increase in net investment income. Average account balances grew 15.2% in the
first three months of 2008, resulting in higher investment income. The additional income resulting from the
larger account balances was partially reduced in the first three months of 2008
by losses on embedded derivatives. The
segment continually monitors and adjusts credited rates as appropriate in an
effort to maintain and/or improve its interest spread.
37
Benefits and expenses
Operating benefits and expenses increased $13.3 million, or 20.0%,
for the three months ended March 31, 2008 compared to the three months
ended March 31, 2007. This increase
was primarily the result of higher credited interest and unfavorable mortality
fluctuations. Mortality was unfavorable
by $4.8 million in the first three months of 2008 compared to unfavorable
mortality of $2.3 million in the first three months of 2007, an
unfavorable change of $2.5 million.
The unfavorable mortality variances primarily relate to recent sales of
large single premium immediate annuity (SPIA) cases. Because this SPIA block has not reached a critical
size relative to the total amount of annuities in-force, volatility in mortality
results is expected.
The increase in DAC amortization (not related to realized capital gains
and losses) for the three months ended March 31, 2008 compared to the
three months ended March 31, 2007 was the result of overall growth and
increased spreads. We periodically
review and update as appropriate our key assumptions including future
mortality, expenses, lapses, premium persistency, investment yields and
interest spreads. Changes to these
assumptions result in adjustments which increase or decrease DAC
amortization. The periodic review and
updating of assumptions is referred to as unlocking. Retrospective DAC unlocking in the market
value adjusted annuity line, although favorable in the first three months of
2008, was not as favorable as retrospective unlocking in the first three months
of 2007. For the three months ended March 31,
2008, DAC amortization for the Annuities segment was reduced by
$0.3 million due to favorable retrospective DAC unlocking in the market
value adjusted annuity line. Favorable
retrospective DAC unlocking of $1.2 million was recorded by the segment
during the first three months of 2007.
Sales
Total sales increased $296.9 million, or 94.2%, for the three
months ended March 31, 2008 compared to the three months ended March 31,
2007. Sales of fixed annuities increased
$283.1 million, or 119.8%, for the three months ended March 31, 2008
compared to the three months ended March 31, 2007. The increase in fixed annuity sales was
primarily due to strong sales in the single premium immediate annuity and
market value adjusted annuity products, as well as our continued efforts to
increase wholesale distribution. The
continuation of new annuity sales through the Chase distribution system
contributed $81.9 million in fixed annuity sales in the first three months
of 2008 compared to $75.8 million for the first three months ended March 31,
2007. Sales of variable annuities
increased $13.8 million, or 17.5% for the three months ended March 31,
2008 compared to the three months ended March 31, 2007. A general decline in the equity markets has
increased the net amount at risk with respect to guaranteed minimum death
benefits by 172.7% as of March 31, 2008 compared to March 31, 2007.
38
Stable Value Products
Segment results of operations
Segment results were as follows:
|
|
Three Months Ended
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
(Dollars In Thousands)
|
|
|
|
REVENUES
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
78,361
|
|
$
|
79,101
|
|
(0.9
|
)%
|
Realized gains (losses)
|
|
5,433
|
|
1,425
|
|
281.3
|
|
Total revenues
|
|
83,794
|
|
80,526
|
|
|
|
BENEFITS AND EXPENSES
|
|
|
|
|
|
|
|
Benefits and settlement expenses
|
|
59,929
|
|
64,719
|
|
(7.4
|
)
|
Amortization of deferred policy acquisition
cost
|
|
1,067
|
|
1,168
|
|
(8.6
|
)
|
Other operating expenses
|
|
1,149
|
|
1,028
|
|
11.8
|
|
Total benefits and expenses
|
|
62,145
|
|
66,915
|
|
(7.1
|
)
|
INCOME BEFORE INCOME TAX
|
|
21,649
|
|
13,611
|
|
59.1
|
|
Less: realized gains (losses)
|
|
5,433
|
|
1,425
|
|
|
|
OPERATING INCOME
|
|
$
|
16,216
|
|
$
|
12,186
|
|
33.1
|
|
The following table summarizes key data for the Stable Value Products
segment:
|
|
Three Months Ended
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
(Dollars In Thousands)
|
|
|
|
Sales
|
|
|
|
|
|
|
|
GIC
|
|
$
|
74,232
|
|
$
|
2,500
|
|
2,869.3
|
%
|
GFA - Direct Institutional
|
|
|
|
|
|
n/a
|
|
GFA - Registered Notes - Institutional
|
|
450,000
|
|
|
|
n/a
|
|
GFA - Registered Notes - Retail
|
|
113,404
|
|
13,120
|
|
764.4
|
|
|
|
$
|
637,636
|
|
$
|
15,620
|
|
3,982.2
|
|
|
|
|
|
|
|
|
|
Average Account Values
|
|
$
|
5,140,310
|
|
$
|
5,461,832
|
|
|
|
|
|
|
|
|
|
|
|
Operating Spread
|
|
|
|
|
|
|
|
Net investment income yield
|
|
6.10
|
%
|
5.94
|
%
|
|
|
Interest credited
|
|
4.67
|
|
4.86
|
|
|
|
Operating expenses
|
|
0.17
|
|
0.16
|
|
|
|
Operating spread
|
|
1.26
|
%
|
0.92
|
%
|
|
|
39
Three Months Ended March 31, 2008
compared to Three Months Ended March 31, 2007
Segment operating income
Operating income increased $4.0 million, or 33.1%, for the three
months ended March 31, 2008 compared to the three months ended March 31,
2007. The increase in operating earnings
resulted from a higher operating spread, which was partially offset by a
decline in average account values. The
operating spread increased 34 basis points due to the scheduled maturity
of several large high-coupon contracts and an improvement in portfolio asset
yields. The segment continually reviews
its investment portfolio for opportunities to increase the net investment
income yield in an effort to maintain or increase interest spread.
Total sales
increased $622.0 million, for the three months ended March 31, 2008
compared to the three months ended March 31, 2007. The increase was
primarily the result of our re-entry into the institutional funding
agreement-backed note market. These
sales accounted for 70.6% of the segments sales during the first three months
of 2008.
40
Asset
Protection
Segment results of operations
Segment results were as follows:
|
|
Three Months Ended
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
(Dollars In Thousands)
|
|
|
|
REVENUES
|
|
|
|
|
|
|
|
Gross premiums and policy fees
|
|
$
|
95,335
|
|
$
|
99,420
|
|
(4.1
|
)%
|
Reinsurance ceded
|
|
(47,443
|
)
|
(45,138
|
)
|
5.1
|
|
Net premiums and policy fees
|
|
47,892
|
|
54,282
|
|
(11.8
|
)
|
Net investment income
|
|
9,905
|
|
9,212
|
|
7.5
|
|
Other income
|
|
15,136
|
|
16,529
|
|
(8.4
|
)
|
Total operating revenues
|
|
72,933
|
|
80,023
|
|
(8.9
|
)
|
BENEFITS AND EXPENSES
|
|
|
|
|
|
|
|
Benefits and settlement expenses
|
|
24,766
|
|
25,815
|
|
(4.1
|
)
|
Amortization of deferred policy acquisition
cost
|
|
14,332
|
|
20,703
|
|
(30.8
|
)
|
Other operating expenses
|
|
23,983
|
|
23,421
|
|
2.4
|
|
Total benefits and expenses
|
|
63,081
|
|
69,939
|
|
(9.8
|
)
|
INCOME BEFORE INCOME TAX
|
|
9,852
|
|
10,084
|
|
(2.3
|
)
|
OPERATING INCOME
|
|
$
|
9,852
|
|
$
|
10,084
|
|
(2.3
|
)
|
The following table summarizes key data for the Asset Protection
segment:
|
|
Three Months Ended
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
(Dollars In Thousands)
|
|
|
|
Sales
|
|
|
|
|
|
|
|
Credit insurance
|
|
$
|
22,790
|
|
$
|
28,082
|
|
(18.8
|
)%
|
Service contracts
|
|
71,663
|
|
74,807
|
|
(4.2
|
)
|
Other products
|
|
16,262
|
|
30,186
|
|
(46.1
|
)
|
|
|
$
|
110,715
|
|
$
|
133,075
|
|
(16.8
|
)
|
Loss Ratios
(1)
|
|
|
|
|
|
|
|
Credit insurance
|
|
35.9
|
%
|
34.5
|
%
|
|
|
Service contracts
|
|
65.0
|
|
62.4
|
|
|
|
Other products
|
|
32.6
|
|
30.0
|
|
|
|
(1)
Incurred claims as a percentage of
earned premiums.
Three Months Ended March 31, 2008
compared to Three Months Ended March 31, 2007
Segment operating income
Operating income decreased $0.2 million, or 2.3%, for the three
months ended March 31, 2008 compared to the three months ended March 31,
2007. The decrease was primarily the result of $1.5 million of lower IPP
earnings in 2008 due to the loss of a significant customer during the second
quarter of 2007, and partially offset by a $0.6 million gain from the sale of a
small insurance subsidiary.
Earnings from core product lines decreased $0.6 million, or 5.7%,
for the three months ended March 31, 2008 compared to the three months
ended March 31, 2007. Within the segments core product lines, credit
insurance earnings increased $0.6 million, or 84.1%, for the three months ended
March 31, 2008 compared to the three months ended March 31,
2007. The increase in credit insurance
earnings resulted primarily from a $0.6 million gain related to the sale of a
small insurance subsidiary and its related operations during the first quarter
of 2008. Service contract
41
earnings improved $0.1 million, or 0.9%, for the three months
ended March 31, 2008 compared to the three months ended March 31,
2007. The service contract line was favorably impacted by higher investment
income and lower expenses. Earnings from other products declined $1.3 million,
or 68.2%, for the three months ended March 31, 2008 compared to the prior
year. The decline in other products related primarily to lower volume in the
IPP line resulting from the loss of a significant customer.
Net
premiums and policy fees
Net premiums
and policy fees decreased $6.4 million, or 11.8%, for the three months
ended March 31, 2008 compared to the three months ended March 31, 2007. Credit
insurance and related earned premiums decreased $7.4 million, or 48.5%, due to
the sale of a small insurance subsidiary during the first quarter of 2008. Net
premiums in the service contract line increased $0.2 million, or 0.8%, for the
three months ended March 31, 2008 compared to the three months ended March 31,
2007. Within the other product lines, net premiums increased $0.9 million, or
7.6%, for the three months ended March 31, 2008 compared to the prior year,
primarily due to an increase in the GAP product line, partially offset by
declines in the IPP line.
Other income
Other income
decreased $1.4 million, or 8.4%, for the three months ended March 31, 2008
compared to the three months ended March 31, 2007, primarily due to a decline
in service contract volume on lower sales.
Benefits
and settlement expenses
Benefits and
settlement expenses decreased $1.0 million, or 4.1%, for the three months ended
March 31, 2008 compared to the three months ended March 31, 2007. The credit
insurance and related claims for the three months ended March 31, 2008 compared
to the prior year decreased $2.5 million, or 46.7%, as a result of lower volume
and a $0.6 million decrease related to the sale of a small insurance subsidiary
and its related operations. Service contract claims increased $0.8 million, or
4.9%, due to higher loss ratios. Other products claims increased $0.6 million,
or 17.1%, primarily attributable to higher GAP claims.
Amortization
of DAC and Other Operating Expenses
Amortization
of DAC was $6.4 million, or 30.8%, lower for the three months ended March 31,
2008 compared to the three months ended March 31, 2007, mainly due to a $2.9
million decrease resulting from the sale of a small insurance subsidiary and
its related operations during the first quarter of 2008 and lower premium in
the credit insurance products. Other operating expenses increased $0.6 million,
or 2.4%, for the three months ended March 31, 2008, primarily due to higher
expenses in the credit insurance line compared to the three months ended March
31, 2007.
Sales
Total segment
sales decreased $22.4 million, or 16.8%, for the three months ended March 31,
2008 compared to the three months ended March 31, 2007. The decline was primarily due to the other
products line which decreased as a result of lower GAP and IPP sales. GAP sales
declined due to price increases, tighter underwriting controls, and declines in
auto sales. The decreases in credit insurance and service contract sales are
primarily due to declines in auto and marine sales.
Reinsurance
The majority
of the Asset Protection segments reinsurance activity relates to the cession
of single premium credit life insurance and credit accident and health
insurance, credit property, vehicle service contracts and guaranteed asset
protection insurance to producer affiliated reinsurance companies (PARCs).
These arrangements are coinsurance contracts ceding the business on a first
dollar quota share basis at levels ranging from 50% to 100% to limit our
exposure and allow the PARCs to share in the underwriting income of the
product. Reinsurance contracts do not relieve us from our obligations to our
policyholders. Failure of reinsurers to honor their obligations could result in
losses to the Company or our affiliates. A more detailed discussion of the
components of reinsurance can be found in the Reinsurance section of
Note 1,
Basis of
Presentation and Summary of Significant Accounting Policies.
42
Ceded unearned premiums reserves and claim reserves
with PARCs are generally secured by trust accounts, letters of credit or on a
funds withheld basis.
Reinsurance impacted the Asset Protection segment line
items as shown in the following table:
Asset Protection Segment
Line Item Impact of Reinsurance
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Dollars In Thousands)
|
|
REVENUES
|
|
|
|
|
|
Reinsurance
ceded
|
|
$
|
(47,443
|
)
|
$
|
(45,138
|
)
|
BENEFITS
AND EXPENSES
|
|
|
|
|
|
Benefit and
settlement expenses
|
|
(20,746
|
)
|
(22,221
|
)
|
Amortization of
deferred policy acquisition costs
|
|
(9,852
|
)
|
(2,299
|
)
|
Other operating
expenses
|
|
(1,756
|
)
|
(8,351
|
)
|
|
|
|
|
|
|
|
|
Reinsurance premiums ceded increased $2.3 million or
5.1% for the three months ended March 31, 2008 compared to the three months
ended March 31, 2007. The increase was primarily due to the cession of a block
of credit business sold through a small insurance subsidiary, prior to the sale
of that company. This was somewhat
offset by the decline in the sales of credit insurance and GAP insurance ceded
to PARCs. In addition, we discontinued
the marketing of credit insurance products through financial institutions in
2005 in which a majority of this business was ceded to PARCs.
Benefits and settlement expenses ceded decreased $1.5
million or 6.6% for the three months ended March 31, 2008 compared to the three
months ended March 31, 2007 as a result of a reduction in reserves related to
the discontinued credit business sold through financial institutions and a
decrease in losses ceded related to the Lenders Indemnity program in runoff,
offset by an increase in service contract claims.
Amortization of DAC ceded increased $7.6 million or
328.5% for the three months ended March 31, 2008 compared to the three months
March 31, 2007, mainly as the result of the cession of certain credit insurance
business.
Other operating expenses ceded decreased $6.6 million
or 79.0% for the three months ended March 31, 2008 compared to the three months
ended March 31, 2007. The fluctuation is partly attributable to the decline in
credit insurance products sold through financial institutions and an overall
decline in credit insurance sales.
Net investment income has no direct impact on
reinsurance cost. However, it should be noted that by ceding business to the
assuming companies, we forgo investment income on the reserves ceded to the
assuming companies. Conversely, the assuming companies will receive investment
income on the reserves assumed which will increase the assuming companies
profitability on business assumed from the Company. The net investment income
impact to the Company and the assuming companies has not been quantified as it
is not reflected in our consolidated financial statements.
43
Corporate and Other
Segment results of operations
Segment results were as follows:
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
(Dollars In Thousands)
|
|
|
|
REVENUES
|
|
|
|
|
|
|
|
Gross premiums
and policy fees
|
|
$
|
8,603
|
|
$
|
9,169
|
|
(6.2
|
)%
|
Reinsurance
ceded
|
|
(1
|
)
|
(4
|
)
|
(75.0
|
)
|
Net premiums and
policy fees
|
|
8,602
|
|
9,165
|
|
(6.1
|
)
|
Net investment
income
|
|
21,744
|
|
36,419
|
|
(40.3
|
)
|
Realized gains
(losses) - investments
|
|
|
|
3,150
|
|
(100.0
|
)
|
Realized gains
(losses) - derivatives
|
|
484
|
|
257
|
|
88.3
|
|
Other income
|
|
904
|
|
937
|
|
(3.5
|
)
|
Total operating
revenues
|
|
31,734
|
|
49,928
|
|
(36.4
|
)
|
Realized gains
(losses) - investments
|
|
3,040
|
|
3,392
|
|
|
|
Realized gains
(losses) - derivatives
|
|
(24,711
|
)
|
(3,369
|
)
|
|
|
Total revenues
|
|
10,063
|
|
49,951
|
|
(79.9
|
)
|
BENEFITS AND EXPENSES
|
|
|
|
|
|
|
|
Benefits and
settlement expenses
|
|
10,367
|
|
10,069
|
|
3.0
|
|
Amortization of
deferred policy acquisition cost
|
|
551
|
|
129
|
|
327.1
|
|
Other operating
expenses
|
|
50,789
|
|
37,953
|
|
33.8
|
|
Total benefits
and expenses
|
|
61,707
|
|
48,151
|
|
28.2
|
|
(LOSS) INCOME BEFORE INCOME TAX
|
|
(51,644
|
)
|
1,800
|
|
|
|
Less: realized
gains (losses) - investments
|
|
3,040
|
|
3,392
|
|
|
|
Less: realized
gains (losses) - derivatives
|
|
(24,711
|
)
|
(3,369
|
)
|
|
|
OPERATING (LOSS) INCOME
|
|
$
|
(29,973
|
)
|
$
|
1,777
|
|
|
|
Three Months Ended March 31, 2008 compared to Three Months Ended March
31, 2007
Segment operating (loss)/ income
The Corporate and Other segment operating income
declined $31.8 million for the three months ended March 31, 2008, compared
to the three months ended March 31, 2007, due primarily to mark-to-market
adjustments on a $419 million portfolio of securities designated for trading.
This trading portfolio negatively impacted the first three months of 2008 by
approximately $19.4 million, a $20.1 million less favorable impact than in the
first three months of 2007. In addition,
the segment experienced lower participating income and higher interest
expense. The overall performance of our
investment portfolio continued to be strong, with no significant credit issues
in either the securities or mortgage portfolio.
Operating revenues
Operating revenues for the Corporate and Other segment
are primarily comprised of net investment income on capital and net premiums
and policy fees related to several non-strategic lines of business. Net investment income for this segment
decreased $14.7 million, or 40.3%, for the three months ended March 31,
2008 compared to the three months ended March 31, 2007, and net premiums and
policy fees declined $0.6 million, or 6.1%. The decrease in net investment income was primarily
the result of mark-to-market changes on the trading portfolio and a decline in
participating income, partially offset by an increase in unallocated capital
and investment income from proceeds of non-recourse funding obligations
compared to the prior year. The decline
in net premiums and policy fees was the expected result of the runoff of
business in the non-strategic lines of business which are no longer being
marketed.
44
Benefits and expenses
Benefits and expenses increased $13.6 million, or
28.2%, for the three months ended March 31, 2008 compared to the three months
ended March 31, 2007. The increase was
primarily due to an increase in interest expense of $10.3 million, or
42.0%, for the three months ended March 31, 2008 compared to the three months
ended March 31, 2007. Of this increase
in interest expense, approximately $9.9 million relates to additional issuances
of non-recourse funding obligations. In
addition, increases in general corporate overhead expenses have contributed to
the increase in benefits and expenses.
45
CONSOLIDATED INVESTMENTS
Portfolio Description
As of March 31, 2008, our investment portfolio equaled
approximately $29.0 billion. The types
of assets in which we may invest is influenced by various state laws which
prescribe qualified investment assets.
Within the parameters of these laws, we invest in assets giving
consideration to such factors as liquidity needs, investment quality,
investment return, matching of assets and liabilities, and the overall
composition of the investment portfolio by asset type and credit exposure.
A significant portion of our bond portfolio is
invested in residential mortgage-backed securities, commercial mortgage-backed
securities, and asset-backed securities.
These holdings at March 31, 2008 equaled approximately $8.9
billion. Mortgage-backed securities are
constructed from pools of mortgages and may have cash flow volatility as a
result of changes in the rate at which prepayments of principal occur with
respect to the underlying loans.
Prepayments of principal on the underlying loans can be expected to
accelerate with decreases in market interest rates and diminish with increases
in interest rates. We have not invested
in the higher risk tranches of mortgage-backed securities (except
mortgage-backed securities issued in securitization transactions sponsored by
the Company). In addition, we have
entered into derivative contracts at times to partially offset the volatility
in the market value of these securities.
As of March 31, 2008, we had residential
mortgage-backed securities with a total market value of $78.8 million, or 0.3%
of total invested assets, that were supported by collateral classified as
sub-prime. $76.5 million, or 97.0%, of these securities were rated AAA. Additionally, as of March 31, 2008, we held
$663.9 million, or 2.3% of invested assets, of securities supported by
collateral classified as Alt-A. The following table shows the percentage of our
collateral classified as Alt-A, at March 31, 2008, grouped by rating category:
|
|
Percentage of
|
|
|
|
Alt-A
|
|
Rating
|
|
Securities
|
|
AAA
|
|
78.2
|
%
|
AA
|
|
20.7
|
|
A
|
|
1.1
|
|
|
|
100.0
|
%
|
46
The tables below show a breakdown of our residential
mortgage-backed securities portfolio by type and rating at March 31,
2008. As of March 31, 2008, these
holdings were approximately $6.2 billion. Planned amortization class
securities (PACs) pay down according to a schedule. Sequentials receive payments in order until
each class is paid off. Pass through
securities receive principal as principal of the underlying mortgages is received.
|
|
Percentage of
|
|
|
|
Residential
|
|
|
|
Mortgage-Backed
|
|
Type
|
|
Securities
|
|
Sequential
|
|
66.5
|
%
|
PAC
|
|
13.2
|
|
Pass Through
|
|
10.0
|
|
Other
|
|
10.3
|
|
|
|
100.0
|
%
|
|
|
Percentage of
|
|
|
|
Residential
|
|
|
|
Mortgage-Backed
|
|
Rating
|
|
Securities
|
|
AAA
|
|
97.0
|
%
|
AA
|
|
2.0
|
|
A
|
|
1.0
|
|
|
|
100.0
|
%
|
Our commercial mortgage backed security (CMBS) portfolio
consists of commercial mortgage-backed securities issued in securitization
transactions. Portions of the CMBS are
sponsored by the Company, in which we securitized portions of our mortgage loan
portfolio. As of March 31, 2008, the CMBS holdings were approximately $1.2
billion. Of this amount, $834.2 million
related to retained beneficial interests of commercial mortgage loan
securitizations the Company completed. The following table shows the
percentages of our CMBS holdings, at March 31, 2008, grouped by rating
category:
|
|
Percentage of
|
|
|
|
Commercial
|
|
|
|
Mortgage-Backed
|
|
Rating
|
|
Securities
|
|
AAA
|
|
84.5
|
%
|
AA
|
|
8.9
|
|
A
|
|
3.5
|
|
BBB
|
|
1.2
|
|
Below investment grade
|
|
1.9
|
|
|
|
100.0
|
%
|
Asset-backed securities (ABS) pay down based on cash
flow received from the underlying pool of assets, such as receivables on auto
loans, student loans, credit cards, etc. As of March 31, 2008, these holdings
were approximately $1.5 billion. The
following table shows the percentages of our ABS holdings, at March 31, 2008, grouped
by rating category:
|
|
Percentage of
|
|
|
|
Asset-Backed
|
|
Rating
|
|
Securities
|
|
AAA
|
|
94.5
|
%
|
AA
|
|
0.8
|
|
A
|
|
0.2
|
|
BBB
|
|
3.5
|
|
Below investment grade
|
|
1.0
|
|
|
|
100.0
|
%
|
47
We obtained ratings of our fixed maturities from Moodys
Investors Service, Inc. (Moodys), Standard & Poors
Corporation (S&P) and Fitch Ratings (Fitch). If a bond is not rated by Moodys, S&P,
or Fitch, we use ratings from the Securities Valuation Office of the National
Association of Insurance Commissioners (NAIC), or we rate the bond based
upon a comparison of the unrated issue to rated issues of the same issuer or
rated issues of other issuers with similar risk characteristics. At March 31, 2008, over 99.0% of our
bonds were rated by Moodys, S&P, Fitch, and/or the NAIC.
The approximate percentage distribution of our fixed
maturity investments by quality rating at March 31, 2008, is as follows:
|
|
Percentage of
|
|
|
|
Fixed Maturity
|
|
Type
|
|
Investments
|
|
AAA
|
|
42.2
|
%
|
AA
|
|
8.2
|
|
A
|
|
17.8
|
|
BBB
|
|
27.0
|
|
BB or less
|
|
4.8
|
|
|
|
100.0
|
%
|
Our portfolio consists primarily of fixed maturity
securities (bonds and redeemable preferred stocks) and commercial mortgage
loans. Within our fixed maturity
securities, we maintain portfolios classified as available for sale and
trading. We generally purchase our
investments with the intent to hold to maturity by purchasing investments that
match future cash flow needs. However,
we may sell any of our investments to maintain proper matching of assets and
liabilities. Accordingly, we classified
$19.4 billion or 83.6% of our fixed maturities as available for sale as of
March 31, 2008. These securities are
carried at fair value on our Consolidated Condensed Balance Sheets. Changes in fair value, net of related DAC and
VOBA, are charged or credited directly to shareowners equity. Changes in fair value that are other than
temporary are recorded as realized losses in the Consolidated Condensed Statements
of Income.
Our trading portfolio, which accounts for
$3.8 billion or 16.4% of our fixed maturities as of March 31, 2008,
consists of two major categories. First,
we consolidate a special-purpose entity, in accordance with FASB
Interpretation (FIN) No. 46,
Consolidation of Variable
Interest Entities
, whose investments are managed by the
Company. As of March 31, 2008, fixed
maturities with a market value of $411.3 million and short-term investments
with a market value of $17.6 million were classified as trading securities
related to this special-purpose entity.
Additionally, as of March 31, 2008, we held fixed maturities with a
market value of $3.4 billion and short-term investments with a market
value of $112.9 million, which were added as part of the Chase Insurance
Group acquisition. Investment results
for the Chase Insurance Group portfolios, including gains and losses from
sales, are passed to the reinsurers through the contractual terms of the
reinsurance arrangements. Trading
securities are carried at fair value and changes in fair value are recorded in
net income as they occur. Offsetting
these amounts are corresponding changes in the fair value of the embedded
derivative liability associated with the underlying reinsurance arrangement.
Our investments in debt and equity securities are reported
at market value, and investments in mortgage loans are reported at amortized
cost. As of March 31, 2008, our fixed
maturity investments (bonds and redeemable preferred stocks) had a market value
of $23.2 billion, which was 2.5% below amortized cost of
$23.8 billion. We had
$3.4 billion in mortgage loans as of March 31, 2008. While our mortgage loans do not have quoted
market values, as of March 31, 2008, we estimated the market value of
our mortgage loans to be $3.7 billion (using discounted cash flows from
the next call date), which was 8.8% greater than the amortized cost. Most of our mortgage loans have significant
prepayment fees. These assets are
invested for terms approximately corresponding to anticipated future benefit
payments. Thus, market fluctuations are
not expected to adversely affect liquidity.
48
The following table shows the reported values of our
invested assets:
|
|
March 31, 2008
|
|
December 31, 2007
|
|
|
|
(Dollars In Thousands)
|
|
Publicly-issued bonds
|
|
$
|
19,020,547
|
|
65.7
|
%
|
$
|
19,588,486
|
|
67.5
|
%
|
Privately issued bonds
|
|
4,147,271
|
|
14.3
|
|
3,800,505
|
|
13.1
|
|
Redeemable preferred stock
|
|
83
|
|
0.0
|
|
78
|
|
0.0
|
|
Fixed maturities
|
|
23,167,901
|
|
80.0
|
|
23,389,069
|
|
80.6
|
|
Equity securities
|
|
289,307
|
|
1.0
|
|
117,037
|
|
0.4
|
|
Mortgage loans
|
|
3,377,397
|
|
11.6
|
|
3,284,326
|
|
11.3
|
|
Investment real estate
|
|
7,975
|
|
0.0
|
|
8,026
|
|
0.0
|
|
Policy loans
|
|
813,107
|
|
2.8
|
|
818,280
|
|
2.8
|
|
Other long-term investments
|
|
193,364
|
|
0.7
|
|
185,892
|
|
0.6
|
|
Short-term investments
|
|
1,121,138
|
|
3.9
|
|
1,236,443
|
|
4.3
|
|
Total invesments
|
|
$
|
28,970,189
|
|
100.0
|
%
|
$
|
29,039,073
|
|
100.0
|
%
|
Included in the preceding table are $3.8 billion and
$4.0 billion of fixed maturities and $130.5 million and $67.0 million of
short-term investments classified as trading securities as of March 31, 2008
and December 31, 2007, respectively.
Market values for private, non-traded securities are
determined as follows: 1) we obtain estimates from independent pricing
services and 2) we estimate market value based upon a comparison to quoted
issues of the same issuer or issues of other issuers with similar terms and
risk characteristics. We analyze the independent pricing services valuation
methodologies and related inputs, including an assessment of the observability
of market inputs. Upon obtaining this information related to market value,
management makes a determination as to the appropriate valuation amount. The
market value of private, non-traded securities was $4.1 billion as of March 31,
2008, representing 14.3% of our total invested assets.
We participate in securities lending, primarily as an
investment yield enhancement, whereby securities that are held as investments
are loaned to third parties for short periods of time. We require collateral of 102% of the market
value of the loaned securities to be separately maintained. The loaned securities market value is
monitored on a daily basis, with additional collateral obtained as
necessary. As of March 31, 2008,
securities with a market value of $348.5 million were loaned under these
agreements. As collateral for the loaned
securities, we receive short-term investments, which are recorded in
short-term investments with a corresponding liability recorded in other
liabilities to account for our obligation to return the collateral. As of March 31, 2008, collateral related to
these agreements equaled $356.3 million.
Mortgage
Loans
We invest a significant portion of our investment
portfolio in commercial mortgage loans.
As of March 31, 2008, our mortgage loan holdings equaled approximately
$3.4 billion. We generally do not lend on speculative properties and have
specialized in making loans on either credit-oriented commercial properties or
credit-anchored strip shopping centers and apartments. Our underwriting procedures relative to our
commercial loan portfolio are based on a conservative, disciplined
approach. We concentrate our
underwriting expertise on a small number of commercial real estate asset types
associated with the necessities of life (retail, multi-family, professional
office buildings, and warehouses). We believe these asset types tend to weather
economic downturns better than other commercial asset classes in which we have
chosen not to participate. We believe this disciplined approach has helped to maintain
a relatively low delinquency and foreclosure rate throughout our history.
We record mortgage loans net of an allowance for
credit losses. This allowance is
calculated through analysis of specific loans that are believed to be at a
higher risk of becoming impaired in the near future. As of March 31, 2008 and December 31,
2007, our allowance for mortgage loan credit losses was $0.5 million and
$0.5 million, respectively.
Our mortgage lending criteria generally require that
the loan-to-value ratio on each mortgage be at or less than 75% at the time of
origination. Projected rental payments
from credit anchors (i.e., excluding rental payments from smaller local
tenants) generally exceed 70% of the propertys projected operating expenses
and debt service. We also offer a
commercial loan product under which we will permit a loan-to-value ratio of up
to 85% in exchange
49
for a participating interest in the cash flows from the underlying real
estate. Approximately
$660.4 million of our mortgage loans have this participation feature.
Many of our mortgage loans have call or interest rate
reset provisions between 3 and 10 years. However, if interest rates were to
significantly increase, we may be unable to call the loans or increase the
interest rates on our existing mortgage loans commensurate with the
significantly increased market rates.
As of March 31, 2008, delinquent mortgage loans and
foreclosed properties were less than 0.1% of invested assets. We do not expect these investments to
adversely affect our liquidity or ability to maintain proper matching of assets
and liabilities. As of March 31, 2008,
$7.4 million, or 0.2%, of the mortgage loan portfolio was
nonperforming. It is our policy to cease
to carry accrued interest on loans that are over 90 days delinquent. For loans less than 90 days delinquent,
interest is accrued unless it is determined that the accrued interest is not
collectible. If a loan becomes over
90 days delinquent, it is our general policy to initiate foreclosure
proceedings unless a workout arrangement to bring the loan current is in place.
Between 1996 and 1999, we securitized
$1.4 billion of our mortgage loans. We sold the senior tranches while
retaining the subordinate tranches. We
continue to service the securitized mortgage loans. During 2007, we securitized an additional
$1.0 billion of our mortgage loans. We
sold the highest rated tranche for approximately $218.3 million, while
retaining the remaining tranches. We continue
to service the securitized mortgage loans.
At March 31, 2008, we had investments related to retained beneficial
interests of mortgage loan securitizations of $834.2 million.
Risk
Management and Impairment Review
We monitor the overall credit quality of our portfolio
within established guidelines. The
following table shows our available for sale fixed maturities by credit rating
as of March 31, 2008:
|
|
|
|
Percent of
|
|
S&P or Equivalent
Designation
|
|
Market Value
|
|
Market Value
|
|
|
|
(Dollars In Thousands)
|
|
|
|
AAA
|
|
$
|
8,055,032
|
|
41.6
|
%
|
AA
|
|
1,611,785
|
|
8.3
|
|
A
|
|
3,311,359
|
|
17.1
|
|
BBB
|
|
5,297,322
|
|
27.3
|
|
Investment grade
|
|
18,275,498
|
|
94.3
|
|
BB
|
|
731,161
|
|
3.8
|
|
B
|
|
289,551
|
|
1.5
|
|
CCC or lower
|
|
78,867
|
|
0.4
|
|
In or near default
|
|
73
|
|
0.0
|
|
Below investment grade
|
|
1,099,652
|
|
5.7
|
|
Redeemable preferred stock
|
|
83
|
|
0.0
|
|
Total
|
|
$
|
19,375,233
|
|
100.0
|
%
|
Not included in the table above are $3.8 billion of
investment grade and $29.9 million of less than investment grade fixed
maturities classified as trading securities.
50
Limiting bond exposure to any creditor group is
another way we manage credit risk. The
following table summarizes our ten largest fixed maturity exposures to an
individual creditor group as of March 31, 2008:
Creditor
|
|
Market Value
|
|
|
|
(Dollars In Millions)
|
|
AT&T Corporation
|
|
$
|
174.0
|
|
Citigroup Inc.
|
|
140.6
|
|
American International Group
|
|
139.8
|
|
Toyota
|
|
138.3
|
|
Bank of America Corp.
|
|
129.8
|
|
Wachovia Group
|
|
124.8
|
|
Wells Fargo & Company
|
|
124.5
|
|
Comcast Corp.
|
|
117.0
|
|
Metlife Inc.
|
|
114.9
|
|
Berkshire Hathaway Inc.
|
|
113.1
|
|
|
|
|
|
|
We review our positions on a monthly basis for
possible credit concerns and review our current exposure, credit enhancement,
and delinquency experience. Management considers a number of factors when
determining the impairment status of individual securities. These include the economic condition of
various industry segments and geographic locations and other areas of
identified risks. Although it is
possible for the impairment of one investment to affect other investments, we
engage in ongoing risk management to safeguard against and limit any further
risk to its investment portfolio.
Special attention is given to correlative risks within specific
industries, related parties, and business markets.
We consider a number of factors in determining whether
the impairment is other than temporary.
These include, but are not limited to: 1) actions taken by rating
agencies, 2) default by the issuer, 3) the significance of the
decline, 4) the intent and ability to hold the investment until recovery,
5) the time period during which the decline has occurred, 6) an
economic analysis of the issuers industry, and 7) the financial strength,
liquidity, and recoverability of the issuer.
Management performs a security-by-security review each quarter in
evaluating the need for any other-than-temporary impairments. Although no set formula is used in this
process, the investment performance, collateral position, and continued
viability of the issuer are significant measures considered.
We consider a number of factors relating to the issuer
in determining the financial strength, liquidity, and recoverability of an
issuer. These include but are not
limited to: available collateral, assets that might be available to repay debt,
operating cash flows, financial ratios, access to capital markets, quality of
management, market position, exposure to litigation or product warranties, and
the effect of general economic conditions on the issuer. Once management has determined that a
particular investment has suffered an other than temporary impairment, the
asset is written down to its estimated fair value.
There are certain risks and uncertainties associated
with determining whether declines in market values are other than
temporary. These include significant
changes in general economic conditions and business markets, trends in certain
industry segments, interest rate fluctuations, rating agency actions, changes
in significant accounting estimates and assumptions, commission of fraud, and
legislative actions. We continuously
monitor these factors as they relate to the investment portfolio in determining
the status of each investment.
51
Realized
Gains and Losses
The
following table sets forth realized investment gains and losses for the periods
shown.
|
|
Three Months Ended
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
(Dollars In Thousands)
|
|
|
|
Fixed maturity
gains - sales
|
|
$
|
9,062
|
|
$
|
2,202
|
|
$
|
6,860
|
|
Fixed maturity
losses - sales
|
|
(521
|
)
|
(3,017
|
)
|
2,496
|
|
Equity gains -
sales
|
|
|
|
5,451
|
|
(5,451
|
)
|
Equity losses -
sales
|
|
|
|
|
|
|
|
Impairments on
fixed maturity securities
|
|
|
|
|
|
|
|
Impairments on
equity securities
|
|
|
|
(48
|
)
|
48
|
|
Modco trading
portfolio trading activity
|
|
(35,996
|
)
|
5,496
|
|
(41,492
|
)
|
Other
|
|
(590
|
)
|
3,210
|
|
(3,800
|
)
|
Total realized
gains (losses) - investments
|
|
$
|
(28,045
|
)
|
$
|
13,294
|
|
$
|
(41,339
|
)
|
|
|
|
|
|
|
|
|
Foreign currency
swaps
|
|
$
|
3,171
|
|
$
|
4,577
|
|
$
|
(1,406
|
)
|
Foreign currency
adjustments on stable value contracts
|
|
(3,007
|
)
|
(443
|
)
|
(2,564
|
)
|
Derivatives
related to mortgage loan commitments
|
|
(13,593
|
)
|
|
|
(13,593
|
)
|
Embedded
derivatives related to reinsurance
|
|
29,365
|
|
(2,837
|
)
|
32,202
|
|
Derivatives
related to corporate debt
|
|
6,493
|
|
1,321
|
|
5,172
|
|
Credit default
swaps
|
|
(15,150
|
)
|
|
|
(15,150
|
)
|
Other
derivatives
|
|
(8,936
|
)
|
(4,909
|
)
|
(4,027
|
)
|
Total realized
(losses) gains - derivatives
|
|
$
|
(1,657
|
)
|
$
|
(2,291
|
)
|
$
|
634
|
|
Realized
gains and losses on investments reflect portfolio management activities
designed to maintain proper matching of assets and liabilities and to enhance
long-term investment portfolio performance.
The change in net realized investment gains (losses), excluding
impairments, during the first three months of 2008 primarily reflects the
normal operation of our asset/liability program within the context of the
changing interest rate environment.
There
were no impairments for the three months ended March 31, 2008 compared to
$0.1 million for the three months ended March 31, 2007. The $0.6 million of other realized losses
recognized for the three months ended March 31, 2008 includes foreign exchange
gains of $0.6 million and other losses totaling $1.2 million. As of March 31, 2008, net losses of $36.0
million primarily related to mark-to-market changes on our modified
coinsurance (Modco) trading portfolios associated with the Chase
Insurance Group acquisition were also included in realized gains and
losses. Of this amount, approximately
$7.7 million of losses were realized through the sale of certain securities,
which will be reimbursed to us over time through the reinsurance settlement
process for this block of business. Additional details on our investment
performance and evaluation are provided in the Consolidated Investments
section below.
Realized
investment gains and losses related to derivatives represent changes in the
fair value of derivative financial instruments and gains (losses) on
derivative contracts closed during the period.
We have entered into foreign currency swaps to mitigate the risk of
changes in the value of principal and interest payments to be made on certain
of our foreign currency denominated stable value contracts. We recorded net realized gains of
$0.2 million from these securities for the three months ended March 31,
2008. These gains were the result of
differences in the related foreign currency spot and forward rates used to
value the stable value contracts and foreign currency swaps. We have taken short positions in
U.S. Treasury futures to mitigate interest rate risk related to our
mortgage loan commitments. We recorded
$13.6 million in net losses from these securities for the three months ended
March 31, 2008. The net losses from
these securities were the result of $10.7 million of adjustments related to
closed positions and $2.9 million of mark-to-market adjustments.
52
We
also have in place various modified coinsurance and funds withheld arrangements
that, in accordance with DIG B36 (Embedded Derivatives: Modified
Coinsurance Arrangements and Debt Instruments That Incorporate Credit Risk
Exposures That Are Unrelated or Only Partially Related to the Creditworthiness
of the Obligor under Those Instruments), contain embedded derivatives. The $29.4 million in gains on these embedded
derivatives were a result of spread widening, partially offset by lower
interest rates. In the first three
months of 2008, the investment portfolios that support the related modified
coinsurance reserves and funds withheld arrangements had mark-to-market losses
that more than offset the gains on these embedded derivatives.
We use
interest rate swaps to mitigate interest rate risk related to certain Senior
Notes, Medium-Term Notes, and subordinated debt securities. These positions resulted in gains of
$6.5 million for the three months ended March 31, 2008.
Credit default swaps reflected unrealized loss
adjustments of $15.2 million, primarily related to mark-to-market
adjustments, for the three months ended March 31, 2008. We entered into these credit default swaps to
enhance the return on our investment portfolio.
We also use various swaps, options, and swaptions to
mitigate risk related to other interest rate exposures. We realized losses of $2.5 million on
swaptions for the three months ended March 31, 2008. Equity call options generated losses of
$3.5 million for the three months ended March 31, 2008. The GMWB rider embedded derivatives on
certain variable deferred annuities had realized losses of $2.8
million for the three months ended March 31, 2008. Other derivative contracts generated net
losses of $0.2 million for the three months ended March 31, 2008.
Realized
losses are comprised of both write-downs on other-than-temporary impairments
and actual sales of investments. For the
three months ended March 31, 2008, there were no pre-tax other-than-temporary
impairments in our investments compared to $0.1 million for the three months
ended March 31, 2007.
As
previously discussed, management considers several factors when determining
other-than-temporary impairments.
Although we generally intend to hold securities until maturity, we may
change our position as a result of a change in circumstances. Any such decision is consistent with our
classification of all but a specific portion of our investment portfolio as
available for sale. For the three months
ended March 31, 2008, we sold securities in an unrealized loss position
with a market value of $93.2 million resulting in a realized loss of
$0.5 million. The remaining security sales that generated realized losses
included a significant number of US Treasury and government obligations and
were sold as a result of normal portfolio rebalancing activity and tax
planning. No single security sold during
the first three months of 2008 incurred a loss greater than $0.1 million. For
such securities, the proceeds, realized loss, and total time period that the
security had been in an unrealized loss position are presented in the table
below:
|
|
Proceeds
|
|
% Proceeds
|
|
Realized Loss
|
|
% Realized Loss
|
|
|
|
(Dollars In Thousands)
|
|
<= 90 days
|
|
$
|
72,701
|
|
78.0
|
%
|
$
|
(206
|
)
|
39.5
|
%
|
>90 days but
<= 180 days
|
|
7,000
|
|
7.5
|
|
(129
|
)
|
24.8
|
|
>180 days but
<= 270 days
|
|
1,000
|
|
1.1
|
|
(19
|
)
|
3.6
|
|
>270 days but
<= 1 year
|
|
12,490
|
|
13.4
|
|
(167
|
)
|
32.1
|
|
Total
|
|
$
|
93,191
|
|
100.0
|
%
|
$
|
(521
|
)
|
100.0
|
%
|
Unrealized Gains and Losses
Available for Sale Securities
The
information presented below relates to investments at a certain point in time
and is not necessarily indicative of the status of the portfolio at any time
after March 31, 2008, the balance sheet date. Information about unrealized gains and losses
is subject to rapidly changing conditions, including volatility of financial
markets and changes in interest rates.
As indicated above, management considers a number of factors in
determining if an unrealized loss is other than temporary, including our
ability and intent to hold the security until recovery. Furthermore, since the timing of recognizing
realized gains and losses is largely based on managements decisions as to the
timing and selection of investments to be sold, the tables and information
provided below should be considered within the context of the overall
unrealized gain (loss) position of the portfolio. As of March 31, 2008, we had an overall
pre-tax net unrealized loss of $590.5 million.
53
For
traded and private fixed maturity and equity securities held that are in an
unrealized loss position as of March 31, 2008, the estimated market value,
amortized cost, unrealized loss, and total time period that the security has
been in an unrealized loss position are presented in the table below:
|
|
Estimated
|
|
% Market
|
|
Amortized
|
|
% Amortized
|
|
Unrealized
|
|
% Unrealized
|
|
|
|
Market Value
|
|
Value
|
|
Cost
|
|
Cost
|
|
Loss
|
|
Loss
|
|
|
|
(Dollars In Thousands)
|
|
<= 90 days
|
|
$
|
6,514,572
|
|
55.8
|
%
|
$
|
6,778,368
|
|
53.8
|
%
|
$
|
(263,796
|
)
|
28.2
|
%
|
>90 days but
<= 180 days
|
|
1,563,729
|
|
13.4
|
|
1,767,390
|
|
14.0
|
|
(203,661
|
)
|
21.8
|
|
>180 days but
<= 270 days
|
|
754,997
|
|
6.5
|
|
836,905
|
|
6.6
|
|
(81,908
|
)
|
8.7
|
|
>270 days but
<= 1 year
|
|
743,392
|
|
6.4
|
|
857,261
|
|
6.8
|
|
(113,869
|
)
|
12.2
|
|
>1 year but
<= 2 years
|
|
721,951
|
|
6.2
|
|
834,462
|
|
6.6
|
|
(112,511
|
)
|
12.0
|
|
>2 years but
<= 3 years
|
|
1,073,693
|
|
9.2
|
|
1,190,984
|
|
9.5
|
|
(117,291
|
)
|
12.5
|
|
>3 years but
<= 4 years
|
|
195,685
|
|
1.7
|
|
218,723
|
|
1.7
|
|
(23,038
|
)
|
2.5
|
|
>4 years but
<= 5 years
|
|
85,591
|
|
0.7
|
|
95,504
|
|
0.8
|
|
(9,913
|
)
|
1.1
|
|
>5 years
|
|
18,119
|
|
0.1
|
|
27,414
|
|
0.2
|
|
(9,295
|
)
|
1.0
|
|
Total
|
|
$
|
11,671,729
|
|
100.0
|
%
|
$
|
12,607,011
|
|
100.0
|
%
|
$
|
(935,282
|
)
|
100.0
|
%
|
The
unrealized losses as of March 31, 2008, primarily relate to the widening
of credit spreads as treasury rates declined during the quarter. Factors such
as credit enhancements within the deal structures and the underlying collateral
performance/characteristics support the recoverability of the investments. The
Company does not consider these unrealized loss positions to be other than
temporary, based on the factors discussed and because the Company has the
ability and intent to hold these investments until maturity or until the fair
values of the investments have recovered.
As of
March 31, 2008, securities with a market value of $709.2 million and
$130.7 million of unrealized losses were issued in commercial mortgage
loan securitizations that we sponsored, including $8.2 million of
unrealized losses greater than five years.
We do not consider these unrealized positions to be other than temporary
because the underlying mortgage loans continue to perform consistently with our
original expectations. Our underwriting
procedures relative to our commercial loan portfolio are based on a
conservative, disciplined approach. We
concentrate our underwriting expertise on a small number of commercial real
estate asset types associated with the necessities of life (retail,
multi-family, professional office buildings, and warehouses). We believe these
asset types tend to weather economic downturns better than other commercial
asset classes that we have chosen to ignore. We believe this disciplined
approach has helped to maintain a relatively low delinquency and foreclosure
rate throughout our history.
In
assessing whether or not these unrealized positions should be considered other
than temporary, we review the underlying cash flows, as well as the associated
values of the real estate collateral for the loans included in our commercial
mortgage loan securitizations.
54
We
have no material concentrations of issuers or guarantors of fixed maturity
securities. The industry segment
composition of all securities in an unrealized loss position held as of
March 31, 2008, is presented in the following table:
|
|
Estimated
|
|
% Market
|
|
Amortized
|
|
% Amortized
|
|
Unrealized
|
|
% Unrealized
|
|
|
|
Market Value
|
|
Value
|
|
Cost
|
|
Cost
|
|
Loss
|
|
Loss
|
|
|
|
(Dollars In Thousands)
|
|
Agency Mortgages
|
|
$
|
276,389
|
|
2.4
|
%
|
$
|
280,263
|
|
2.2
|
%
|
$
|
(3,874
|
)
|
0.4
|
%
|
Banking
|
|
1,067,163
|
|
9.1
|
|
1,222,016
|
|
9.7
|
|
(154,853
|
)
|
16.6
|
|
Basic Industrial
|
|
319,744
|
|
2.7
|
|
349,461
|
|
2.8
|
|
(29,717
|
)
|
3.2
|
|
Brokerage
|
|
389,903
|
|
3.3
|
|
426,883
|
|
3.4
|
|
(36,980
|
)
|
4.0
|
|
Capital Goods
|
|
87,355
|
|
0.7
|
|
94,135
|
|
0.7
|
|
(6,780
|
)
|
0.7
|
|
Communications
|
|
425,818
|
|
3.7
|
|
477,453
|
|
3.8
|
|
(51,635
|
)
|
5.5
|
|
Consumer
Cyclical
|
|
261,002
|
|
2.2
|
|
298,564
|
|
2.4
|
|
(37,562
|
)
|
4.0
|
|
Consumer
Noncyclical
|
|
248,948
|
|
2.1
|
|
261,174
|
|
2.1
|
|
(12,226
|
)
|
1.3
|
|
Electric
|
|
837,169
|
|
7.2
|
|
881,297
|
|
7.0
|
|
(44,128
|
)
|
4.7
|
|
Energy
|
|
134,631
|
|
1.2
|
|
139,245
|
|
1.1
|
|
(4,614
|
)
|
0.5
|
|
Finance
Companies
|
|
296,151
|
|
2.5
|
|
330,307
|
|
2.6
|
|
(34,156
|
)
|
3.7
|
|
Insurance
|
|
590,349
|
|
5.1
|
|
642,096
|
|
5.1
|
|
(51,747
|
)
|
5.5
|
|
Municipal
Agencies
|
|
470
|
|
0.0
|
|
492
|
|
0.0
|
|
(22
|
)
|
0.0
|
|
Natural Gas
|
|
489,454
|
|
4.2
|
|
515,117
|
|
4.1
|
|
(25,663
|
)
|
2.7
|
|
Non-Agency
Mortgages
|
|
4,190,698
|
|
35.9
|
|
4,478,705
|
|
35.5
|
|
(288,007
|
)
|
30.8
|
|
Other Finance
|
|
1,572,816
|
|
13.5
|
|
1,700,065
|
|
13.5
|
|
(127,249
|
)
|
13.6
|
|
Other Industrial
|
|
110,680
|
|
1.0
|
|
115,807
|
|
0.9
|
|
(5,127
|
)
|
0.6
|
|
Other Utility
|
|
14,608
|
|
0.1
|
|
15,044
|
|
0.1
|
|
(436
|
)
|
0.1
|
|
Real Estate
|
|
11,170
|
|
0.1
|
|
12,364
|
|
0.1
|
|
(1,194
|
)
|
0.1
|
|
Technology
|
|
83,344
|
|
0.7
|
|
88,286
|
|
0.7
|
|
(4,942
|
)
|
0.5
|
|
Transportation
|
|
141,546
|
|
1.2
|
|
146,575
|
|
1.2
|
|
(5,029
|
)
|
0.5
|
|
U.S. Govt
Agencies
|
|
122,321
|
|
1.1
|
|
131,662
|
|
1.0
|
|
(9,341
|
)
|
1.0
|
|
Total
|
|
$
|
11,671,729
|
|
100.0
|
%
|
$
|
12,607,011
|
|
100.0
|
%
|
$
|
(935,282
|
)
|
100.0
|
%
|
The
range of maturity dates for securities in an unrealized loss position as of
March 31, 2008, varies, with 12.7% maturing in less than 5 years,
18.1% maturing between 5 and 10 years, and 69.2% maturing after
10 years. The following table shows
the credit rating of securities in an unrealized loss position as of March 31,
2008:
S&P or Equivalent
|
|
Estimated
|
|
% Market
|
|
Amortized
|
|
% Amortized
|
|
Unrealized
|
|
% Unrealized
|
|
Designation
|
|
Market Value
|
|
Value
|
|
Cost
|
|
Cost
|
|
Loss
|
|
Loss
|
|
|
|
(Dollars In Thousands)
|
|
AAA/AA/A
|
|
$
|
8,543,272
|
|
73.2
|
%
|
$
|
9,150,306
|
|
72.6
|
%
|
$
|
(607,034
|
)
|
64.9
|
%
|
BBB
|
|
2,273,806
|
|
19.5
|
|
2,443,390
|
|
19.4
|
|
(169,584
|
)
|
18.1
|
|
Investment grade
|
|
10,817,078
|
|
92.7
|
|
11,593,696
|
|
92.0
|
|
(776,618
|
)
|
83.0
|
|
BB
|
|
551,193
|
|
4.7
|
|
623,462
|
|
4.9
|
|
(72,269
|
)
|
7.8
|
|
B
|
|
230,404
|
|
2.0
|
|
276,465
|
|
2.2
|
|
(46,061
|
)
|
4.9
|
|
CCC or lower
|
|
73,054
|
|
0.6
|
|
113,388
|
|
0.9
|
|
(40,334
|
)
|
4.3
|
|
Below investment
grade
|
|
854,651
|
|
7.3
|
|
1,013,315
|
|
8.0
|
|
(158,664
|
)
|
17.0
|
|
Total
|
|
$
|
11,671,729
|
|
100.0
|
%
|
$
|
12,607,011
|
|
100.0
|
%
|
$
|
(935,282
|
)
|
100.0
|
%
|
As of
March 31, 2008, securities in an unrealized loss position that were rated
as below investment grade represented 7.3% of the total market value and 17.0%
of the total unrealized loss. Unrealized
losses related to below investment grade securities that had been in an
unrealized loss position for more than twelve months were $89.1 million. Securities in an unrealized loss position
rated less than investment grade were 3.0% of invested assets. We generally purchase our investments with
the intent to hold to maturity. We do
not expect these investments to adversely affect our liquidity or ability to
maintain proper matching of assets and liabilities.
55
The
following table shows the estimated market value, amortized cost, unrealized
loss, and total time period that the security has been in an unrealized loss
position for all below investment grade securities:
|
|
Estimated
|
|
% Market
|
|
Amortized
|
|
% Amortized
|
|
Unrealized
|
|
% Unrealized
|
|
|
|
Market Value
|
|
Value
|
|
Cost
|
|
Cost
|
|
Loss
|
|
Loss
|
|
|
|
(Dollars In Thousands)
|
|
<= 90 days
|
|
$
|
264,648
|
|
31.0
|
%
|
$
|
279,400
|
|
27.6
|
%
|
$
|
(14,752
|
)
|
9.3
|
%
|
>90 days but
<= 180 days
|
|
190,587
|
|
22.3
|
|
208,555
|
|
20.6
|
|
(17,968
|
)
|
11.3
|
|
>180 days but
<= 270 days
|
|
73,930
|
|
8.6
|
|
88,396
|
|
8.7
|
|
(14,466
|
)
|
9.1
|
|
>270 days but
<= 1 year
|
|
71,668
|
|
8.4
|
|
94,017
|
|
9.3
|
|
(22,349
|
)
|
14.1
|
|
>1 year but
<= 2 years
|
|
52,496
|
|
6.1
|
|
74,737
|
|
7.4
|
|
(22,241
|
)
|
14.0
|
|
>2 years but
<= 3 years
|
|
145,260
|
|
17.0
|
|
182,052
|
|
17.9
|
|
(36,792
|
)
|
23.2
|
|
>3 years but
<= 4 years
|
|
35,586
|
|
4.2
|
|
52,373
|
|
5.2
|
|
(16,787
|
)
|
10.6
|
|
>4 years but
<= 5 years
|
|
5,482
|
|
0.6
|
|
11,681
|
|
1.1
|
|
(6,199
|
)
|
3.9
|
|
>5 years
|
|
14,994
|
|
1.8
|
|
22,104
|
|
2.2
|
|
(7,110
|
)
|
4.5
|
|
Total
|
|
$
|
854,651
|
|
100.0
|
%
|
$
|
1,013,315
|
|
100.0
|
%
|
$
|
(158,664
|
)
|
100.0
|
%
|
As of
March 31, 2008, below investment grade securities with a market value of
$23.8 million and $11.1 million of unrealized losses were issued in
commercial mortgage loan securitizations that we sponsored, including
securities in an unrealized loss position greater than five years with a market
value of $13.6 million and $6.1 million of unrealized losses. We do not consider these unrealized positions
to be other than temporary, because the underlying mortgage loans continue to
perform consistently with our original expectations. In addition, of the total below investment
grade securities, approximately $733.8 million and $82.5 million, respectively,
relate to corporate securities and public utility securities.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
We
meet our liquidity requirements primarily through positive cash flows from our
operating subsidiaries. Primary sources
of cash from the operating subsidiaries are premiums, deposits for policyholder
accounts, investment sales and maturities, and investment income. Primary uses of cash for the operating
subsidiaries include benefit payments, withdrawals from policyholder accounts,
investment purchases, policy acquisition costs, and other operating expenses.
While
we generally anticipate that the cash flow of our operating subsidiaries will
be sufficient to meet our investment commitments and operating cash needs, we
recognize that investment commitments scheduled to be funded may, from time to
time, exceed the funds then available.
Therefore, we have established repurchase agreement programs for certain
of our insurance subsidiaries to provide liquidity when needed. We expect that the rate received on our
investments will equal or exceed our borrowing rate. As of March 31, 2008, we did not have a
liability related to such borrowings. Additionally, we may, from time to time,
sell short-duration stable value products to complement our cash management
practices. We may also use securitization
transactions involving our commercial mortgage loans to increase liquidity for
the operating subsidiaries.
In
addition, under a revolving line of credit arrangement, we have the ability to
borrow on an unsecured basis at an interest rate of LIBOR plus 0.30%. On April
16, 2008, we entered into a Second Amended and Restated Credit Agreement (the
Credit Agreement) to increase the commitment to a maximum principal amount of
$500 million (the New Credit Facility). We have the right in certain circumstances
to request that the commitment under the New Credit Facility be increased up to
a maximum principal amount of $600 million.
The maturity date on the New Credit Facility is April 16, 2013. On March
31, 2008, we had $20 million outstanding under our existing $200 million
revolving line of credit due July 30, 2009 (the Existing Credit Facility). We
paid the outstanding balance under the Existing Credit Facility in full on
April 16, 2008. There is currently no balance outstanding under the New Credit Facility.
Our
positive cash flows from operations are used to fund an investment portfolio
that provides for future benefit payments.
We employ a formal asset/liability program to manage the cash flows of
our investment portfolio relative to our long-term benefit obligations.
56
The
life insurance subsidiaries were committed as of March 31, 2008, to fund
mortgage loans in the amount of $843.1 million. Our subsidiaries held $1.2 billion in
cash and short-term investments as of March 31, 2008. We had an additional $11.3 million in
cash and short-term investments available for general corporate purposes.
Sources
and Uses of Cash
Our
primary sources of funding are dividends from our operating subsidiaries; revenues
from investment, data processing, legal, and management services rendered to
subsidiaries; investment income; and external financing. These sources of cash support our general
corporate needs including our common stock dividends and debt service. The states in which our insurance
subsidiaries are domiciled impose certain restrictions on the insurance
subsidiaries ability to pay us dividends.
These restrictions are generally based in part on the prior years
statutory income and surplus. Generally,
these restrictions pose no short-term liquidity concerns. We plan to retain substantial portions of the
earnings of our insurance subsidiaries in those companies primarily to support
their future growth.
The
following chart shows the cash flows provided by or used in operating,
investing, and financing activities for the three months ended March 31, 2008
and March 31, 2007:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Dollars In Thousands)
|
|
|
|
|
|
|
|
Net cash
provided by operating activities
|
|
$
|
199,465
|
|
$
|
231,485
|
|
Net cash (used
in) provided by investing activities
|
|
(604,984
|
)
|
102,530
|
|
Net cash provided
by (used in) financing activites
|
|
377,300
|
|
(283,341
|
)
|
Total
|
|
$
|
(28,219
|
)
|
$
|
50,674
|
|
Three
Months Ended March 31, 2008 compared to Three Months Ended March 31, 2007
Net cash
provided by operating activities
-
Cash
flows from operating activities are affected by the timing of premiums
received, fees received, investment income, and expenses paid. Principal
sources of cash include sales of our products and services. As an insurance
business, we typically generate positive cash flows from operating activities,
as premiums and deposits collected from our insurance and investment products
exceed benefits paid and redemptions, and we invest the excess. Accordingly, in
analyzing our cash flows we focus on the change in the amount of cash available
and used in investing activities.
Net cash (used
in) provided by investing activities
-
The variance in net cash used in investing activities for
the three months ended March 31, 2008 compared to March 31, 2007 was primarily
the result of activity related to our investment portfolio.
Net cash
provided by (used in) financing activities
-
Changes in cash from financing activities primarily relate
to the issuance and repayment of borrowings, dividends to our stockholders and
other capital transactions, as well as the issuance of, and redemptions and
benefit payments on, investment contracts. The increase for the three months
ended March 31, 2008 compared to March 31, 2007 was primarily the result of
fluctuations in investment product deposits and withdrawals.
Capital Resources
To
give us flexibility in connection with future acquisitions and other funding
needs, we have registered debt securities, preferred and common stock, and
stock purchase contracts of Protective Life Corporation, and additional
preferred securities of special purpose finance subsidiaries under the
Securities Act of 1933 on a delayed (or shelf) basis.
57
As of
March 31, 2008, our capital structure consisted of Medium-Term Notes,
Senior Notes, Subordinated Debentures, and shareowners equity. We also had a $200 million revolving
line of credit, under which we could borrow funds at an interest rate of LIBOR
plus 0.30%, with balances due July 30, 2009. As of March 31, 2008, we had an
outstanding balance of $20 million under this line of credit. During April of 2008, we entered into the New
Credit Facility with a maturity date of April 16, 2013, to increase the
capacity to $500 million. See Note 11,
Subsequent Event
for additional information. No
compensating balances are required to maintain the line of credit. The line of credit arrangement contains,
among other provisions, requirements for maintaining certain financial ratios
and restrictions on the indebtedness that we and our subsidiaries can
incur. Additionally, the line of credit
arrangement precludes us, on a consolidated basis, from incurring debt in
excess of 40% of our total capital. We
were in compliance with all debt covenants as of March 31, 2008.
Golden
Gate Captive Insurance Company (Golden Gate), a special purpose
financial captive insurance company wholly owned by Protective Life, our
largest operating subsidiary, had $800.0 million of non-recourse funding
obligations outstanding as of March 31, 2008, the maximum amount available
under a surplus notes facility established with certain purchasers. These non-recourse funding obligations bear a
floating rate of interest and mature in 2037.
As the block of business grows and ages, unless additional funding
mechanisms are put into place, reserving increases will reduce our available
statutory capital and surplus. We have
experienced higher proportional borrowing costs associated with the
non-recourse funding obligations supporting the business reinsured to Golden
Gate. The maximum rate we could be
required to pay under these obligations is LIBOR plus 425 basis points. These costs have been mitigated by a drop in
LIBOR during the three months ended March 31, 2008.
Golden
Gate II Captive Insurance Company (Golden Gate II), a special
purpose financial captive insurance company wholly owned by
Protective Life, had $575.0 million of non-recourse funding
obligations outstanding as of March 31, 2008.
These non-recourse funding obligations mature in 2052. We do not anticipate having to pursue
additional funding related to this block of business; however, we have
contingent approval to issue an additional $100 million of obligations if
necessary. We have experienced higher
proportional borrowing costs associated with certain of our non-recourse
funding obligations supporting the business reinsured to Golden Gate II. These
higher costs are the result of higher interest costs associated with the
illiquidity of the current market for auction rate securities, as well as a
negative watch placed on our guarantor by certain rating agencies. The maximum rate we could be required to pay
under these obligations is LIBOR plus 200 basis points. These costs have been mitigated by a drop in
LIBOR during the three months ended March 31, 2008.
On
May 7, 2007, our Board of Directors extended our previously authorized
$100 million share repurchase program.
The current authorization extends through May 6, 2010. During the
first three months of 2008, we repurchased approximately 450,800 shares, at a
total cost of approximately $17.1 million. For additional information, see Part
II, Item 2,
Unregistered Sales of Equity Securities and Use of
Proceeds
. Future activity
will be dependent upon many factors, including capital levels, rating agency
expectations, and the relative attractiveness of alternative uses for capital.
A life
insurance companys statutory capital is computed according to rules prescribed
by the National Association of Insurance Commissioners (NAIC), as
modified by state law. Generally
speaking, other states in which a company does business defer to the
interpretation of the domiciliary state with respect to NAIC rules, unless
inconsistent with the other states law.
Statutory accounting rules are different from U.S. GAAP and are
intended to reflect a more conservative view, for example, requiring immediate
expensing of policy acquisition costs.
The NAICs risk-based capital requirements require insurance companies
to calculate and report information under a risk-based capital formula. The achievement of long-term growth will
require growth in the statutory capital of our insurance subsidiaries. The subsidiaries may secure additional
statutory capital through various sources, such as retained statutory earnings
or equity contributions by us.
We cede material amounts of insurance and transfer
related assets to other insurance companies through reinsurance. However, notwithstanding the transfer of
related assets, we remain liable with respect to ceded insurance should any
reinsurer fail to meet the obligations that such reinsurer assumed. We evaluate the financial condition of our
reinsurers and monitor the concentration of credit risk arising from them. During the first three months of 2008, we
ceded premiums to third-party reinsurers amounting to $371.1 million. In addition, we had receivables from
reinsurers amounting to $5.3 billion as of March 31, 2008. We review reinsurance receivable amounts for
collectability and establish appropriate bad debt reserves if deemed
appropriate.
58
As of
March 31, 2008, we had approximately $730.5 million (fair value) of Auction
Rate Securities (ARSs). Of these holdings, approximately $727.5 million, or
99.6%, were rated AAA. The holdings
include approximately $700.8 million of student loan backed auction rate
securities, which are guaranteed by the Federal Family Education Loan Program,
and $29.7 million of municipal auction rate securities. While the auction rate
market has experienced certain liquidity constraints, we believe that based on
our cash, cash equivalents and marketable securities balances, and our operating cash flows, any lack of liquidity
in the ARS market will not have a material impact on our liquidity, financial
condition, or cash flows.
Liabilities
Many
of our products contain surrender charges and other features that reward
persistency and penalize the early withdrawal of funds. Certain stable value and annuity contracts
have market-value adjustments that protect us against investment losses if
interest rates are higher at the time of surrender than at the time of issue.
As of
March 31, 2008, we had policy liabilities and accruals of approximately $17.9
billion. Our interest-sensitive life
insurance policies have a weighted average minimum credited interest rate of
approximately 3.7%.
59
Contractual Obligations
The
table below sets forth future maturities of debt, non-recourse funding
obligations, subordinated debt securities, stable value products, notes
payable, operating lease obligations, other property lease obligations,
mortgage loan commitments, liabilities related to variable interest entities,
policyholder obligations, and defined benefit pension obligations.
As of
March 31, 2008, in accordance with
FASB
Interpretation No. 48,
Accounting for Uncertainty
in Income Taxes-an Interpretation of FASB Statement 109
, we
recorded a $32.4 million liability for uncertain tax positions, including
interest on unrecognized tax benefits.
These amounts are not included in the long-term contractual obligations
table because of the difficulty in making reasonably reliable estimates of the
occurrence or timing of cash settlements with the respective taxing
authorities.
|
|
|
|
Payments due by period
|
|
|
|
|
|
Less than
|
|
|
|
|
|
More than
|
|
|
|
Total
|
|
1 year
|
|
1-3 years
|
|
3-5 years
|
|
5 years
|
|
|
|
(Dollars In Thousands)
|
|
Long-term debt
(a)
|
|
$
|
781,080
|
|
$
|
29,520
|
|
$
|
77,168
|
|
$
|
65,422
|
|
$
|
608,970
|
|
Non-recourse
funding obligations
(b)
|
|
3,785,209
|
|
71,628
|
|
143,257
|
|
143,257
|
|
3,427,067
|
|
Subordinated
debt securities
(c)
|
|
1,929,102
|
|
37,147
|
|
74,294
|
|
74,294
|
|
1,743,367
|
|
Stable value
products
(d)
|
|
6,435,577
|
|
1,605,138
|
|
1,850,052
|
|
1,354,573
|
|
1,625,814
|
|
Operating leases
(e)
|
|
31,298
|
|
6,687
|
|
11,377
|
|
6,805
|
|
6,429
|
|
Home office
lease
(f)
|
|
89,827
|
|
2,575
|
|
5,164
|
|
5,143
|
|
76,945
|
|
Mortgage loan
commitments
|
|
843,136
|
|
843,136
|
|
|
|
|
|
|
|
Liabilities
related to variable interest entities
(g)
|
|
427,581
|
|
11,033
|
|
416,548
|
|
|
|
|
|
Policyholder
obligations
(h)
|
|
20,739,980
|
|
1,584,673
|
|
2,844,295
|
|
2,644,089
|
|
13,666,923
|
|
Defined benefit
pension obligations
(i)
|
|
2,326
|
|
2,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
Long-term debt includes all principal
amounts owed on note agreements and expected interest payments due over the
term of notes.
(b)
Non-recourse funding obligations include
all principal amounts owed on note agreements and expected interest payments
due over the term of the notes.
(c)
Subordinated debt securities includes all
principal amounts owed to our non-consolidated special purpose finance
subsidiaries and interest payments due over the term of the obligations.
(d)
Anticipated stable value products cash
flows including interest.
(e)
Includes all lease payments required under operating lease
agreements.
(f)
The lease payments shown assume we
exercise our option to purchase the building at the end of the lease term. Additionally, the payments due by period
above were computed based on the terms of the renegotiated lease agreement,
which was entered in January 2007.
(g)
Liabilities related to variable interest
entities are not our legal obligations, but will be repaid with cash flows
generated by the variable interest entities.
The amounts represent scheduled principal and expected interest
payments.
(h)
Estimated contractual policyholder
obligations are based on mortality, morbidity, and lapse assumptions comparable
to our historical experience, modified for recent observed trends. These obligations are based on current
balance sheet values and include expected interest crediting, but do not
incorporate an expectation of future market growth, or future deposits. Due to the significance of the assumptions
used, the amounts presented could materially differ from actual results. As separate account obligations are legally
insulated from general account obligations, the separate account obligations
will be fully funded by cash flows from separate account assets. We expect to fully fund the general account
obligations from cash flows from general account investments.
(i)
Estimated 2008 contributions to our
defined benefit pension plan and unfunded excess benefit plan approximate the
projected expense to be recognized in 2008.
Due to the significance of the assumptions used, this amount could
differ from actual results. No estimate
has been made of amounts to be contributed to these plans in years subsequent
to 2008.
60
FAIR
VALUE OF FINANCIAL INSTRUMENTS
On
January 1, 2008, we adopted SFAS No. 157.
This standard defines fair value, establishes a framework for measuring
fair value, establishes a fair value hierarchy based on the quality of inputs
used to measure fair value and enhances disclosure requirements for fair value
measurements. The term fair value as
used in this document is defined in accordance with SFAS No. 157. The
cumulative effect of adopting this standard resulted in an increase to January
1, 2008 retained earnings of $1.5 million and a decrease in income before
income taxes of $0.4 million for the three months ended March 31, 2008. The standard describes three levels of inputs
that may be used to measure fair value. For more information, see Note 1
,
Basis of Presentation and
Summary of Significant Accounting Policies
and Note 10,
Fair Value of Financial
Instruments.
Available-for-sale securities and trading account
securities are recorded at fair value, which is primarily based on actively
traded markets where prices are based on either direct market quotes or
observed transactions. Liquidity is a significant factor in the determination
of the fair value for these securities.
Market price quotes may not be readily available for some positions, or
for some positions within a market sector where trading activity has slowed
significantly or ceased. Situations of
illiquidity generally are triggered by the markets perception of credit
uncertainty regarding a single company or a specific market sector. In these
instances, fair value is determined based on limited available market
information and other factors, principally from reviewing the issuers
financial position, changes in credit ratings, and cash flows on the
investments. At March 31, 2008, $4.2
billion of Available-for-sale and trading account assets were classified as
level three fair value assets.
The fair values of derivative assets and liabilities
include adjustments for market liquidity, counterparty credit quality and other
deal specific factors, where appropriate. The fair values of derivative assets
and liabilities traded in the over-the-counter market are determined using
quantitative models that require the use of multiple market inputs including
interest rates, prices and indices to generate continuous yield or pricing
curves and volatility factors, which are used to value the position. The
predominance of market inputs are actively quoted and can be validated through
external sources. Estimation risk is greater for derivative asset and liability
positions that are either option-based or have longer maturity dates where
observable market inputs are less readily available or are unobservable, in
which case quantitative based extrapolations of rate, price or index scenarios
are used in determining fair values. At March 31, 2008, the level three fair
values of derivative assets and liabilities determined by these quantitative
models was $8.5 million and $18.1 million. These amounts reflect the full fair
value of the derivatives as defined in accordance with SFAS No. 157 and do not
isolate the discrete value associated with the specific subjective valuation
variable.
The liabilities of certain of our annuity account
balances are calculated at fair value using actuarial valuation models. These
models use various observable and unobservable inputs including projected
future cash flows, policyholder behavior, the Companys credit rating and other
market conditions. At March 31, 2008,
the level three fair value of these liabilities was $146.0 million. This amount
reflects the full fair value of the liabilities as defined in accordance with
SFAS No. 157 and does not isolate the discrete value associated with the
specific subjective valuation variable.
MARKET RISK EXPOSURES AND OFF-BALANCE
SHEET ARRANGEMENTS
Our financial position and earnings are
subject to various market risks including changes in interest rates, changes in
the yield curve, changes in spreads between risk-adjusted and risk-free
interest rates, changes in foreign currency rates, changes in used vehicle
prices, and equity price risks. We
analyze and manage the risks arising from market exposures of financial
instruments, as well as other risks, through an integrated asset/liability
management process. Our asset/liability
management programs and procedures involve the monitoring of asset and
liability durations for various product lines; cash flow testing under various
interest rate scenarios; and the continuous rebalancing of assets and
liabilities with respect to yield, risk, and cash flow characteristics. These programs also incorporate the use of
derivative financial instruments primarily to reduce our exposure to interest
rate risk, inflation risk, currency exchange risk, and equity market risk.
The
primary focus of our asset/liability program is the management of interest rate
risk within the insurance operations.
This includes monitoring the duration of both investments and insurance
liabilities to maintain an appropriate balance between risk and profitability
for each product category, and for us as a whole. It is our policy to generally maintain asset
and liability durations within one-half year of one another, although, from
time to time, a broader interval may be allowed.
61
Derivative
instruments that are used as part of our interest rate risk management strategy
include interest rate swaps, interest rate futures, interest rate options and
interest rate swaptions. Our inflation
risk management strategy involves the use of swaps that require us to pay a
fixed rate and receive a floating rate that is based on changes in the Consumer
Price Index (CPI). We use foreign
currency swaps to manage our exposure to changes in the value of foreign
currency denominated stable value contracts.
We also use S&P 500
®
options to mitigate our
exposure to the value of equity indexed annuity contracts.
We
have sold credit derivatives to enhance the return on our investment
portfolio. These credit default swaps
create credit exposure similar to an investment in publicly-issued fixed
maturity cash investments. As of March 31,
2008, the notional amount of these credit default swaps was $210.0 million and
the swaps were in an unrealized loss position of $16.2 million,
respectively. As a result of the ongoing
disruption in the credit markets, the fair value of these derivatives is
expected to fluctuate in response to changing market conditions. We believe that the unrealized loss recorded
on these credit default swaps is not indicative of the economic value of the
investment. We expect the unrealized loss to reverse over the remaining life of
the credit default swap portfolio.
Derivative
instruments expose us to credit and market risk and could result in material
changes from quarter-to-quarter. We
minimize our credit risk by entering into transactions with highly rated
counterparties. We manage the market
risk associated with interest rate and foreign exchange contracts by
establishing and monitoring limits as to the types and degrees of risk that may
be undertaken. We monitor our use of
derivatives in connection with our overall asset/liability management programs
and procedures.
In
the ordinary course of our commercial mortgage lending operations, we will
commit to provide a mortgage loan before the property to be mortgaged has been
built or acquired. The mortgage loan
commitment is a contractual obligation to fund a mortgage loan when called upon
by the borrower. The commitment is not
recognized in our financial statements until the commitment is actually
funded. The mortgage loan commitment
contains terms, including the rate of interest, which may be different than
prevailing interest rates. As of March 31,
2008, we had outstanding mortgage loan commitments of $843.1 million at an average
rate of 6.28%.
We
believe our asset/liability management programs and procedures and certain
product features provide protection against the effects of changes in interest
rates under various scenarios.
Additionally, we believe our asset/liability management programs and
procedures provide sufficient liquidity to enable us to fulfill our obligation
to pay benefits under our various insurance and deposit contracts. However, our asset/liability management
programs and procedures incorporate assumptions about the relationship between
short-term and long-term interest rates (i.e., the slope of the yield
curve), relationships between risk-adjusted and risk-free interest rates,
market liquidity, spread movements and other factors, and the effectiveness of
our asset/liability management programs and procedures may be negatively
affected whenever actual results differ from those assumptions.
RECENTLY ISSUED ACCOUNTING STANDARDS
See
Note 1,
Basis of Presentation and Summary of
Significant Accounting Policies
, to the Consolidated Condensed
Financial Statements for information regarding recently issued accounting
standards.
62
RECENT DEVELOPMENTS
A
proposal to amend Actuarial Guideline 38 (promulgated by the NAIC and part
of the codification of statutory accounting principles) was approved by the
NAIC, with an effective date of July 1, 2005. Actuarial Guideline 38, also known as
AXXX, sets forth the reserve requirements for universal life insurance with
secondary guarantees (ULSG). The
changes to Actuarial Guideline 38 increase the reserve levels required for
many ULSG products, and potentially make those products more expensive and less
competitive as compared to other products including term and whole life
products. To the extent that the
additional reserves are generally considered to be economically redundant,
capital market or other solutions may emerge to reduce the impact of the
amendment. The NAIC is continuing to
study this issue and has issued additional changes to AG38 and
Regulation XXX, which had the effect of modestly decreasing the reserves
required for certain traditional and universal life policies that are issued on
January 1, 2007, and later. In
addition, accounting and actuarial groups within the NAIC have studied whether
to change the accounting standards that relate to certain reinsurance credits,
and whether, if changes are made, they are to be applied retrospectively,
prospectively only, or in a phased-in manner; a requirement to reduce the
reserve credit on ceded business, if applied retroactively, would have a
negative impact on our statutory capital.
The NAIC is also currently working to reform state regulation in various
areas, including comprehensive reforms relating to life insurance reserves.
Our
ability to implement financing solutions designed to fund a portion of our
statutory reserves on both the traditional and universal life blocks of
business is dependent on factors such as our ratings, the size of the blocks of
business affected, our mortality experience, credit market guarantors, and
other factors. We cannot predict the
continued availability of such solutions or the form that the solution may
take. To the extent that such solutions
are not available, our financial position could be adversely affected through
impacts including, but not limited to, higher borrowing costs, surplus strain,
lower sales capacity and possible reduced earnings expectations. Management continues to monitor options
related to these financing solutions.
During
2006, the NAIC made the determination that certain securities previously
classified as preferred securities had both debt and equity characteristics
and because of this, required unique reporting treatment. Under
a short-term solution, NAIC guidance mandates that certain of these securities
may have to carry a lower rating for asset valuation reserve and risk based
capital calculations. As a
result, certain securities receive a lower rating classification for asset
valuation reserve and risk based capital calculations. Our insurance subsidiaries currently invest
in these securities. As of March 31,
2008, we (including both insurance and non-insurance subsidiaries) held
approximately $1.0 billion (statutory carrying value) in securities that
meet the aforementioned notch-down criteria, based on evaluation of the
underlying characteristics of the securities.
A working group made up of accounting, actuarial and investment parties
continue to investigate what the appropriate long-term capital treatment should
be for these securities. We cannot
predict what impact a change in this guidance may have.
During
2006, the NAICs Reinsurance Task Force adopted a proposal suggesting broad
changes to the United States reinsurance market, with the stated intent to
establish a regulatory system that distinguishes financially strong reinsurers
from weak reinsurers, without relying exclusively on their state or country of
domicile, with collateral to be determined as appropriate. The task force recommended that regulation of
reinsurance procedures be amended to focus on broad based risk and credit
criteria and not solely on U.S. licensure status. Evaluation of this proposal will be taken
under consideration by the NAICs Financial Condition (E) Committee, the
Reinsurance Task Forces parent committee, as one of its charges during
2007. We cannot provide any assurance as
to what impact such changes to the United States reinsurance industry will have
on the availability, cost, or collateral restrictions associated with ongoing
or future reinsurance transactions.
The
NAIC adopted amendment(s) to the Unfair Trade Practices Act regarding the
use of travel in insurance underwriting.
The amendment states that the denial of life insurance based upon an individuals
past lawful travel experiences or future lawful travel plans, is prohibited
unless(i) the risk of loss for individuals traveling to a specified
destination at a specified time is reasonably anticipated to be greater than if
the individuals did not travel to that destinations at that time, and (ii) the
risk of traveling to a specific destination is based on sound actuarial
principles and actual or reasonably anticipated experience. We cannot predict at this time what impact,
if any, such changes would have on us.
63
The
California Department of Insurance has promulgated proposed regulations that
would characterize some life insurance agents as brokers and impose certain
obligations on those agents that may conflict with the interests of insurance
carriers or require the agent to, among other things, advise the client with
respect to the best available insurer.
We cannot predict the outcome of this regulatory proposal or whether any
other state will propose or adopt similar actions.
In
connection with our discontinued lenders indemnity product, we have discovered
facts and circumstances that support allegations against third parties
(including policyholders and the administrator of the associated loan program),
and we have instituted litigation to establish the rights and liabilities of
various parties; we have also received claims seeking to assert liability
against us for various matters, including claims alleging payments owing for
bad faith refusal to pay and payments with respect to policies for which
premiums were not received by us and this matter is addressed by the pending
litigation matters. In addition, we are
defending an arbitration claim by the reinsurer of this lenders indemnity product. The reinsurer asserts that it is entitled to
a return of most of the lenders indemnity claims that were paid on behalf of
us by the administrator, claiming that the claims were not properly payable
under the terms of the policies. The
reinsurer was under common ownership with the program administrator, and we are
vigorously defending this arbitration.
Although we cannot predict the outcome of any litigation or arbitration,
we do not believe that the outcome of these matters will have a material impact
on our financial condition or results of operations.
IMPACT OF INFLATION
Inflation
increases the need for life insurance.
Many policyholders who once had adequate insurance programs may increase
their life insurance coverage to provide the same relative financial benefit
and protection. Higher interest rates
may result in higher sales of certain of our investment products.
The
higher interest rates that have traditionally accompanied inflation could also
affect our operations. Policy loans
increase as policy loan interest rates become relatively more attractive. As interest rates increase, disintermediation
of stable value and annuity account balances and individual life policy cash
values may increase. The market value of
our fixed-rate, long-term investments may decrease, we may be unable to
implement fully the interest rate reset and call provisions of our mortgage
loans, and our ability to make attractive mortgage loans, including
participating mortgage loans, may decrease.
In addition, participating mortgage loan income may decrease. The difference between the interest rate
earned on investments and the interest rate credited to life insurance and
investment products may also be adversely affected by rising interest rates.
Item 3.
QUANTITATIVE
AND QUALTITATIVE DISCLOSURES ABOUT MARKET RISK
There
has been no material change from the disclosures in the Companys Annual Report
on Form 10-K for the year ended December 31, 2007.
Item 4.
CONTROLS
AND PROCEDURES
(a)
Disclosure
controls and procedures
In
order to ensure that the information the Company must disclose in its filings
with the Securities and Exchange Commission is recorded, processed, summarized
and reported on a timely basis, the Companys management, under the direction
of its Chief Executive Officer and Chief Financial Officer, evaluated its
disclosure controls and procedures (as such term is defined in Rules 13a-15(e)
under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as
of the end of the period covered by this report. Based on that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that the
Companys disclosure controls and procedures were effective for the purposes
set forth in the definition thereof in Exchange Act Rule 13a-15(e) as of such
date. 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 systems 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.
64
(b)
Changes
in internal control over financial reporting
There have been no changes
in the Companys internal control over financial reporting that occurred during
the quarter ended March 31, 2008 that have materially affected, or are
reasonably likely to materially affect, such internal control over financial
reporting. The Companys 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.
PART II
Item 1A.
Risk
Factors
The
operating results of companies in the insurance industry have historically been
subject to significant fluctuations. The
factors which could affect the Companys future results include, but are not
limited to, general economic conditions and the known trends and uncertainties. In addition to other information set forth in
this report, you should carefully consider the factors discussed in Part I,
Item 1A, Risk Factors and Cautionary Factors that may Affect Future
Results in the Companys Annual Report on Form 10-K for the year ended December 31,
2007, which could materially affect the Companys business, financial
condition, or future results of operations.
Item 2.
Unregistered
Sales of Equity Securities and Use of Proceeds
During the quarter ended March 31, 2008, the
Company issued no securities in transactions which were not registered under
the Securities Act of 1933, as amended (the Act).
Issuer Purchases of Equity Securities
|
|
|
|
|
|
Total Number
|
|
Approximate
|
|
|
|
|
|
|
|
of Shares
|
|
Value of
|
|
|
|
|
|
|
|
Purchased as
|
|
Shares that
|
|
|
|
Total Number
|
|
Average
|
|
Part of Publicly
|
|
May Yet Be
|
|
|
|
of Shares
|
|
Price Paid
|
|
Announced
|
|
Purchased Under
|
|
Period
|
|
Purchased
|
|
Per Share
|
|
Programs
|
|
the Program
(1)
|
|
|
|
(Dollars in Thousands, Except Share Amounts)
|
|
January 1, 2008 through January 31, 2008
|
|
|
|
$
|
|
|
|
|
$
|
100,000
|
|
February 1, 2008 through February 29, 2008
|
|
129,900
|
|
$
|
38.56
|
|
129,900
|
|
$
|
94,988
|
|
March 1, 2008 through March 31, 2008
|
|
320,900
|
|
$
|
37.77
|
|
320,900
|
|
$
|
82,857
|
|
Total
|
|
450,800
|
|
$
|
38.00
|
|
450,800
|
|
$
|
82,857
|
|
(1)
|
In May 2004, the
Company announced the initiation of its $100 million share repurchase
program, which commenced execution on February 12, 2008. On May 7,
2007, the Board of Directors extended the share repurchase program through
May 6, 2010.
|
Item 6.
Exhibits
|
Exhibit 31(a)
|
-
|
Certification Pursuant to
§302 of the Sarbanes Oxley Act of 2002.
|
|
|
|
|
|
Exhibit 31(b)
|
-
|
Certification Pursuant to
§302 of the Sarbanes Oxley Act of 2002.
|
|
|
|
|
|
Exhibit 32(a)
|
-
|
Certification Pursuant to
18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes
Oxley Act of 2002.
|
|
|
|
|
|
Exhibit 32(b)
|
-
|
Certification Pursuant to
18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes
Oxley Act of 2002.
|
|
|
|
|
|
Exhibit 99
|
-
|
Safe Harbor for Forward
Looking Statements.
|
65
SIGNATURE
Pursuant to the requirements
of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned thereunto duly authorized.
|
PROTECTIVE
LIFE CORPORATION
|
|
|
Date:
|
May 8,
2008
|
/s/
Steven G. Walker
|
|
Steven
G. Walker
|
|
Senior
Vice President, Controller
|
|
and
Chief Accounting Officer
|
|
|
|
66
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