PLC FORM 10Q 03-31-2007
 
 
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, 2007
 
or
 
[ ] 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
(State or other jurisdiction of incorporation or organization)
 
95-2492236
(IRS Employer Identification No.)
 
2801 Highway 280 South
Birmingham, Alabama 35223
(Address of principal executive offices and zip code)
 
(205) 268-1000
(Registrant's 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 [    ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer ý     Accelerated Filer o     Non-accelerated filer o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [    ] No [ X ]
 
Number of shares of Common Stock, $0.50 par value, outstanding as of  May 9, 2007: 70,072,942
 
 
 

PROTECTIVE LIFE CORPORATION
Quarterly Report on Form 10-Q
For Quarter Ended March 31, 2007
 
INDEX
 
 
 
Part I.
Financial Information:
  
Item 1.
  
 
  
 
 
  
 
 
  
 
 
 
 
   
 
 
   
 
   
 
   
Part II.
Other Information:
  
 
   
 
   
 
   
   
Signature 
 
   
   
 

PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in thousands except per share amounts)
(Unaudited)
 
     
Three Months Ended 
     
March 31 
     
2007 
    
2006 
  
Revenues
Premiums and policy fees
  
$
660,824
  
$
507,694
  
Reinsurance ceded
    
(370,997
)
  
(280,670
)
Net of reinsurance ceded
    
289,827
    
227,024
  
Net investment income
    
415,682
    
299,065
  
Realized investment gains (losses):
Derivative financial instruments
    
(2,291
)
  
13,337
  
All other investments
    
13,294
    
5,153
  
Other income
    
76,263
    
48,536
  
Total revenues
    
792,775
    
593,115
  
Benefits and expenses
Benefits and settlement expenses, net of reinsurance ceded:
(three months: 2007 - $292,899; 2006 - $256,558)
    
472,770
    
349,608
  
Amortization of deferred policy acquisition costs and value of businesses acquired
    
75,202
    
50,031
  
Other operating expenses, net of reinsurance ceded:
(three months: 2007 - $65,303; 2006 - $46,291)
    
111,475
    
82,819
  
Total benefits and expenses
    
659,447
    
482,458
  
Income before income tax
    
133,328
    
110,657
  
Income tax expense
    
42,745
    
38,520
  
Net income
  
$
90,583
  
$
72,137
  
Net income per share - basic
  
$
1.28
  
$
1.02
  
Net income per share - diluted
  
$
1.27
  
$
1.01
  
Cash dividends paid per share
  
$
0.215
  
$
0.195
  
Average shares outstanding - basic
    
70,017,662
    
70,752,202
  
Average shares outstanding - diluted
    
71,487,063
    
71,559,255
  
 
 
 
 
 
 
See Notes to Consolidated Condensed Financial Statements
PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
     
March 31 
  
December 31 
     
2007 
  
2006 
Assets
Investments:
Fixed maturities, at fair market value (amortized cost: 2007 - $21,393,317; 2006 - $21,194,871)
  
$
21,570,487
  
$
21,367,263
  
Equity securities, at fair market value (cost: 2007 - $65,626; 2006 - $121,823)
    
69,211
    
128,695
  
Mortgage loans
    
4,025,025
    
3,880,028
  
Investment real estate, net of accumulated depreciation (2007 - $5,606; 2006 - $5,483)
    
38,828
    
38,918
  
Policy loans
    
822,930
    
839,502
  
Other long-term investments
    
167,571
    
310,225
  
Short-term investments
    
1,064,768
    
1,381,073
  
Total investments
    
27,758,820
    
27,945,704
  
Cash
    
120,190
    
69,516
  
Accrued investment income
    
265,772
    
284,529
  
Accounts and premiums receivable, net of allowance for uncollectible amounts
(2007 - $4,268; 2006 - $4,140)
    
121,051
    
194,447
  
Reinsurance receivables
    
4,780,956
    
4,618,122
  
Deferred policy acquisition costs and value of businesses acquired
    
3,212,048
    
3,198,735
  
Goodwill
    
100,318
    
100,479
  
Property and equipment, net of accumulated depreciation (2007 - $106,116; 2006 - $109,718)
    
42,245
    
43,796
  
Other assets
    
163,543
    
165,656
  
Income tax receivable
    
116,684
    
116,318
  
Assets related to separate accounts
Variable annuity
    
2,790,233
    
2,750,129
  
Variable universal life
    
319,972
    
307,863
  
Total assets
  
$
39,791,832
  
$
39,795,294
  
Liabilities
Policy liabilities and accruals
  
$
16,305,821
  
$
16,059,930
  
Stable value product account balances
    
5,055,382
    
5,513,464
  
Annuity account balances
    
8,966,309
    
8,958,089
  
Other policyholders' funds
    
323,898
    
328,664
  
Securities sold under repurchase agreements
    
2,844
    
16,949
  
Other liabilities
    
1,240,616
    
1,323,375
  
Deferred income taxes
    
429,481
    
374,486
  
Non-recourse funding obligations
    
525,000
    
425,000
  
Liabilities related to variable interest entities
    
421,684
    
420,395
  
Long-term debt
    
466,532
    
479,132
  
Subordinated debt securities
    
524,743
    
524,743
  
Liabilities related to separate accounts
Variable annuity
    
2,790,233
    
2,750,129
  
Variable universal life
    
319,972
    
307,863
  
Total liabilities
    
37,372,515
    
37,482,219
  
Commitments and contingent liabilities - Note 3
              
Share-owners' equity
Preferred Stock, $1 par value, shares authorized: 4,000,000; Issued: None
Common Stock, $.50 par value, shares authorized: 2007 and 2006 -160,000,000
shares issued: 2007 and 2006 - 73,251,960
    
36,626
    
36,626
  
Additional paid-in capital
    
440,813
    
438,485
  
Treasury stock, at cost (2007 - 3,195,069 shares; 2006 - 3,287,312 shares)
    
(11,468
)
  
(11,796
)
Unallocated stock in Employee Stock Ownership Plan
(2007 - 262,682 shares; 2006 - 366,243 shares)
    
(853
)
  
(1,231
)
Retained earnings
    
1,916,245
    
1,838,560
  
Accumulated other comprehensive income (loss):
Net unrealized gains (losses) on investments, net of income tax:
(2007 - $35,463; 2006 - $22,109)
    
64,674
    
41,405
  
Accumulated gain (loss) - hedging, net of income tax: (2007 - $(2,046); 2006 - $(3,179))
    
(3,700
)
  
(5,954
)
Postretirement benefits liability adjustment, net of income tax: (2007 - $(12,292); 2006 - $(12,292))
    
(23,020
)
  
(23,020
)
Total share-owners’ equity
    
2,419,317
    
2,313,075
  
   
$
39,791,832
  
$
39,795,294
  
See Notes to Consolidated Condensed Financial Statements
PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
   
 Three Months Ended
     
March 
     
2007 
    
2006 
  
Cash flows from operating activities
Net income
  
$
90,583
  
$
72,137
  
Adjustments to reconcile net income to net cash provided by operating activities:
Realized investment (gains) losses
    
(11,003
)
  
(5,153
)
Amortization of deferred policy acquisition costs and value of businesses acquired
    
75,202
    
50,031
  
Capitalization of deferred policy acquisition costs
    
(120,762
)
  
(97,740
)
Depreciation expense
    
3,023
    
3,349
  
Deferred income tax
    
43,166
    
40,278
  
Accrued income tax
    
(179
)
  
(14,353
)
Interest credited to universal life and investment products
    
254,930
    
189,714
  
Policy fees assessed on universal life and investment products
    
(139,408
)
  
(119,662
)
Change in reinsurance receivables
    
(162,834
)
  
(125,759
)
Change in accrued investment income and other receivables
    
92,153
    
13,174
  
Change in policy liabilities and other policyholders' funds
of traditional life and health products
    
73,525
    
142,632
  
Trading securities:
              
Maturities and principal reductions of investments
    
104,301
    
0
  
Sale of investments
    
406,347
    
0
  
Cost of investments acquired
    
(647,243
)
  
0
  
Other net change in trading securities
    
85,820
    
7,294
  
Change in other liabilities
    
78,413
    
(53,336
)
Other, net
    
5,451
    
(11,616
)
Net cash provided by operating activities
    
231,485
    
90,990
  
Cash flows from investing activities
Investments available for sale:
              
Maturities and principal reductions of investments
              
Fixed maturities
    
393,595
    
265,542
  
Equity securities
    
2,000
    
0
  
Sale of investments
              
Fixed maturities
    
990,203
    
2,076,761
  
Equity securities
    
60,117
    
1,858
  
Cost of investments acquired
              
Fixed maturities
    
(1,379,879
)
  
(2,180,522
)
Equity securities
    
(537
)
  
(1,706
)
Mortgage loans:
              
New borrowings
    
(239,785
)
  
(262,617
)
Repayments
    
94,635
    
141,448
  
Change in investment real estate, net
    
3,298
    
15,736
  
Change in policy loans, net
    
16,572
    
2,678
  
Change in other long-term investments, net
    
(1,144
)
  
18,420
  
Change in short-term investments, net
    
164,799
    
(70,500
)
Purchase of property and equipment
    
(2,145
)
  
(1,093
)
Sales of property and equipment
    
640
    
0
  
Other investing activities, net
    
161
    
0
  
Net cash provided by investing activities
    
102,530
    
6,005
  
Cash flows from financing activities
              
Borrowings under line of credit arrangements and long-term debt
    
31,000
    
13,000
  
Principal payments on line of credit arrangement and long-term debt
    
(43,600
)
  
(22,500
)
Net proceeds from securities sold under repurchase agreements
    
(14,105
)
  
0
  
Payments on liabilities related to variable interest entities
    
1,289
    
(5,710
)
Issuance of non-recourse funding obligations
    
100,000
    
25,000
  
Dividends to share owners
    
(15,044
)
  
(13,620
)
Investment product deposits and change in universal life deposits
    
543,512
    
486,646
  
Investment product withdrawals
    
(837,199
)
  
(629,139
)
Excess tax benefits on stock based compensation
    
762
    
2,403
  
Other financing activities, net
    
(49,956
)
  
373
  
Net cash used in financing activities
    
(283,341
)
  
(143,547
)
Change in cash
    
50,674
    
(46,552
)
Cash at beginning of period
    
69,516
    
83,670
  
Cash at end of period
  
$
120,190
  
$
37,118
  
See Notes to Consolidated Condensed Financial Statements
 
 
 
 
PROTECTIVE LIFE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in tables are in thousands, except per share amounts)


1.
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 periods ended March 31, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. 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 Company's Annual Report on Form 10-K for the year ended December 31, 2006.

New Accounting Pronouncements
 
               Statement of Position 05-1. Effective January 1, 2007, the Company adopted Statement of Position (“SOP”) 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts” (“SOP 05-1”). SOP 05-1 provides guidance on accounting by insurance enterprises for deferred acquisition costs on internal replacements of insurance and investment contracts other than those specifically described in Statement of Financial Accounting Standards (“SFAS”) No. 97 (“SFAS 97”), “Accounting and Reporting by Insurance Enterprises for Certain Long- Duration Contracts and for Realized Gains and Losses from the Sale of Investments.” SOP 05-1 defines an internal replacement as a modification in product benefits, features, rights, or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. Contract modifications that result in a substantially unchanged contract will be accounted for as a continuation of the replaced contract. Contract modifications that result in a substantially changed contract should be accounted for as an extinguishment of the replaced contract, and any unamortized DAC, unearned revenue and deferred sales charges must be written off. The Company recorded no cumulative effect adjustment related to this adoption and does not expect it to have a material impact on its ongoing financial position or results of operations.

 
SFAS No. 155 - Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140. Effective January 1, 2007, the Company adopted SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments - an amendment of Financial Accounting Standards Board (“FASB”) Statements No. 133 and 140” (“SFAS 155”). SFAS 155 (1) permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, (2) clarifies which interest-only (IO) strips and principal-only (PO) strips are not subject to the requirements of FAS 133, (3) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, (4) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and (5) amends Statement 140 to eliminate the prohibition on a qualifying special purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. The adoption of SFAS 155 resulted in a positive cumulative effect adjustment to opening retained earnings of approximately $2.0 million ($1.3 million net of taxes), related to the Company’s equity indexed annuity product line.

FASB Interpretation No. 48. Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement 109” (“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition, measurement and disclosure of an income tax position taken or expected to be taken in an income tax return. Additionally, this interpretation requires, in order for the Company to recognize a benefit in its financial statements from a given tax return position, that there must be a greater than 50 percent chance of success with the relevant taxing authority with regard to that tax return position. In making this analysis, the Company must assume that the taxing authority is fully informed of all of the facts regarding this issue. Furthermore, new disclosures regarding the effect of the accounting for uncertain tax positions on the financial statements will be required.

As a result of the implementation of FIN 48, the Company recognized a $0.9 million decrease in the liability for unrecognized income tax benefits, which was accounted for as an increase to the January 1, 2007 retained earnings balance. The Company’s liability for all unrecognized income tax benefits as of January 1, 2007 was $23.9 million. If recognized, approximately $3.2 million would be recorded as a component of income tax expense.

Any accrued interest and penalties related to unrecognized tax benefits have been included in income tax expense. The Company had approximately $5.9 million of accrued interest associated with unrecognized tax benefits as of January 1, 2007.

There were no significant changes to any of these amounts during the quarter ending March 31, 2007. The Company’s 2003 through 2005 income tax returns remain open to examination by the Internal Revenue Service and major state income taxing jurisdictions.

Accounting Pronouncements Not Yet Adopted

SFAS No. 157 - Fair Value Measurements. In September 2006, FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). This statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 is effective prospectively with a limited form of retrospective application for fiscal years beginning after November 15, 2007 (January 1, 2008 for the Company). The Company is currently evaluating the impact that SFAS 157 will have on its consolidated results of operations and financial position.

SFAS No. 159 - The Fair Value Option for Financial Assets and Financial Liabilities. In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115” (“SFAS 159”). This standard permits entities to choose to measure eligible financial assets and financial liabilities at fair value. SFAS 159 is effective for the Company beginning January 1, 2008. The Company has not yet made a decision as to whether or not it will elect the fair value option for any financial assets or financial liabilities. As a result, the Company does not know what impact, if any, that SFAS 159 will have on its consolidated results of operations and 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 share-owners' equity. Included in these reclassifications is a change in the Consolidated Condensed Statement of Cash Flows to remove the effects of policy fees assessed on universal life and investment products from financing activities. While this had no effect on total cash flow, for the three months ended March 31, 2006, net cash provided by operating activities was decreased and net cash provided by financing activities was increased by $119.7 million.

2.  NON-RECOURSE FUNDING OBLIGATIONS

Non-Recourse Funding Obligations

The Company issued $100.0 million of non-recourse funding obligations during the first three months of 2007, bringing the total amount outstanding to $525.0 million at March 31, 2007. The weighted average interest rate as of March 31, 2007, was 6.8%.


3.
COMMITMENTS AND CONTINGENT LIABILITIES

The Company is contingently liable to obtain a $20 million letter of credit under indemnity agreements with its directors. Such agreements provide insurance protection in excess of the directors’ liability insurance in force at the time up to $20 million. Should certain events occur constituting a change in control of the Company, 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.

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 provide, however, that an assessment may be excused or deferred if it would threaten an insurer's own financial strength.

A number of civil jury verdicts have been returned against insurers and other providers of financial services involving sales practices, alleged agent misconduct, failure to properly supervise representatives, relationships with agents or persons with whom the insurer does business, and other matters. Increasingly these lawsuits have resulted in the award of substantial judgments that are disproportionate to the actual damages, including material amounts of punitive and non-economic compensatory damages. In some states, juries, judges, and arbitrators have substantial discretion in awarding punitive and non-economic compensatory damages which creates the potential for unpredictable material adverse judgments or awards in any given lawsuit or arbitration. Arbitration awards are subject to very limited appellate review. In addition, in some class action and other lawsuits, companies have made material settlement payments. The Company, like other financial services companies, in the ordinary course of business, is involved in such litigation and in arbitration. Although the outcome of any such litigation or arbitration cannot be predicted, the Company believes that at the present time there are no pending or threatened lawsuits that are reasonably likely to have a material adverse effect on the financial position, results of operations, or liquidity of the Company.


4.
STOCK-BASED COMPENSATION

Performance shares awarded in 2007 and their estimated fair value at grant date are as follows:

Year
Awarded
Performance
Shares
Estimated
Fair Value
     
 
2007
 
64,700
 
$2,800


The criteria for payment of 2007 performance awards is based primarily upon a comparison of the Company’s average return on average equity over a four-year period (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 Company’s results are below the median of the comparison group (40th percentile for 2007 awards), no portion of the award is earned. If the Company’s results are at or above the 90th percentile, the award maximum is earned. Awards are paid in shares of Company Common Stock.

During  the first quarter of 2007, 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 Company’s Common Stock. The SARs are exercisable either in four equal annual installments beginning one year after the date of grant or after five years depending on the terms of the 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 2007 is as follows:

   
Weighted Average
Base Price
  
No. of SARs
  
 
Balance at December 31, 2006
  
$
29.33
    
1,155,946
  
SARs granted
    
43.46
 
  
218,900
  
SARs exercised
    
23.98
    
(2,500
)
Balance at March 31, 2007
  
$
31.59
    
1,372,346
  


The SARs issued in 2007 had estimated fair values at grant date of $2.4 million. The fair value of the 2007 SARs was estimated using a Black-Scholes option pricing model. The assumptions used in the pricing model varied depending on the vesting period of the awards. Assumptions used in the model for the 2007 SARs were as follows: expected volatility ranged from 16.2% to 31.0%, the risk-free interest rate ranged from 4.5% to 4.6%, a dividend rate of 1.9%, a zero forfeiture rate, and the expected exercise date ranged from 2012 to 2015. The Company will pay an amount in stock equal to the difference between the specified base price of the Company’s Common Stock and the market value at the exercise date for each SAR.

Additionally during 2007, the Company issued 30,250 restricted stock units at a fair value of $43.46 per unit. These awards, with a total fair value of $1.3 million, vest over a four year period.


5.
DEFINED BENEFIT PENSION PLAN AND UNFUNDED EXCESS BENEFITS PLAN

Components of the net periodic benefit cost of the Company’s defined benefit pension plan and unfunded excess benefits plan are as follows:

   
Three Months Ended
March 31
  
   
2007
  
2006
  
     
Service cost - Benefits earned during the period
  
$
2,625
  
$
2,576
  
Interest cost on projected benefit obligations
    
2,540
    
2,496
  
Expected return on plan assets
    
(2,893
)
  
(3,096
)
Amortization of prior service cost
    
53
    
64
  
Amortization of actuarial losses
    
849
    
1,272
  
Net periodic benefit cost
  
$
3,174
  
$
3,312
  


The Company previously disclosed in its financial statements for the year ended December 31, 2006, that it expected that no funding would be required in 2007. The Company has not yet determined the amount, if any, that it will contribute to its defined benefit pension plan during 2007. As of March 31, 2007, 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. The cost of these plans for the three months ended March 31, 2007 and 2006 was immaterial.

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
  
   
2007
  
2006
  
     
Calculation of basic earnings per share:
              
Net income
  
$
90,583
  
$
72,137
  
               
Average shares issued and outstanding
    
69,996,445
    
69,793,369
  
Issuable under various deferred compensation plans
    
1,021,217
    
958,833
  
Weighted shares outstanding - Basic
    
71,017,662
    
70,752,202
  
               
Basic earnings per share
  
$
1.28
  
$
1.02
  
               
Calculation of diluted earnings per share:
              
Net income
  
$
90,583
  
$
72,137
  
               
Weighted shares outstanding - Basic
    
71,017,662
    
70,752,202
  
Stock appreciation rights (“SARs”)(a)
    
264,585
    
316,254
  
Issuable under various other stock-back compensation plans
    
204,816
    
490,799
  
Weighted shares outstanding - Diluted
    
71,487,063
    
71,559,255
  
               
Diluted earnings per share
  
$
1.27
  
$
1.01
  
(a) Excludes 166,820 and 155,200 SARs as of March 31, 2007 and 2006, respectively, that are antidilutive. In the event the average market price exceeds the issue price of the SARs, such rights would be dilutive to the Company’s earnings per share and will be included in the Company’s calculation of the diluted average shares outstanding.


7.
COMPREHENSIVE INCOME

The following table sets forth the Company's comprehensive income (loss) for the periods presented below:

   
Three Months Ended
March 31
  
   
2007
  
2006
  
     
Net income
  
$
90,583
  
$
72,137
  
Change in net unrealized gains on investments, net of income tax:
(three months: 2007 - $16,330; 2006 - $(78,279))
    
29,782
    
(147,425
)
Change in accumulated gain-hedging, net of income tax:
(three months: 2007 - $1,247; 2006 - $2,285)
    
2,254
    
4,303
  
Reclassification adjustment for amounts included in
net income, net of income tax:
(three months: 2007 - $(3,571); 2006 - $1,419)
    
(6,513
)
  
2,660
  
 
Comprehensive income (loss)
  
$
116,106
  
$
(68,325
)
 
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 bank owned life insurance (“BOLI”) products on a national basis primarily through networks of independent insurance agents and brokers, stockbrokers, direct marketing channels, and independent marketing organizations.

·  
The Acquisitions segment focuses on acquiring, converting, and servicing policies acquired from other companies. The segment’s 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 (“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.

·  
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 (“RV”). In addition, the segment markets an inventory protection product (“IPP”) and a guaranteed asset protection (“GAP”) product.

The Company has an additional segment referred to as Corporate and Other. The Corporate and Other segment primarily consists of net investment income and expenses not attributable to the segments above (including net investment income on unallocated capital and interest on debt). This segment also includes earnings from several non-strategic lines of business (mostly cancer insurance, residual value insurance, surety insurance, and group annuities), various investment-related transactions, and the operations of several small subsidiaries.

The Company uses the same accounting policies and procedures to measure segment operating income and assets as it uses to measure its 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 Company’s 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 are no significant intersegment transactions.

 
The following tables summarize financial information for the Company’s segments. Asset adjustments represent the inclusion of assets related to discontinued operations.

   
Three Months Ended
March 31
  
   
2007
  
2006
  
     
Revenues
              
Life Marketing
  
$
270,539
  
$
218,925
  
Acquisitions
    
237,982
    
101,451
  
Annuities
    
73,754
    
63,796
  
Stable Value Products
    
80,526
    
77,379
  
Asset Protection
    
80,023
    
65,149
  
Corporate and Other
    
49,951
    
66,415
  
Total revenues
  
$
792,775
  
$
593,115
  
               
Segment Operating Income
              
Life Marketing
  
$
65,280
  
$
40,781
  
Acquisitions
    
32,249
    
19,906
  
Annuities
    
5,606
    
4,741
  
Stable Value Products
    
12,186
    
12,344
  
Asset Protection
    
10,084
    
8,738
  
Corporate and Other
    
1,777
    
11,663
  
Total segment operating income
    
127,182
    
98,173
  
               
Realized investment gains (losses) - investments(1)
    
8,948
    
(173
)
Realized investment gains (losses) - derivatives(2)
    
(2,802
)
  
12,657
  
Income tax expense
    
(42,745
)
  
(38,520
)
Net income
  
$
90,583
  
$
72,137
  
               
(1)   Realized investment gains (losses) - investments
  
$
13,294
  
$
5,153
  
Less participating income from real estate ventures
    
3,150
    
5,326
  
Less related amortization of DAC
    
1,196
    
0
  
   
$
8,948
  
$
(173
)
               
(2)   Realized investment gains (losses) - derivatives
  
$
(2,291
)
$
13,337
  
Less settlements on certain interest rate swaps
    
257
    
1,331
  
Less derivative losses related to certain annuities
    
254
    
(651
)
   
$
(2,802
)
$
12,657
  
 
Life Marketing operating income for the first quarter of 2007 includes a $15.7 million gain on the sale of a subsidiary which is included in other income.


   
Operating Segment Assets
March 31, 2007
  
                   
   
Life
Marketing
  
Acquisitions
  
Annuities
  
Stable Value
Products
  
                           
Investments and other assets
  
$
8,409,881
  
$
12,016,365
  
$
8,245,004
  
$
5,047,472
  
Deferred policy acquisition costs and value of businesses acquired
    
1,883,037
    
912,622
    
252,481
    
16,529
  
Goodwill
    
10,193
    
32,007
    
0
    
0
  
Total assets
  
$
10,303,111
  
$
12,960,994
  
$
8,497,485
  
$
5,064,001
  
                           
                           
     
Asset
Protection 
    
Corporate
and Other 
    
Adjustments 
 
  
Total
Consolidated 
  
     
 
                    
Investments and other assets
  
$
1,297,227
  
$
1,437,645
  
$
25,872
  
$
36,479,466
  
Deferred policy acquisition costs and value of businesses acquired
    
119,682
    
27,697
    
0
    
3,212,048
  
Goodwill
    
58,035
    
83
    
0
    
100,318
  
Total assets
  
$
1,474,944
  
$
1,465,425
  
$
25,872
  
$
39,791,832
  
                           
                           
                           
 
Operating Segment Assets
December 31, 2006 
                           
     
Life  
Marketing  
    
Acquisitions 
    
Annuities 
    
Stable Value
Products 
  
                           
Investments and other assets
  
$
8,041,854
  
$
10,650,928
  
$
8,142,681
  
$
5,369,107
  
Deferred policy acquisition costs and value of businesses acquired
    
1,846,219
    
925,218
    
261,826
    
16,603
  
Goodwill
    
10,354
    
32,007
    
0
    
0
  
Total assets
  
$
9,898,427
  
$
11,608,153
  
$
8,404,507
  
$
5,385,710
  
                           
                           
     
Asset    
Protection  
    
Corporate
and Other 
    
Adjustments 
    
Total
Consolidated 
  
                           
Investments and other assets
  
$
992,932
  
$
3,261,874
  
$
36,704
  
$
36,496,080
  
Deferred policy acquisition costs and value of businesses acquired
    
125,745
    
23,124
    
0
    
3,198,735
  
Goodwill
    
58,035
    
83
    
0
    
100,479
  
Total assets
  
$
1,176,712
  
$
3,285,081
  
$
36,704
  
$
39,795,294
  



ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollar amounts in tables are in thousands)


This Management’s Discussion and Analysis should be read in its entirety, since it contains detailed information that is important to understanding the Company’s results and financial condition. The Overview below is qualified in its entirety by the full Management’s Discussion and Analysis.

FORWARD-LOOKING STATEMENTS - CAUTIONARY LANGUAGE

This report reviews the Company’s financial condition and results of operations including its liquidity and capital resources. Historical information is presented and discussed. Where appropriate, factors that may affect future financial performance are also identified and discussed. Certain statements made in this report include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include any statement that may predict, forecast, indicate or imply future results, performance or achievements instead of historical facts and may contain words like “believe,” “expect,” “estimate,” “project,” “budget,” “forecast,” “anticipate,” “plan,” “will,” “shall,” “may,” and other words, phrases, or expressions with similar 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 the Company cannot give assurances that such statements will prove to be correct. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

For a more complete understanding of the Company’s business and its current period results, please read the following Management’s Discussion and Analysis of Financial Condition and Results of Operations in conjunction with the Company’s latest Annual Report on Form 10-K and other filings with the SEC.

OVERVIEW

Protective Life Corporation (the “Company”) is a holding company whose subsidiaries provide financial services through the production, distribution, and administration of insurance and investment products. Founded in 1907, Protective Life Insurance Company is the Company's largest operating subsidiary. Unless the context otherwise requires, the "Company" refers to the consolidated group of Protective Life Corporation and its subsidiaries.

The Company operates several business segments each having a strategic focus. An operating segment is generally distinguished by products and/or channels of distribution. The Company's operating segments are Life Marketing, Acquisitions, Annuities, Stable Value Products, and Asset Protection. The Company has an additional segment referred to as Corporate and Other which consists of net investment income on unallocated capital, interest on debt, earnings from various investment-related transactions, and the operations of several non-strategic lines of business. The Company periodically evaluates its operating segments in light of the segment reporting requirements prescribed by SFAS 131, “Disclosures about Segments of an Enterprise and Related Information,” and makes adjustments to its segment reporting as needed.

KNOWN TRENDS AND UNCERTAINTIES

The factors which could affect the Company's future results include, but are not limited to, general economic conditions and the following known trends and uncertainties: we are exposed to the risks of natural disasters, pandemics, malicious and terrorist acts that could adversely affect our operations; we operate in a mature, highly competitive industry, which could limit our ability to gain or maintain our position in the industry and negatively affect profitability; a ratings downgrade could adversely affect our ability to compete; our policy claims fluctuate from period to period resulting in earnings volatility; our results may be negatively affected should actual experience differ from management's assumptions and estimates; the use of reinsurance introduces variability in our statements of income; we could be forced to sell investments at a loss to cover policyholder withdrawals; interest rate fluctuations could negatively affect our spread income or otherwise impact our business; equity market volatility could negatively impact our business; 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 the Company and its 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; our ability to maintain competitive unit costs is dependent upon the level of new sales and persistency of existing business; our investments are subject to market and credit risks; 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 acquisition; we are dependent on the performance of others; our reinsurers could fail to meet assumed obligations, increase rates or be subject to adverse developments that could affect us; 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; our ability to grow depends in large part upon the continued availability of capital; new accounting rules or changes to existing accounting rules could negatively impact us; and 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. Please refer to Exhibit 99 about these factors that could affect future results.

The Company’s results may fluctuate from period to period due to fluctuations in mortality, persistency, claims, expenses, interest rates, and other factors. Therefore, it is management's opinion that quarterly operating results for an insurance company are not necessarily indicative of results to be achieved in future periods, and that a review of operating results over a longer period is necessary to assess an insurance company's performance.


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). 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 the Company’s business is internally assessed. Although the items excluded from segment operating income may be significant components in understanding and assessing the Company’s overall financial performance, management believes that segment operating income enhances an investor’s understanding of the Company’s results of operations by highlighting the income (loss) attributable to the normal, recurring operations of the Company’s business. However, segment operating income should not be viewed as a substitute for U.S. GAAP net income. In addition, the Company’s 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
        
   
2007
  
2006
    
Change
  
   
(Dollars in thousands)
        
Segment Operating Income
                
Life Marketing
  
$
65,280
  
$
40,781
      
60.1
%
Acquisitions
    
32,249
    
19,906
      
62.0
  
Annuities
    
5,606
    
4,741
      
18.2
  
Stable Value Products
    
12,186
    
12,344
      
(1.3
)
Asset Protection
    
10,084
    
8,738
      
15.4
  
Corporate and Other
    
1,777
    
11,663
      
(84.8
)
Total segment operating income
    
127,182
    
98,173
      
29.5
  
                       
Realized investment gains (losses) - investments(1)
    
8,948
    
(173
)
        
Realized investment gains (losses) - derivatives(2)
    
(2,802
)
  
12,657
          
Income tax expense
    
(42,745
)
  
(38,520
)
        
Net income
  
$
90,583
  
$
72,137
      
25.6
  
                       
(1)   Realized investment gains (losses) - investments
  
$
13,294
  
$
5,153
          
Less participating income from real estate ventures
    
3,150
    
5,326
          
Less related amortization of DAC
    
1,196
    
0
          
   
$
8,948
  
$
(173
)
        
                       
(2)   Realized investment gains (losses) - derivatives
  
$
(2,291
)
$
13,337
          
Less settlements on certain interest rate swaps
    
257
    
1,331
          
Less derivative losses related to certain annuities
    
254
    
(651
)
        
   
$
(2,802
)
$
12,657
          

 
Net income for the first quarter of 2007 reflects a 29.5% increase in segment operating income compared to the same period of 2006. The two largest items contributing to this increase include a $15.7 million gain on the sale of the Life Marketing segment’s direct marketing subsidiary and a $12.3 million increase in operating earnings in the Acquisitions segment resulting from the prior year acquisition of the Chase Insurance Group. Net realized investment gains were $6.1 million for the first quarter of 2007 compared $12.5 million for the same period of 2006, a decrease of $6.3 million.

Life Marketing segment operating income was $65.3 million for the current quarter representing an increase of 60.1% over the same period of the prior year. This increase was primarily due to a $15.7 million gain before taxes on the sale of the segment’s direct marketing subsidiary combined with favorable mortality variances. The increase in the Acquisitions segment’s operating income for the current quarter is due to the acquisition of the Chase Insurance Group completed in the third quarter of 2006. This acquisition contributed $14.5 million to the Acquisition segment’s operating income for the first quarter of 2007.

Favorable DAC unlocking of $1.2 million during the first quarter of 2007 was partially offset by unfavorable mortality results, resulting in an 18.2% increase in operating income for the Annuities segment. A general improvement in the equity markets and increasing account balances contributed to the increase in operating earnings during the first quarter of 2007 for the segment. A decline in average account values offset by an increase in operating spread resulted in operating income that was relatively unchanged for the first quarter of 2007 in the Stable Value Products segment compared to the same period of 2006.

The Asset Protection segment’s 15.4% increase in operating income for the first quarter of 2007 is primarily the result of improvements in the segment’s service contract line, which were up $2.3 million for the quarter. Favorable results from the service contract line were partially offset by unfavorable results from other product lines and lines the segment is no longer marketing.

The decline in operating income for the Corporate and Other segment is primarily the result of an $11.1 million increase in interest expense resulting from increased borrowings, partially offset by higher net investment income on unallocated capital.

RESULTS BY BUSINESS SEGMENT

In the following segment discussions, various statistics and other key data the Company uses to evaluate its segments are presented. Sales statistics are used by the Company to measure the relative progress in its marketing efforts, but may or may not have an immediate impact on reported segment operating income. Sales data for traditional life insurance are based on annualized premiums, while universal life sales are based on annualized planned (target) premiums plus 6% of amounts received in excess of target premiums. Sales of annuities are measured based on the amount of deposits received. Stable value contract sales are measured at the time that the funding commitment is made based on the amount of deposit to be received. Sales within the Asset Protection segment are generally based on the amount of single premium and fees received.

Sales and life insurance in-force amounts are derived from the Company’s various sales tracking and administrative systems, and are not derived from the Company’s financial reporting systems or financial statements. Mortality variances are derived from actual claims compared to expected claims. These variances do not represent the net impact to earnings due to the interplay of reserves and DAC amortization.


Life Marketing
The Life Marketing segment markets 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. Segment results were as follows:

   
Three Months Ended
March 31
        
   
2007
  
2006
    
Change
  
   
(Dollars in thousands)
        
REVENUES
                      
Gross premiums and policy fees
  
$
345,685
  
$
325,364
      
6.2
%
Reinsurance ceded
    
(207,614
)
  
(208,631
)
    
(0.5
)
Net premiums and policy fees
    
138,071
    
116,733
      
18.3
  
Net investment income
    
81,103
    
72,853
      
11.3
  
Other income
    
51,365
    
29,339
      
75.1
  
Total operating revenues
    
270,539
    
218,925
      
23.6
  
                       
BENEFITS AND EXPENSES
                      
Benefits and settlement expenses
    
149,329
    
135,899
      
9.9
  
Amortization of deferred policy acquisition costs
    
28,698
    
19,466
      
47.4
  
Other operating expenses
    
27,232
    
22,779
      
19.5
  
Total benefits and expenses
    
205,259
    
178,144
      
15.2
  
                       
OPERATING INCOME
    
65,280
    
40,781
      
60.1
  
                       
INCOME BEFORE INCOME TAX
  
$
65,280
  
$
40,781
      
60.1
  
 

 
The following table summarizes key data for the Life Marketing segment:

   
Three Months Ended
March 31
        
 
2007
2006
 
Change
 
    
(Dollars in thousands) 
        
Sales By Product
                        
Traditional
    
$
33,492
  
$
37,476
      
(10.6
 )%
Universal life
      
14,197
    
31,488
      
(54.9
)
Variable universal life
      
1,828
    
1,285
      
42.3
  
     
$
49,517
  
$
70,249
      
(29.5
)
                         
Sales By Distribution Channel
                        
Brokerage general agents
    
$
29,879
  
$
38,179
      
(21.7
)
Independent agents
      
8,328
    
13,800
      
(39.7
)
Stockbrokers/banks
      
8,493
    
13,567
      
(37.4
)
BOLI / other
      
2,817
    
4,703
      
(40.1
)
     
$
49,517
  
$
70,249
      
(29.5
)
                         
Average Life Insurance In-Force(1)
                        
Traditional
    
$
409,159,975
  
$
363,267,522
      
12.6
  
Universal life
      
51,478,248
    
49,263,933
      
4.5
  
     
$
460,638,223
  
$
412,531,455
      
11.7
  
                         
Average Account Values
                        
Universal life
    
$
4,860,730
  
$
4,619,947
      
5.2
  
Variable universal life
      
313,917
    
260,431
      
20.5
  
     
$
5,174,647
  
$
4,880,378
      
6.0
  
                         
Mortality Experience (2)
    
$
7,763
  
$
352
          
                         
(1) Amounts are not adjusted for reinsurance ceded.
(2) Represents a favorable (unfavorable) variance as compared to pricing assumptions. Excludes results related to Chase Acquisition Group which was acquired in the third quarter of 2006.


During 2005, the Company reduced its reliance on reinsurance (see additional comments below) and entered into a securitization structure to fund the additional statutory reserves required as a result of these changes in the Company’s reinsurance arrangements. The securitization structure results in a reduction of current taxes and a corresponding increase in deferred taxes as compared to the previous result obtained in using traditional reinsurance. The benefit of reduced current taxes is attributed to the applicable life products and is an important component of the profitability of these products. In addition to the fluctuations in premiums and benefits and settlement expenses discussed below, earnings emerge more slowly under a securitization structure relative to the previous reinsurance structure utilized by the Company.

Operating income increased 60.1% from the first quarter of 2006 primarily due to a gain recognized on the sale of the segment’s direct marketing subsidiary combined with favorable mortality results. Excluding the $15.7 million gain on the sale of a subsidiary which is included in other income, total revenues increased 16.4%. This increase in total revenues is the result of growth of life insurance in-force and average account values, and was partially offset by higher overall benefits and expenses (15.2% higher for the first quarter of 2007, as compared to the same period of 2006).

Net premiums and policy fees grew by 18.3% in the current quarter due in part to the growth in 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 second quarter of 2005, the Company reduced its 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 its newly written traditional life products (products written during the second 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. The Company’s maximum retention level for newly issued universal life products is $1,000,000.


Net investment income in the segment increased 11.3% for the quarter, reflecting the growth of the segment’s assets caused by the increase in life reserves. Other income increased 75.1% for the first quarter of 2007, primarily due to a $15.7 million gain recognized on the sale of the segment’s direct marketing subsidiary. The remainder of the increase in other income is the result of additional income from the segment’s broker-dealer subsidiary. The increase in income from the broker-dealer subsidiary is the result of increased fees related to variable annuity managed accounts and higher investment advisory fees. This increase in income was primarily offset by an increase in other operating expenses.

Benefits and settlement expenses were 9.9% higher than the first quarter of 2006, 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, partially offset for the current quarter by favorable fluctuations in mortality experience. The majority of the current quarter mortality variance (66%) is associated with traditional life products. The gross mortality variance (actual results compared to pricing) for the first quarter of 2007 was $7.4 million more favorable than the same period of 2006. The estimated mortality impact on earnings for the first quarter of 2007 was a favorable $7.5 million, which was approximately $8.0 million more favorable than estimated mortality impact on earnings for the same period of 2006. The increase in DAC amortization for the first quarter of 2007 compared to the same period of 2006 was primarily due to the increase in the Company’s block of term business not subject to reinsurance, combined with overall growth in average life insurance in-force.

Other operating expenses for the segment were as follows:

   
Three Months Ended
March 31
        
   
2007
  
2006
    
Change
  
   
(Dollars in thousands)
        
Insurance Companies:
                      
First year commissions
  
$
70,406
  
$
94,268
      
(25.3
 )%
Renewal commissions
    
9,561
    
8,404
      
13.8
  
First year ceding allowances
    
(15,915
)
  
(32,832
)
    
(51.5
)
Renewal ceding allowances
    
(54,591
)
  
(46,332
)
    
17.8
  
General & administrative
    
44,194
    
43,263
      
2.2
  
Taxes, licenses and fees
    
8,860
    
8,073
      
9.7
  
Other operating expenses incurred
    
62,515
    
74,844
      
(16.5
)
                       
Less commissions, allowances & expenses capitalized
    
(70,131
)
  
(81,642
)
    
(14.1
)
                       
Other operating expenses
    
(7,616
)
  
(6,798
)
    
12.0
  
                       
Marketing Companies:
                      
Commissions
    
22,881
    
17,553
      
30.4
  
Other
    
11,967
    
12,024
      
(0.5
)
Other operating expenses
    
34,848
    
29,577
      
17.8
  
                       
Other operating expenses
  
$
27,232
  
$
22,779
      
19.5
%


The Company utilizes reinsurance for most of its products, with the terms of the reinsurance agreed upon before products are made available for sale. The Company determines its pricing, and analyzes its financial performance, on a net of reinsurance basis with the objective of achieving an attractive return on investment for its shareholders. Generally, the Company’s profits emerge as a level percentage of premium for Statement of Financial Accounting Standards No. 60 (“SFAS 60”) products and as a level percentage of estimated gross profits for Statement of Financial Accounting Standards No. 97 (“SFAS 97”) products. Under both SFAS 60 and 97, the amount of earnings and investment will vary with the utilization of reinsurance. In addition, the utilization of reinsurance can cause fluctuations in individual income and expense line items from year to year. Consideration of all components of the segment’s income statement, including amortization of deferred acquisition costs (“DAC”), is required to assess the impact of reinsurance on segment operating income.

Reinsurance allowances represent the amount the reinsurer is willing to pay for reimbursement of acquisition and other costs incurred by the direct writer of the business. The amount and timing of these allowances are negotiated by the Company and each reinsurer. The Company receives allowances according to the prescribed schedules in the reinsurance contracts, which may or may not bear a relationship to actual operating expenses incurred by the Company. First year commissions 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 commissions paid by the Company. However the pattern of reinsurance allowances does not impact the pattern of earnings from year to year. While the recognition of reinsurance allowances is consistent with U.S. GAAP, non-deferred allowances often exceed the segment’s non-deferred direct costs, causing net other operating expenses to be negative. However, consistent with SFAS 60 and SFAS 97, fluctuations in non-deferred allowances tend to be offset by changes in DAC amortization with the resulting profits emerging as a level percentage of premiums for SFAS 60 products and as a level percentage of estimated gross profits for SFAS 97 products.

Reinsurance allowances tend to be highest in the first year of a policy and subsequently decline. Ultimate reinsurance allowances are defined as the level of allowances at the end of a policy’s term. The Company's practice is to defer as a component of DAC, reinsurance allowances in excess of the ultimate allowance. This practice is consistent with the Company's practice of deferring direct commissions.

The following table summarizes reinsurance allowances 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 reduce 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
    
   
2007
  
2006
    
Change
  
   
(Dollars in thousands)
        
Allowances received
  
$
70,506
  
$
79,164
      
(10.9
 )%
Less amount deferred
    
(38,580
)
  
(48,076
)
    
(19.8
)
Allowances recognized (reduction in other operating expenses)
  
$
31,926
  
$
31,088
      
2.7
  


Non-deferred reinsurance allowances of $31.9 million and $31.1 million were recognized in the first quarters of 2007 and 2006, respectively, resulting in reductions in operating expenses by these amounts in the same periods. Non-deferred reinsurance allowances increased 2.7% in the first quarter of 2007 compared to the same quarter of 2006, primarily as the result of the increase in the Company’s life insurance in-force.

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 SFAS 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 97 DAC amortization. Deferred reinsurance allowances on SFAS 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 60 policies impact SFAS 60 DAC amortization.

The amounts of ceded premium paid by the Company and allowances reimbursed by the reinsurer are reflected in the table below:

   
Three Months Ended
March 31
      
   
2007
  
2006
  
Change
  
   
(Dollars in thousands)
  
Ceded premiums
  
$
207,614
  
$
208,631
        
(0.5
)%
Allowances received
    
70,506
    
79,164
        
(10.9
)
Net ceded premiums
  
$
137,108
  
$
129,467
        
5.9
%


The net ceded premium increased 5.9% in the first quarter of 2007 compared to the same period of the prior year, primarily due to the decrease in allowances received. The Company’s move during 2005 to reduce its 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. As reinsurance allowances tend to be highest in the first year of a policy and subsequently decline, for a period of time, the decrease in allowances received will outpace the decrease in ceded premiums, resulting in an increase in net ceded premiums.

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 its 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 (“IBNR”) claims are reviewed by the Company’s actuarial staff to ensure that appropriate amounts are ceded. Ceded policy reserves are calculated by various administrative systems based on the nature of the specific reinsurance transactions and terms of the contracts.

The Company analyzes and monitors the credit worthiness of each of its reinsurance partners to ensure collectibility and minimize collection issues. For reinsurance companies that do not meet predetermined standards, the Company requires collateral such as assets held in trusts or letters of credit.

Other operating expenses for the insurance companies decreased in the first quarter of 2007 from the prior year as a result of a $2.1 million true-up during the first quarter of 2006 of field compensation expenses related to sales in prior periods that increased expense in the prior year period. Excluding the prior year true-up, other operating expenses increased 14.4% for the insurance companies in the first quarter of 2007 compared to the same period of the prior year, as a result of higher incurred non-deferrable expenses. Amounts capitalized as DAC generally include first year commissions, reinsurance allowances, and other deferrable acquisition expenses. The changes in these amounts generally reflect the trends in sales.

Other operating expenses for the segment’s marketing companies increased 17.8% for the first quarter of 2007 compared to the prior year primarily as a result of higher commissions and other expenses in the segment’s broker-dealer subsidiary associated with the higher revenue.

Sales for the segment declined 29.5% in the first quarter of 2007 versus 2006, primarily due to a 54.9% decline in UL sales. The decline in UL sales in the first quarter of 2007 is the expected result of pricing adjustments on certain UL products in response to the higher reserve levels required under Actuarial Guideline 38 (“AG38”). See additional discussion of AG38 and its impact on certain UL products in the “Recent Developments” section herein. Traditional life sales declined 10.6% in the first quarter of 2007 compared to the same period of the prior year. The decrease in traditional life sales is the result of intense competition in the market for these products. The Company continually reviews its product features and pricing in an effort to maintain or improve its competitive position. Sales of BOLI business declined in the first quarter of 2007 compared to the prior year. BOLI sales can vary widely between periods as the segment responds to opportunities for these products only when required returns can be achieved.

The Company has reduced its reliance on reinsurance for newly written traditional life products by moving towards a securitization structure under which profitability is not expected to emerge immediately after the business is written. In addition, older, more profitable traditional life policies continue to run off in the ordinary course. These two factors combined with financing costs in connection with the securitization structure and the Company’s pricing actions to remain competitive in the market are expected to put pressure on the profitability of this segment.

 
Acquisitions

The Acquisitions segment focuses on acquiring, converting, and servicing policies acquired from other companies. The segment's primary focus is on life insurance policies sold to individuals. Segment results were as follows:

   
Three Months Ended
March 31
        
   
2007
  
2006
    
Change
  
   
(Dollars in thousands)
        
REVENUES
                      
Gross premiums and policy fees
  
$
198,288
  
$
62,986
      
214.8
%
Reinsurance ceded
    
(118,241
)
  
(16,642
)
    
610.5
  
Net premiums and policy fees
    
80,047
    
46,344
      
72.7
  
Net investment income
    
148,986
    
54,490
      
173.4
  
Other income
    
4,719
    
617
      
664.8
  
Total operating revenues
    
233,752
    
101,451
      
130.4
  
Realized gains (losses) - investments
    
7,933
    
0
          
Realized gains (losses) - derivatives
    
(3,703
)
  
0
          
Total revenues
    
237,982
    
101,451
          
                       
BENEFITS AND EXPENSES
                      
Benefits and settlement expenses
    
166,889
    
67,454
      
147.4
  
Amortization of deferred policy acquisition costs and value of businesses acquired
    
18,770
    
6,335
      
196.3
  
Other operating expenses
    
15,844
    
7,756
      
104.3
  
Operating benefits and expenses
    
201,503
    
81,545
      
147.1
  
Amortization of DAC/VOBA related to realized gains (losses) - investments
    
606
    
0
          
Total benefits and expenses
    
202,109
    
81,545
          
                       
INCOME BEFORE INCOME TAX
    
35,873
    
19,906
      
80.2
  
                       
Less realized gains (losses)
   
4,230
    
0
          
Less related amortization of DAC
    
(606
)
  
0
          
OPERATING INCOME
  
$
32,249
  
$
19,906
      
62.0
  


The following table summarizes key data for the Acquisitions segment:

   
Three Months Ended
March 31
        
   
2007
  
2006
    
Change
  
   
(Dollars in thousands)
        
Average Life Insurance In-Force(1)
                      
Traditional
  
$
229,810,031
  
$
10,166,239
      
2160.5
%
Universal life
    
31,262,387
    
16,455,957
      
90.0
  
   
$
261,072,418
  
$
26,622,196
      
880.7
  
                       
Average Account Values
                      
Universal life
  
$
3,076,331
  
$
1,688,627
      
82.2
  
Fixed annuity(2)
    
5,650,139
    
209,049
      
2602.8
  
Variable annuity
    
195,840
    
65,543
      
198.8
  
   
$
8,922,310
  
$
1,963,219
      
354.5
  
                       
Interest Spread - UL & Fixed Annuities
                      
Net investment income yield
    
6.35
%
  
6.87
%
        
Interest credited to policyholders
    
4.13
    
5.10
          
Interest spread
    
2.22
%
  
1.77
%
        
                       
Mortality Experience(3)
  
$
774
  
$
267
          
(1) Amounts are not adjusted for reinsurance ceded.
(2) Includes general account balances held within variable annuity products.
(3) Represents a favorable variance as compared to pricing assumptions. Excludes results related to Chase Acquisition Group which was acquired in the third quarter of 2006.

In the ordinary course of business, the Acquisitions segment regularly considers acquisitions of blocks of policies or smaller insurance companies. The level of the segment’s 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 to decline as the result of lapses, deaths, and other terminations of coverage unless new acquisitions are made. The Company completed its acquisition of the Chase Insurance Group during the third quarter of 2006. This acquisition drove the increases in revenues, expenses, and earnings of the segment for the first quarter of 2007, as compared to the prior year period. This acquisition also drove the large increases in the segment’s life insurance in-force and UL and annuity account values compared to the prior year period.

Net premiums and policy fees increased 72.7% from the first quarter of 2006 as a result of the Chase Insurance Group acquisition which contributed $34.7 million to net premiums and policy fees during the first quarter of 2007. The 173.4% increase in net investment income in the first quarter of 2007 compared to the same period of 2006 is due to the increase in liabilities resulting from the 2006 acquisition. The interest spread increased 45 basis points from the first quarter of 2006 as a result of the higher spreads associated with the Chase Insurance Group block of business. The segment continues to review credited rates on UL and annuity business for all blocks of business to minimize the impact of lower earned rates on interest spreads.

Benefits and settlement expenses for the first quarter of 2007 are 147.4% higher than the comparable period of 2006 due to the 2006 acquisition, which contributed $101.6 million to expenses in the first quarter of 2007. The Chase acquisition resulted in an additional $12.8 million of VOBA amortization for the first quarter of 2007, driving the quarterly increase of 196.3%. Other operating expenses increased 104.3% from the first quarter of 2006 primarily due to higher commissions resulting from higher net premiums.

Annuities

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. Segment results were as follows:

   
Three Months Ended
March 31
        
   
2007
  
2006
    
Change
  
   
(Dollars in thousands)
        
REVENUES
                      
Gross premiums and policy fees
  
$
8,262
  
$
8,144
      
1.4
%
Reinsurance ceded
    
0
    
0
      
0.0
  
Net premiums and policy fees
    
8,262
    
8,144
      
1.4
  
Net investment income
    
60,861
    
53,494
      
13.8
  
Realized gains (losses) - derivatives
    
254
    
(651
)
        
Other income
    
2,713
    
2,899
      
(6.4
)
Operating revenues
    
72,090
    
63,886
      
12.8
  
Realized gains (losses) - Investments
    
1,664
    
(90
)
        
Total revenues
    
73,754
    
63,796
          
 
BENEFITS AND EXPENSES
                      
Benefits and settlement expenses
    
55,949
    
47,313
      
18.3
  
Amortization of deferred policy acquisition costs
    
4,538
    
5,126
      
(11.5
)
Other operating expenses
    
5,997
    
6,706
      
(10.6
)
Operating benefits and expenses
    
66,484
    
59,145
      
12.4
  
Amortization of DAC related to realized gains
(losses) - investment
    
590
    
0
          
Total benefits and expenses
    
67,074
    
59,145
          
                       
INCOME BEFORE INCOME TAX
    
6,680
    
4,651
      
43.6
  
                       
Less realized gains (losses) - investments
    
1,664
    
(90
)
        
Less related amortization of DAC
    
(590
)
  
0
          
OPERATING INCOME
  
$
5,606
  
$
4,741
      
18.2
  


The following table summarizes key data for the Annuities segment:

   
Three Months Ended
March 31
        
   
2007
  
2006
    
Change
  
   
(Dollars in thousands)
        
Sales
                      
Fixed annuity
  
$
243,862
  
$
92,090
      
164.8
%
Variable annuity
    
79,671
    
73,731
      
8.1
  
   
$
323,533
  
$
165,821
      
95.1
  
                       
Average Account Values
                      
Fixed annuity(1)
  
$
4,045,331
  
$
3,422,366
      
18.2
  
Variable annuity
    
2,580,211
    
2,358,898
      
9.4
  
   
$
6,625,542
  
$
5,781,264
      
14.6
  
                       
Interest Spread - Fixed Annuities(2)
                      
Net investment income yield
    
5.92
%
  
6.14
%
        
Interest credited to policyholders
    
5.24
    
5.39
          
Interest spread
    
0.68
%
  
0.75
%
        
                       
 
As of                    
March 31
        
     
2007
    
2006
          
                       
GMDB - Net amount at risk(3)
  
$
90,614
  
$
120,269
      
(24.7
)
GMDB - Reserves
    
2,615
    
2,561
      
2.1
  
S&P 500® Index
    
1,421
    
1,295
      
9.7
  
(1) Includes general account balances held within variable annuity products.
(2) Interest spread on average general account values.
(3) Guaranteed death benefit in excess of contract holder account balance.


Segment operating income increased 18.2% during the first quarter of 2007 compared to the same period of 2006. This improvement is primarily due to favorable results in the market value adjusted annuity line following a favorable DAC unlocking adjustment, and is partially offset by a decrease in operating income in the single premium immediate annuity line, resulting from unfavorable mortality results. Operating income was also favorably impacted for the first quarter of 2007 compared to the same period of the prior year by improvement in the equity markets and increasing account values, offset by a tightening of spreads.

Segment operating revenues increased 12.8% in the first quarter of 2007 compared to the same period of 2006. Minor fluctuations in net premiums and policy fees and other income were offset by increases in net investment income. Average account balances grew 14.6% in the first quarter of 2007 resulting in higher investment income. The additional income resulting from the larger account balances was partially reduced in 2007 by a 7 basis point decline in interest spreads, resulting from a rebalancing of the investment portfolio during the fourth quarter of 2006. The segment continually monitors and adjusts credited rates as appropriate in an effort to maintain or improve its interest spread.

Operating benefits and expenses increased 12.4% for the first quarter of 2007 compared to the same period of the prior year. This increase is primarily the result of higher credited interest and unfavorable mortality fluctuations, partially offset by reductions in DAC amortization resulting from favorable unlocking. Benefits and settlement expenses increased 18.3% for the quarter compared to the same period of 2006 due primarily to higher credited interest and changes in mortality. The increase in credited interest is the result of the 14.6% increase in average account values. Mortality was unfavorable by $2.3 million for the first quarter of 2007, compared to unfavorable mortality of $1.6 million for the same period of 2006, an unfavorable change of $0.7 million. This unfavorable mortality variance primarily relates to the nonrecurring sales of $122 million of single premium immediate annuities on 28 lives sold in the fourth quarter of 2004 in a structured transaction. Because this block of annuities is large relative to the total amount of annuities in-force, volatility in mortality results are expected.

The decrease in DAC amortization in the first quarter of 2007 compared to 2006 is primarily the result of DAC unlocking. The Company periodically reviews and updates as appropriate its 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.” During the first quarter of 2007, DAC amortization for the Annuities segment was reduced $1.2 million due to favorable DAC unlocking in the market value adjusted annuity line. Favorable DAC unlocking of $0.1 million was recorded by the segment during the first quarter of 2006.

Total sales were 95.1% higher for the first quarter of 2007 than the same period of the prior year. The Chase Insurance Group acquisition, and the continuation of new annuity sales through the former Chase distribution system, contributed $75.8 million in fixed annuity sales in the first quarter of 2007. Excluding the impact of the acquisition, total sales increased 49.4% for the first quarter of 2007 compared to the same period of the prior year. Sales of fixed annuities (excluding the impact of the acquisition) increased 82.5% for the first quarter of 2007 compared to 2006. A general improvement in the equity markets reduced the net amount at risk with respect to guaranteed minimum death benefits by 24.7%.


Stable Value Products

The Stable Value Products segment sells guaranteed funding agreements (“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. Segment results were as follows:

   
Three Months Ended
March 31
        
   
2007
  
2006
    
Change
  
   
(Dollars in thousands)
        
REVENUES
                      
Net investment income
  
$
79,101
  
$
82,233
      
(3.8
)%
Realized gains (losses)
    
1,425
    
(4,854
)
        
Total revenues
    
80,526
    
77,379
          
                       
BENEFITS AND EXPENSES
                      
Benefits and settlement expenses
    
64,719
    
67,463
      
(4.1
)
Amortization of deferred policy acquisition costs
    
1,168
    
1,229
      
(5.0
)
Other operating expenses
    
1,028
    
1,197
      
(14.1
)
Total benefits and expenses
    
66,915
    
69,889
      
(4.3
)
                       
INCOME BEFORE INCOME TAX
    
13,611
    
7,490
      
81.7
  
                       
Less realized gains (losses)
    
1,425
    
(4,854
)
        
OPERATING INCOME
  
$
12,186
  
$
12,344
      
(1.3
)


The following table summarizes key data for the Stable Value Products segment:

   
Three Months Ended
March 31