In
this Annual Report on Form 10-K, unless the context otherwise requires, “The
Company,” “we,” “us,” and “our” refer to Protective Life Corporation and its
subsidiaries.
Protective
Life Corporation 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 (“Protective Life”) 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.
Copies of
the Company’s Proxy Statement and 2007 Annual Report to Shareowners will be
furnished to anyone who requests such documents from the
Company. Requests for copies should be directed to: Shareowner
Relations, Protective Life Corporation, P. O. Box 2606, Birmingham,
Alabama 35202, Telephone (205) 268-3573, FAX
(205) 268-5547. Copies may also be requested through the
Internet from the Company’s worldwide website
(www.protective.com). The Company makes periodic and current reports
available free of charge on its website as soon as reasonably practicable after
such material is electronically filed with or furnished to the United States
Securities and Exchange Commission (the “SEC”). The information
incorporated herein by reference is also electronically accessible through the
Internet from the “EDGAR Database of Corporate Information” on the SEC worldwide
website (www.sec.gov).
The
Company operates several business segments each having a strategic
focus. An operating segment is generally distinguished by products
and/or distribution channels. 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 operating segments in
light of the segment reporting requirements prescribed by Financial Accounting
Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”)
No. 131, Disclosures
about Segments of an Enterprise and Related Information, and make
adjustments to our segment reporting as needed.
Additional
information concerning the Company’s business segments may be found in Item 7,
Management's Discussion and
Analysis of Financial Condition and Results of Operations and
Note 20, Operating
Segments to Consolidated Financial Statements included
herein.
In the
following paragraphs, the Company reports sales and other statistical
information. These statistics are used to measure the relative
progress of its marketing and acquisition 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 premiums, or “target”: premiums if
lesser, plus 6% of amounts received in excess of target premiums and 10% of
single premiums. (“Target” premiums for universal life are those
premiums upon which full first year commissions are paid). 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.
These
statistics are derived from various sales tracking and administrative systems,
and are not derived from our financial reporting systems or financial
statements. These statistics attempt to measure some of the many
factors that may affect future profitability, and therefore are not intended to
be predictive of future profitability.
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 through a variety of
distribution channels. One distribution system is comprised of
brokerage general agencies who recruit a network of independent life
agents. The segment also distributes insurance products through a
network of experienced independent personal producing general agents who are
recruited by regional sales managers, through stockbrokers and banks and through
worksite arrangements. The Company markets its BOLI products through
independent marketing organizations that specialize in the BOLI
market.
The
following table shows the Life Marketing segment’s sales measured by new
premium.
|
Year
Ended
|
|
|
|
|
December
31,
|
|
Sales
|
|
|
|
(Dollars
In Millions)
|
|
2003
|
|
$ |
290
|
|
|
2004
|
|
|
262 |
|
|
2005
|
|
|
295 |
|
|
2006
|
|
|
228 |
|
|
2007
|
|
|
229 |
|
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 and annuity products sold to individuals. These
acquisitions may be accomplished through acquisitions of companies or through
the reinsurance of blocks of policies from other insurers. Forty-four
transactions have been closed by the segment since 1970,
including seventeen since 1989. The level of the segment’s
acquisition activity is predicated upon many factors, including available
capital, operating capacity, and market dynamics. The Company expects
acquisition opportunities to continue to be available as the life insurance
industry continues to consolidate; however, we believe we may face increased
competition for future acquisitions.
Most
acquisitions closed by the Acquisitions segment do not include the acquisition
of an active sales force, thus policies acquired through the segment are
typically “closed” blocks of business (no new policies are being
marketed). Therefore, the amount of insurance in-force for a
particular acquisition is expected to decline with time due to lapses, deaths,
and other terminations of coverage. In transactions where some
marketing activity was included, the Company generally either ceased future
marketing efforts or redirected those efforts to another segment of the
Company. However, in the case of the acquisition of West Coast Life
Insurance Company (“West Coast”) which was closed by the Acquisitions
segment in 1997, the Company elected to continue marketing new policies and to
operate West Coast as a component of our Life Marketing
segment. Additionally, the Company has continued marketing new
annuity products associated with our 2006 acquisition of the Chase Insurance
Group (see below). New annuity product sales resulting from this
acquisition are reported as a component of the Annuities segment.
The
Company believes that its focused and disciplined approach to the acquisition
process and its experience in the assimilation, conservation, and servicing of
acquired policies provides a significant competitive advantage over many other
companies that attempt to make similar acquisitions.
Since
most acquisitions consist of closed blocks of business, earnings and account
values from the Acquisitions segment are expected to decline with time unless
new acquisitions are made. Therefore, the segment’s revenues and
earnings may fluctuate from year to year depending upon the level of acquisition
activity.
On
July 3, 2006, the Company completed its acquisition of the Chase Insurance
Group, which consisted of five insurance companies that manufacture and
administer traditional life insurance and annuity products and four related
non-insurance companies (which collectively are referred to as the “Chase
Insurance Group.”) The Chase Insurance Group historically was
headquartered in Elgin, Illinois, and offered primarily level premium term and
other traditional life products, as well as fixed and variable annuity
products. While the Company has ceased marketing level premium term
and other traditional life products previously offered by the Chase Insurance
Group, as noted above, the Company has continued marketing fixed annuity
products through certain of our insurance subsidiaries.
From time
to time the Company’s other business segments have acquired companies and blocks
of policies which are included in their respective results.
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.
The
Company’s fixed annuities include modified guaranteed annuities which guarantee
an interest rate for a fixed period. Because contract values for
these annuities are "market-value adjusted" upon surrender prior to maturity,
these products afford the Company with a measure of protection from the effects
of changes in interest rates. The Company’s fixed annuities also
include single premium deferred annuities, single premium immediate annuities,
and equity indexed annuities which we began marketing during
2005. The Company’s variable annuities offer the policyholder the
opportunity to invest in various investment accounts.
The
following table shows fixed and variable annuity sales. The demand
for annuity products is related to the general level of interest rates and
performance of the equity markets. Additionally, the Company has
continued the marketing of new annuity products associated with our 2006
acquisition of the Chase Insurance Group and include these sales as a component
of the Annuities segment. During 2007 and 2006, fixed annuity sales
generated through the former Chase Insurance Group distribution channels were
$379.5 million and $276.1 million, respectively.
|
Year
Ended
|
|
Fixed
|
|
|
Variable
|
|
|
Total
|
|
|
December
31,
|
|
Annuities
|
|
|
Annuities
|
|
|
Annuities
|
|
|
|
(Dollars
In Millions)
|
|
2003
|
|
$ |
164 |
|
|
$ |
350 |
|
|
$ |
514 |
|
|
2004
|
|
|
443 |
|
|
|
283 |
|
|
|
726 |
|
|
2005
|
|
|
275 |
|
|
|
312 |
|
|
|
587 |
|
|
2006
|
|
|
878 |
|
|
|
323 |
|
|
|
1,201 |
|
|
2007
|
|
|
1,194 |
|
|
|
472 |
|
|
|
1,666 |
|
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. During 2003, the Company registered a funding agreement-backed
notes program with the SEC. Through this program, the Company was
able to offer notes to both institutional and retail investors. As a
result of the strong sales of these notes since their introduction in 2003, the
amount available under this program was increased by $4 billion in 2005
through a second registration. The segment's funding agreement-backed
notes complement our overall asset/liability management in that the terms of the
funding agreements may be tailored to the needs of Protective Life as the seller
of the funding agreements, as opposed to solely meeting the needs of the
buyer.
Additionally,
the segment markets guaranteed investment contracts (“GICs”) to 401(k) and
other qualified retirement savings plans. GICs are generally
contracts which specify a return on deposits for a specified period and often
provide flexibility for withdrawals at book value in keeping with the benefits
provided by the plan. The demand for GICs is related to the relative
attractiveness of the “fixed rate” investment option in a 401(k) plan compared
to the equity-based investment options available to plan
participants.
The
Company’s emphasis is on a consistent and disciplined approach to product
pricing and asset/liability management, careful underwriting of early withdrawal
risks, and maintaining low distribution and administration
costs. Most GIC contracts and funding agreements written by the
Company have maturities of three to ten years.
The
following table shows stable value products sales:
|
Year
Ended
|
|
|
|
|
Funding
|
|
|
|
|
|
December
31,
|
|
GICs
|
|
|
Agreements
|
|
|
Total
|
|
|
|
|
(Dollars
In Millions)
|
|
2003
|
|
$ |
275 |
|
|
$ |
1,333 |
|
|
$ |
1,608 |
|
|
2004
|
|
|
59 |
|
|
|
1,524 |
|
|
|
1,583 |
|
|
2005
|
|
|
96 |
|
|
|
1,316 |
|
|
|
1,412 |
|
|
2006
|
|
|
294 |
|
|
|
140 |
|
|
|
434 |
|
|
2007
|
|
|
133 |
|
|
|
794 |
|
|
|
927 |
|
During
2007, the Company chose to reenter the institutional funding agreement-backed
note market. In contrast, during 2006, the Company did not participate in this
market. The rate of growth in account balances is affected by the
amount of maturing contracts relative to the amount of new sales.
Asset
Protection
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 a guaranteed asset protection product and an inventory
protection product . The segment’s products are primarily
marketed through a national network of 4,500 automobile, marine, and RV
dealers. The Asset Protection segment has also offered credit
insurance through banks and consumer finance companies.
The
Company is the 8th largest
independent writer of credit insurance in the United States according to
industry surveys. These policies cover automobile loans made through
automobile dealers throughout the United States and consumer loans made by
financial institutions located primarily in the southeastern United
States. The Company’s ranking with respect to the writing of credit
insurance is expected to decline in future years as the segment discontinues
marketing these products through financial institutions.
On
July 14, 2006, the Company completed an acquisition of the vehicle extended
service contract business of Western General. Western General is
headquartered in Calabasas, California, and is a provider of vehicle service
contracts nationally, focusing primarily on the west coast market. In
addition, Western General currently provides extended service contract
administration for several automobile manufacturers and provides used car
service contracts for a publicly-traded national dealership group.
The
following table shows the insurance and related product sales measured by new
revenue:
|
Year
Ended
|
|
|
|
|
December
31,
|
|
Sales
|
|
|
|
(Dollars
In Millions)
|
|
2003
|
|
$ |
472 |
|
|
2004
|
|
|
460 |
|
|
2005
|
|
|
489 |
|
|
2006
|
|
|
536 |
|
|
2007
|
|
|
552 |
|
In 2007,
approximately 85% of the segment’s sales were through the automobile dealer
distribution channel, and approximately 62% of the segment’s sales were extended
service contracts. A portion of the sales and resulting premium are
reinsured with producer-affiliated reinsurers.
Corporate
and Other
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 other business segments
described 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. The earnings of this
segment may fluctuate from year to year.
Investments
As of
December 31, 2007, our investment portfolio equaled approximately $29.0
billion. The types of assets in which the Company may invest are
influenced by various state laws which prescribe qualified investment
assets. Within the parameters of these laws, the Company invests 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. For further information regarding the Company’s
investments, the maturity of and the concentration of risk among the Company’s
invested assets, derivative financial instruments, and liquidity, see
Notes 2, Summary of
Significant Accounting Policies and Note 4, Investment Operations to
Consolidated Financial Statements, and Item 7, Management's Discussion and Analysis
of Financial Condition and Results of Operations.
A
significant portion of the Company’s bond portfolio is invested in
mortgage-backed securities. Mortgage-backed holdings at December 31,
2007 equaled approximately $8.5 billion. Mortgage-backed securities
are constructed from pools of residential 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 residential loans can be expected to accelerate with decreases
in interest rates and diminish with increases in interest rates. The
Company has 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, the Company has
entered into derivative contracts to partially offset the volatility in the
market value of our mortgage-backed securities.
As of December 31, 2007, the Company had mortgage-backed securities with a total
market value of $89.9 million, or 0.3% of total invested assets, that were
supported by collateral classified as sub-prime. $88.2 million or 98.1% of these
securities were rated AAA. Additionally, as of December 31, 2007, the
Company held $274.5 million, or 0.9% of invested assets, of securities supported
by collateral classified as Alt-A.
The
tables below show a breakdown of the Company’s mortgage-backed securities
portfolio by type and rating at December 31, 2007. As of
December 31, 2007, these holdings were approximately $7.0 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
|
|
|
|
Mortgage-Backed
|
|
Type
|
|
Securities
|
|
Sequential
|
|
|
54.6
|
% |
|
PAC
|
|
|
25.2 |
|
|
Pass
Through
|
|
|
9.1 |
|
|
Other
|
|
|
11.1 |
|
|
|
|
|
100.0
|
% |
| |
|
Percentage
of
|
| |
|
Mortgage
Backed
|
|
Rating
|
|
Securities
|
|
AAA
|
|
|
97.5
|
% |
|
AA
|
|
|
2.4 |
|
| A |
|
0.1 |
|
| |
|
|
100.0
|
% |
The
Company’s 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 the Company securitized portions of its mortgage loan portfolio. As of
December 31, 2007, these holdings were approximately $1.5 billion. Of
this amount, $929.1 million related to retained beneficial interests of
commercial mortgage loan securitizations the Company completed. The following
table shows the percentages of the Company’s CMBS holdings, at December 31,
2007, grouped by rating category:
| |
|
Percentage
of
|
| |
|
Commercial
|
| |
|
Mortgage
Backed
|
|
Rating
|
|
Securities
|
|
AAA
|
|
|
86.1
|
% |
|
AA
|
|
|
7.7 |
|
| A |
|
|
3.1 |
|
|
BBB
|
|
|
1.4 |
|
|
Below
investment grade
|
|
|
1.7 |
|
| |
|
|
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 December 31, 2007, these holdings were approximately $844.5
million. The following table shows the percentages of the Company’s
ABS holdings, at December 31, 2007, grouped by rating category:
|
|
|
|
Percentage
of
|
|
|
|
|
Asset
Backed
|
|
Rating
|
|
|
Securities
|
|
AAA
|
|
|
95.2
|
%
|
|
AA
|
|
|
1.7
|
|
|
A
|
|
|
1.7
|
|
|
BBB
|
|
|
1.4
|
|
|
Below
investment grade
|
|
|
0.0
|
|
|
|
|
|
100.0
|
%
|
The
Company obtained ratings of its fixed maturities from Moody's Investors Service,
Inc. (“Moody's”), Standard & Poor's Corporation (“S&P”) and
Fitch Ratings (“Fitch”). If a bond is not rated by Moody's,
S&P, or Fitch, the Company uses ratings from the Securities Valuation Office
of the National Association of Insurance Commissioners (“NAIC”), or the
Company rates 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 December 31, 2007, over 99% of the Company’s
bonds were rated by Moody's, S&P, Fitch, and/or the NAIC.
The
approximate percentage distribution of the Company’s fixed maturity investments
by quality rating at December 31, 2007, is as follows:
| |
|
Percentage
of
|
| |
|
Fixed
Maturity
|
|
Type
|
|
Investments
|
|
AAA
|
|
|
43.4
|
% |
|
AA
|
|
|
8.8 |
|
| A |
|
|
18.5 |
|
|
BBB
|
|
|
25.7 |
|
|
BB
or less
|
|
|
3.6 |
|
| |
|
|
100.0
|
% |
At
December 31, 2007, approximately $22.6 billion of the Company’s
$23.4 billion fixed maturities portfolio was invested in U.S. Government or
agency-backed securities or investment grade bonds and approximately
$0.8 billion of the Company’s fixed maturities portfolio was rated less
than investment grade, of which $26.1 million were securities issued in
Company-sponsored commercial mortgage loan securitizations.
Risks
associated with investments in less than investment grade debt obligations may
be significantly higher than risks associated with investments in debt
securities rated investment grade. Risk of loss upon default by the
borrower is significantly greater with respect to such debt obligations than
with other debt securities because these obligations may be unsecured or
subordinated to other creditors. Additionally, there is often a
thinly traded market for such securities and current market quotations are
frequently not available for some of these securities. Issuers of
less than investment grade debt obligations usually have higher levels of
indebtedness and are more sensitive to adverse economic conditions, such as
recession or increasing interest rates, than investment-grade
issuers.
During 2007, the Company entered into credit default swaps to enhance the return
on our investment portfolio. As of December 31, 2007, the Company’s
notional amount relative to these credit default swaps equaled approximately
$115.0 million. The Company recognized a $3.3 million pre-tax gain in 2007 from
the change in the swaps' fair value and positions closed.
The
Company also invests a significant portion of its investment portfolio in
commercial mortgage loans. As of December 31, 2007, the Company’s
mortgage loan holdings equaled approximately $3.3 billion. The Company generally
does 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. The Company’s underwriting procedures
relative to its commercial loan portfolio are based on a conservative,
disciplined approach. The Company concentrates its 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). The Company believes these asset types tend to
weather economic downturns better than other commercial asset classes that the
Company has chosen not to participate in. The Company believes this disciplined
approach has helped to maintain a relatively low delinquency and foreclosure
rate throughout our history.
The
average size of loans made during 2007 was $3.2 million. The
average size mortgage loan in the Company’s portfolio is approximately
$2.2 million. The largest single loan amount is
$21.8 million.
The
following table shows a breakdown of the Company’s commercial mortgage loan
portfolio by property type at December 31, 2007:
|
|
|
Percentage
of
|
|
|
|
Mortgage
Loans
|
|
Type
|
|
on
Real Estate
|
|
Retail
|
|
|
64.8
|
% |
|
Office
Buildings
|
|
|
13.8 |
|
|
Apartments
|
|
|
10.5 |
|
|
Warehouses
|
|
|
8.1 |
|
|
Other
|
|
|
2.8 |
|
|
|
|
|
100.0
|
% |
Retail
loans are predominantly on strip shopping centers anchored by one or more
regional or national retail stores. The anchor tenants enter into
long-term leases with the Company's borrowers. These centers provide
the basic necessities of life, such as food, pharmaceuticals, and clothing, and
have been relatively insensitive to changes in economic
conditions. The following are the largest anchor tenants (measured by
the Company’s level of exposure) at December 31, 2007:
|
|
|
Percentage
of
|
|
|
|
|
Mortgage
Loans
|
|
|
Type
|
|
on
Real Estate
|
|
|
Food
Lion, Inc.
|
|
|
2.8
|
% |
|
Wal-Mart
Stores, Inc.
|
|
|
2.3 |
|
|
Walgreen
Corporation
|
|
|
2.0 |
|
|
CVS
Drugs, Inc.
|
|
|
1.3 |
|
|
Tractor
Supply Co.
|
|
|
1.1 |
|
|
|
|
|
9.5
|
% |
The
Company’s mortgage lending criteria generally requires 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 property's projected operating expenses and debt
service. The Company also offers a commercial loan product under
which the Company will permit a loan-to-value ratio of up to 85% in exchange for
a participating interest in the cash flows from the underlying real
estate. Approximately $627.0 million of the Company’s mortgage
loans have this participation feature.
Certain
of the Company’s mortgage loans have call or interest rate reset provisions
between 3 and 10 years. However, if interest rates were to
significantly increase, the Company may be unable to call the loans or increase
the interest rates on its existing mortgage loans commensurate with the
significantly increased market rates.
At
December 31, 2007, $7.5 million or 0.2% of the mortgage loan portfolio
was nonperforming, but less than 90 days delinquent. It is the
Company’s 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
the Company’s general policy to initiate foreclosure proceedings unless a
workout arrangement to bring the loan current is in place.
Between
1996 and 1999, the Company securitized $1.4 billion of its mortgage
loans. The Company sold the senior tranches while
retaining the subordinate tranches. The Company continues to service
the securitized mortgage loans. During 2007, the Company securitized
an additional $1.0 billion of its mortgage loans. The Company sold
the highest rated tranche for approximately $218.3 million, while retaining the
remaining tranches. The Company continues to service the securitized
mortgage loans. At December 31, 2007, the Company had
investments related to retained beneficial interests of mortgage loan
securitizations of $929.1 million. See Note 10, Commercial Mortgage
Securitizations, for additional information on the mortgage loan
securitization completed during 2007.
As a
general rule, the Company does not invest directly in real
estate. The investment real estate held by the Company consists
largely of properties obtained through foreclosures or the acquisition of other
insurance companies. Based on the Company’s experience, the appraised
value of a foreclosed property often approximates the mortgage loan balance on
the property plus costs of foreclosure. Also, foreclosed properties
often generate a positive cash flow enabling us to hold and manage the property
until the property can be profitably sold.
The
following table shows the investment results from continuing operations of the
Company:
|
|
|
Cash,
Accrued
|
|
|
|
|
|
Percentage
|
|
Realized
Investment
|
|
|
|
|
Investment
|
|
|
|
|
|
Earned
on
|
|
Gains
(Losses)
|
|
|
|
|
Income,
and
|
|
|
Net
|
|
|
Average
of
|
|
Derivative
|
|
|
|
|
|
Year
Ended
|
|
Investments
at
|
|
|
Investment
|
|
|
Cash
and
|
|
Financial
|
|
|
All
Other
|
|
|
December
31,
|
|
December
31,
|
|
|
Income
|
|
|
Investments
|
|
Instruments
|
|
|
Investments
|
|
|
(Dollars In Thousands)
|
|
2003
|
|
$ |
17,752,081 |
|
|
$ |
1,030,752 |
|
|
|
6.4
|
% |
|
$ |
12,550 |
|
|
$ |
58,064 |
|
|
2004
|
|
|
19,712,244 |
|
|
|
1,084,217 |
|
|
|
6.1 |
|
|
|
19,591 |
|
|
|
28,305 |
|
|
2005
|
|
|
20,741,423 |
|
|
|
1,180,502 |
|
|
|
5.8 |
|
|
|
(30,881 |
) |
|
|
49,393 |
|
|
2006
|
|
|
28,299,749 |
|
|
|
1,419,778 |
|
|
|
6.0 |
|
|
|
(21,516 |
) |
|
|
104,084 |
|
|
2007
|
|
|
29,476,959 |
|
|
|
1,675,934 |
|
|
|
5.9 |
|
|
|
8,469 |
|
|
|
8,602 |
|
Life
Insurance in Force
The
following table shows life insurance sales by face amount and life insurance in
force:
|
|
|
For
The Year Ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
(Dollars
In Thousands)
|
|
|
New
Business Written
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
Marketing
|
|
$ |
89,463,255 |
|
|
$ |
81,389,241 |
|
|
$ |
60,435,133 |
|
|
$ |
77,917,553 |
|
|
$ |
102,154,269 |
|
|
Group
Products (1)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
67,405 |
|
|
Asset
Protection
|
|
|
2,786,447 |
|
|
|
3,095,205 |
|
|
|
3,770,783 |
|
|
|
5,702,146 |
|
|
|
6,655,790 |
|
|
Total
|
|
$ |
92,249,702 |
|
|
$ |
84,484,446 |
|
|
$ |
64,205,916 |
|
|
$ |
83,619,699 |
|
|
$ |
108,877,464 |
|
|
Business
Acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
|
|
$ |
- |
|
|
$ |
224,498,169 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
Insurance
in Force at End of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
Marketing
|
|
$ |
517,797,133 |
|
|
$ |
453,937,534 |
|
|
$ |
435,430,943 |
|
|
$ |
372,395,267 |
|
|
$ |
305,939,864 |
|
|
Acquisitions
|
|
|
243,050,966 |
|
|
|
265,837,876 |
|
|
|
26,861,772 |
|
|
|
29,135,715 |
|
|
|
30,755,635 |
|
|
Group
Products (1)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
710,358 |
|
|
Asset
Protection
|
|
|
4,333,952 |
|
|
|
4,718,018 |
|
|
|
5,496,543 |
|
|
|
6,807,494 |
|
|
|
9,088,963 |
|
|
Total
|
|
$ |
765,182,051 |
|
|
$ |
724,493,428 |
|
|
$ |
467,789,258 |
|
|
$ |
408,338,476 |
|
|
$ |
346,494,820 |
|
| |
|
|
(1) On
December 31, 2001, the Company completed the sale of substantially all of
its Dental Division, with which
|
|
|
the
group products are associated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) Reinsurance
assumed has been included, reinsurance ceded (2007 - $531,984,866; 2006 -
$576,790,608;
|
|
|
2005
- $393,605,152; 2004 - $354,015,938; 2003 - $292,740,795) has not been
deducted.
|
|
|
|
|
|
The ratio
of voluntary terminations of individual life insurance to mean individual life
insurance in force, which is determined by dividing the amount of insurance
terminated due to lapses during the year by the mean of the insurance in force
at the beginning and end of the year, adjusted for the timing of major
acquisitions was:
|
|
|
Ratio
of
|
|
Year
Ended
|
|
Voluntary
|
|
December
31,
|
|
Termination
|
|
2003
|
|
|
4.1
|
% |
|
2004
|
|
|
4.6 |
|
|
2005
|
|
|
4.2 |
|
|
2006
|
|
|
3.9 |
|
|
2007
|
|
|
4.5 |
|
Investment
Products in Force
The
amount of investment products in force is measured by account
balances. The following table shows stable value product,
acquisitions segment, and annuity segment account balances. Most of
the variable annuity account balances are reported in the Company’s financial
statements as liabilities related to separate accounts.
|
|
|
Stable
|
|
|
Modified
|
|
|
|
|
|
|
|
|
Year
Ended
|
|
Value
|
|
|
Guaranteed
|
|
|
Fixed
|
|
|
Variable
|
|
|
December
31,
|
|
Products
|
|
|
Annuities
|
|
|
Annuities
|
|
|
Annuities
|
|
|
(Dollars In Thousands)
|
|
2003
|
|
$ |
4,676,531 |
|
|
$ |
2,286,417 |
|
|
$ |
851,165 |
|
|
$ |
2,388,033 |
|
|
2004
|
|
|
5,562,997 |
|
|
|
2,406,426 |
|
|
|
753,832 |
|
|
|
2,612,077 |
|
|
2005
|
|
|
6,057,721 |
|
|
|
2,348,037 |
|
|
|
777,422 |
|
|
|
2,639,670 |
|
|
2006
|
|
|
5,513,464 |
|
|
|
2,424,218 |
|
|
|
4,981,587 |
|
|
|
4,302,413 |
|
|
2007
|
|
|
5,046,463 |
|
|
|
2,745,123 |
|
|
|
5,773,855 |
|
|
|
3,975,058 |
|
Below are the fixed annuity account balances by segment as of December 31, 2007
and 2006:
|
Year
Ended
|
|
|
|
|
|
|
|
December
31,
|
|
Annuities
|
|
|
Acquisitions
|
|
|
|
(Dollars
In Thousands)
|
|
|
2006
|
|
|
1,355,844 |
|
|
|
3,625,743 |
|
|
2007
|
|
|
2,118,209 |
|
|
|
3,655,646 |
|
Below are
the variable annuity account balances by segment as of December 31, 2007 and
2006:
|
Year
Ended
|
|
|
|
|
|
|
|
December
31,
|
|
Annuities
|
|
|
Acquisitions
|
|
|
|
(Dollars
In Thousands)
|
|
|
2006
|
|
|
2,765,689 |
|
|
|
1,536,724 |
|
|
2007
|
|
|
2,706,239 |
|
|
|
1,268,819 |
|
Underwriting
The
underwriting policies of the Company’s insurance subsidiaries are established by
management. With respect to individual insurance, the subsidiaries
use information from the application and, in some cases, inspection reports,
attending physician statements, or medical examinations to determine whether a
policy should be issued as applied for, other than applied for, or
rejected. Medical examinations of applicants are required for
individual life insurance in excess of certain prescribed amounts (which vary
based on the type of insurance) and for most individual insurance applied for by
applicants over age 50. In the case of "simplified issue"
policies, which are issued primarily through the Asset Protection segment and
the Life Marketing segment in the worksite market, coverage is rejected if the
responses to certain health questions contained in the application indicate
adverse health of the applicant. For other than "simplified issue"
policies, medical examinations are requested of any applicant, regardless of age
and amount of requested coverage, if an examination is deemed necessary to
underwrite the risk. Substandard risks may be referred to reinsurers
for evaluation of the substandard risk.
The
Company’s insurance subsidiaries generally require blood samples to be drawn
with individual insurance applications above certain face amounts based on the
applicant’s age, except in the worksite and BOLI markets where limited blood
testing is required. Blood samples are tested for a wide range of
chemical values and are screened for antibodies to the HIV
virus. Applications also contain questions permitted by law regarding
the HIV virus which must be answered by the proposed insureds.
During
third quarter of 2006, the Company introduced an advanced underwriting system,
TeleLife®, through the brokerage agent distribution channel for traditional
insurance. TeleLife® streamlines the application process through a
telephonic interview of the applicant, schedules medical exams, accelerates the
underwriting process and the ultimate issuance of a policy, mostly through
electronic means, as well as reduces the number of attending physician
statements.
During 2008, the Company increased its
retention limit to $2,000,000 on certain of its traditional life
products.
Reinsurance
Ceded
The
Company’s insurance subsidiaries cede insurance to other insurance
companies. The ceding insurance company remains liable with respect
to ceded insurance should any reinsurer fail to meet the obligations assumed by
it. The Company has also used reinsurance to reinsure guaranteed
minimum death benefit (“GMDB”) claims relative to our variable annuity
contracts.
For
approximately 10 years prior to mid-2005, the Company entered into reinsurance
contracts in which the Company ceded a significant percentage, generally 90% of
its newly written business on a first dollar quota share basis. The Company’s
traditional life insurance was ceded under coinsurance contracts and universal
life insurance was ceded under yearly renewable term (“YRT”)
contracts. In mid-2005, the Company substantially discontinued
coinsuring its newly written traditional life insurance and moved to YRT
reinsurance as discussed below. The Company continues to reinsure 90% of the
mortality risk, but not the account values, on its newly written universal life
insurance.
The
Company currently enters into reinsurance contracts with reinsurers under YRT
contracts to provide coverage for insurance issued in excess of the amount it
retains on any one life. The amount of insurance retained on any one life was
$500,000 in years prior to mid-2005. In 2005, this retention was increased to
amounts up to $1,000,000 for certain policies.
During
recent years, the life reinsurance market continued the process of consolidation
and tightening, resulting in a higher net cost of reinsurance for much of our
life insurance business. The Company has also been challenged by
changes in the reinsurance market which have impacted management of capital,
particularly in the Company’s term life business which is required to hold
reserves pursuant to Regulation XXX. In response to these
challenges, in 2005, the Company reduced its overall reliance on reinsurance by
changing from coinsurance to yearly renewable term reinsurance arrangements for
certain newly issued traditional life products. Additionally in 2005,
for certain newly issued traditional life products, the Company increased, from
$500,000 to $1,000,000, the amount of insurance it will retain on any one
life. In order to fund the additional statutory reserves
required as a result of these changes in the Company’s reinsurance arrangements,
the Company established a surplus notes facility under which the Company issued
an aggregate of $800 million of non-recourse funding obligations through
December 2007. During 2008, the Company has increased its retention
limit to $2,000,000 on certain of its traditional life products.
In
addition, during 2007, the Company established a surplus notes facility relative
to its universal life products. Under this facility, the Company
issued $575 million of non-recourse funding obligations that will be used to
fund statutory reserves required by the Valuation of Life Insurance Policies
Model Regulation (“Regulation XXX”), as clarified by Actuarial
Guideline 38 (commonly known as “AXXX”). The Company has received
regulatory approval to issue additional series of its floating rate surplus
notes up to an aggregate of $675 million principal amount. The Company’s
maximum retention for newly issued universal life products is
$1,000,000.
During
2006, immediately after the closing of the Company’s acquisition of the Chase
Insurance Group, the Company entered into agreements with Commonwealth Annuity
and Life Insurance Company (formerly known as Allmerica Financial Life Insurance
and Annuity Company) (“CALIC”) and Wilton Reassurance Company and Wilton
Reinsurance Bermuda Limited (collectively, the “Wilton Re Group”), whereby CALIC
reinsured 100% of the variable annuity business of the Chase Insurance Group and
the Wilton Re Group reinsured approximately 42% of the other insurance business
of the Chase Insurance Group.
At
December 31, 2007, the Company had insurance in force of
$765.2 billion of which approximately $532.0 billion
was ceded to reinsurers. See Note 8, Reinsurance to Consolidated
Financial Statements for additional information related to the Company’s use of
reinsurance.
Policy
Liabilities and Accruals
The
applicable insurance laws under which the Company’s insurance subsidiaries
operate require that each insurance company report policy liabilities to meet
future obligations on the outstanding policies. These liabilities are
the amounts which, with the additional premiums to be received and interest
thereon compounded annually at certain assumed rates, are calculated in
accordance with applicable law to be sufficient to meet the various policy and
contract obligations as they mature. These laws specify that the
liabilities shall not be less than liabilities calculated using certain named
mortality tables and interest rates.
The
policy liabilities and accruals carried in the Company’s financial reports
presented on the basis of accounting principles generally accepted in the United
States of America (“U.S. GAAP”) differ from those specified by the
laws of the various states and carried in the insurance subsidiaries' statutory
financial statements (presented on the basis of statutory accounting principles
mandated by state insurance regulations). For policy liabilities
other than those for universal life policies, annuity contracts, GICs, and
funding agreements, these differences arise from the use of mortality and
morbidity tables and interest rate assumptions which are deemed to be more
appropriate for financial reporting purposes than those required for statutory
accounting purposes; from the introduction of lapse assumptions into the
calculation; and from the use of the net level premium method on all
business. Policy liabilities for universal life policies, annuity
contracts, GICs, and funding agreements are generally carried in the Company’s
financial reports at the account value of the policy or contract plus accrued
interest.
Federal
Income Tax Consequences
Existing
federal laws and regulations affect the taxation of the Company’s
products. Income tax payable by policyholders on investment earnings
is deferred during the accumulation period of certain life insurance and annuity
products. This favorable tax treatment may give certain of the
Company’s products a competitive advantage over other non-insurance
products. To the extent that the Code is revised to reduce the
tax-deferred status of life insurance and annuity products, or to increase the
tax-deferred status of competing products, all life insurance companies,
including the Company and its subsidiaries, will be adversely affected with
respect to their ability to sell such products. Also, depending upon
grandfathering provisions, the Company will be affected by the surrenders of
existing annuity contracts and life insurance policies.
Additionally,
if enacted, proposed changes in the federal tax law would establish new
tax-advantaged retirement and life savings plans that will reduce the tax
advantage of investing in life insurance or annuity products. Such
proposals include changes that create new non-life-insurance vehicles for
tax-exempt savings, and such proposals sometimes include provisions for more
generous annual limits on contributions, etc.
In
addition, life insurance products are often used to fund estate tax
obligations. Federal law phases out, and ultimately eliminates, the
U.S. estate tax in 2010. The same law, if not explicitly extended by
Congress and the President via new legislation, reinstates in full the U.S.
estate tax in 2011. President Bush and certain members of Congress
have expressed a desire to either more quickly phase-out, or completely repeal
the U.S. estate tax. If the U.S. estate tax is significantly reduced
or repealed, the demand for certain life insurance products will be adversely
affected.
Additionally,
the Company is subject to corporate income tax. The Company cannot
predict what changes to tax law or interpretations of existing tax law may
ultimately be enacted or adopted or whether such changes will adversely affect
the Company.
The
Company’s insurance subsidiaries are taxed by the federal government in a manner
similar to companies in other industries. However, certain
restrictions apply regarding the consolidation of recently-acquired life
insurance companies into the Company’s consolidated U.S. income tax
return. Additionally, restrictions apply to the combining, in a
consolidated U.S. income tax return, of life-insurance-company taxable income or
losses with non-life-insurance-company taxable losses, or income
respectively. For 2007, the Company will consolidate all of its
subsidiaries into its consolidated U.S. income tax return except for Protective
Life Insurance Company of New York. The former Chase life insurance companies
that were merged into Protective Life Insurance Company will be consolidated as
of the date at which each was merged. The Company will file short-period returns
for those merged companies representing activity during the pre-merger
timeframe.
Under
pre-1984 U.S. tax law, a significant amount of the Company’s taxable income was
not currently taxed. Instead, it was accumulated in a memorandum, or
policyholders' surplus, account. Such income was subject to taxation
only when it was either distributed or accumulated in excess of certain
prescribed limits. The $70.5 million balance in the Company’s
policyholders' surplus account as of December 31, 2003, has been carried
forward without change since that date. Legislation was enacted in
2004 which permitted a life insurance company to reduce, during 2005 and 2006,
its policyholders’ surplus account balances without such reductions being
subject to taxation. During 2006, the Company followed this
legislation and reduced its policyholders’ surplus account balances to
zero.
Competition
Life and
health insurance is a mature and highly competitive industry. In
recent years, the industry has experienced little growth in life insurance
sales, though the aging population has increased the demand for retirement
savings products. The Company encounters significant competition in
all lines of business from other insurance companies, many of which have greater
financial resources than the Company and which may have a greater market share,
offer a broader range of products, services or features, assume a greater level
of risk, have lower operating or financing costs, or have lower profitability
expectations. The Company also faces competition from other providers
of financial services. Competition could result in, among other
things, lower sales or higher lapses of existing products.
The
Company’s move away from reliance on reinsurance for newly written traditional
life products results in a net reduction of current taxes (but an increase in
deferred taxes). The Company allocates the benefits of reduced
current taxes to the life marketing segment and the profitability and
competitive position of certain products is dependent on the continuation of
existing tax rules and interpretations and its ability to generate taxable
income.
The
insurance industry is consolidating, with larger, potentially more efficient
organizations emerging from consolidation. Participants in certain of
the Company’s independent distribution channels are also consolidating into
larger organizations. Some mutual insurance companies have converted
to stock ownership, which gives them greater access to capital
markets. The ability of banks to increase their securities-related
business or to affiliate with insurance companies may materially and adversely
affect sales of all of the Company’s products by substantially increasing the
number and financial strength of potential competitors.
The
Company’s ability to compete is dependent upon, among other things, its ability
to attract and retain distribution channels to market its insurance and
investment products, its ability to develop competitive and profitable products,
its ability to maintain low unit costs, and its maintenance of strong ratings
from rating agencies.
As
technology evolves, comparison of a particular product of any company for a
particular customer with competing products for that customer is more readily
available, which could lead to increased competition as well as agent or
customer behavior, including persistency that differs from past
behavior.
Regulation
The
Company and its subsidiaries are subject to government regulation in each of the
states in which we conduct business. Such regulation is vested in
state agencies having broad administrative power dealing with many aspects of
our business, which may include, among other things, premium rates, reserve
requirements, marketing practices, advertising, privacy, policy forms,
reinsurance reserve requirements, and capital adequacy, and is concerned
primarily with the protection of policyholders and other customers rather than
shareowners.
The
purchase of life insurance products is limited by state insurable interest laws,
which generally require that the purchaser of life insurance have some interest
in the sustained life of the insured. To some extent, the insurable
interest laws present a barrier to the life settlement, or “stranger-owned”
industry, in which a financial entity acquires an interest in life insurance
proceeds, and efforts have been made in some states to strengthen as well as
clarify the insurable interest laws. To the extent these laws are
relaxed, the Company’s lapse assumptions may prove to be unduly
optimistic.
A life
insurance company's statutory capital is computed according to rules prescribed
by the 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 certain NAIC rules, unless inconsistent with
the other state’s law. Statutory accounting rules are different from
U.S. GAAP and are intended to reflect a more conservative view by, for
example, requiring immediate expensing of policy acquisition costs and the use
of more conservative computations of policy liabilities. The NAIC's
risk-based capital requirements require insurance companies to calculate and
report information under a risk-based capital formula. These
requirements are intended to allow insurance regulators to identify inadequately
capitalized insurance companies based upon the types and mixtures of risks
inherent in the insurer's operations. The formula includes components
for asset risk, liability risk, interest rate exposure, and other
factors. Based upon the December 31, 2007 statutory financial
reports, the Company’s insurance subsidiaries are adequately capitalized under
this formula.
The
Company’s insurance subsidiaries are required to file detailed annual reports
with the supervisory agencies in each of the jurisdictions in which they do
business and their business and accounts are subject to examination by such
agencies at any time. Under the rules of the NAIC, insurance
companies are examined periodically (generally every three to five years) by one
or more of the supervisory agencies on behalf of the states in which they do
business. At any given time, a number of financial and/or market
conduct examinations of the Company’s subsidiaries may be ongoing. To
date, no such insurance department examinations have produced any significant
adverse findings regarding any of our insurance company
subsidiaries.
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. Although the Company cannot predict the
amount of any future assessments, most insurance guaranty fund laws currently
provide that an assessment may be excused or deferred if it would threaten an
insurer's own financial strength. The Company’s insurance
subsidiaries were assessed immaterial amounts in 2007, which will be partially
offset by credits against future state premium taxes.
In
addition, many states, including the states in which the Company’s insurance
subsidiaries are domiciled, have enacted legislation or adopted regulations
regarding insurance holding company systems. These laws require
registration of and periodic reporting by insurance companies domiciled within
the jurisdiction which control or are controlled by other corporations or
persons so as to constitute an insurance holding company
system. These laws also affect the acquisition of control of
insurance companies as well as transactions between insurance companies and
companies controlling them. Most states, including Tennessee where
Protective Life is domiciled, require administrative approval of the acquisition
of control of an insurance company domiciled in the state or the acquisition of
control of an insurance holding company whose insurance subsidiary is
incorporated in the state. In Tennessee, the acquisition of 10% of
the voting securities of an entity is generally deemed to be the acquisition of
control for the purpose of the insurance holding company statute and requires
not only the filing of detailed information concerning the acquiring parties and
the plan of acquisition, but also administrative approval prior to the
acquisition.
The
states in which the Company’s insurance subsidiaries are domiciled impose
certain restrictions on the insurance subsidiaries’ ability to pay dividends to
Protective Life Corporation. These restrictions are generally based
in part on the prior year’s statutory income and surplus. In general,
dividends up to specified levels are considered ordinary and may be paid without
prior approval. Dividends in larger amounts are subject to approval
by the insurance commissioner of the state of domicile. The maximum
amount that would qualify as ordinary dividends to Protective Life Corporation
by its insurance subsidiaries in 2007 is estimated to be
$350.5 million. No assurance can be given that more stringent
restrictions will not be adopted from time to time by states in which our
insurance subsidiaries are domiciled; such restrictions could have the effect,
under certain circumstances, of significantly reducing dividends or other
amounts payable to the Company by such subsidiaries without affirmative prior
approval by state regulatory authorities.
The
Company’s insurance subsidiaries may be subject to regulation by the United
States Department of Labor when providing a variety of products and services to
employee benefit plans governed by the Employee Retirement Income Security
Act (“ERISA”). Severe penalties are imposed for breach of duties
under ERISA.
Certain
policies, contracts, and annuities offered by the Company’s subsidiaries are
subject to regulation under the federal securities laws administered by the
SEC. The federal securities laws contain regulatory restrictions and
criminal, administrative and private remedial provisions.
Additional
issues related to regulation of the Company and its insurance subsidiaries are
discussed in Item 7, Management's Discussion and Analysis
of Financial Condition and Results of Operations included
herein.
Employees
At
December 31, 2007, the Company had approximately 2,406 employees, including
approximately 1,289 employees in Birmingham, Alabama. The Company
believes its relations with its employees are satisfactory. Most
employees are covered by contributory major medical, dental, group life, and
long-term disability insurance plans. The cost of these benefits to
the Company in 2007 was approximately $11.8 million. In
addition, substantially all of the employees are covered by a defined benefit
pension plan. In 2007, the Company also matched employee
contributions to its 401(k) Plan and made discretionary profit sharing
contributions for employees not otherwise covered by a bonus or sales incentive
plan. See Note 12, Shareowners’ Equity and Stock-Based
Compensation and Note 13, Employee Benefit Plans to
Consolidated Financial Statements for additional information.
Executive
Officers
As of
February 29, 2008, the Company’s executive officers are as follows:
|
Name
|
|
Age
|
|
Position
|
|
|
|
|
|
|
|
John
D. Johns
|
|
56
|
|
Chairman
of the Board, President, Chief Executive Officer, and a
Director
|
|
Richard
J. Bielen
|
|
47
|
|
Vice
Chairman and Chief Financial Officer
|
|
Carolyn
M. Johnson
|
|
47
|
|
Executive
Vice President, Chief Operating Officer
|
|
Deborah
J. Long
|
|
54
|
|
Executive
Vice President, Secretary, and General Counsel
|
|
Carl
S. Thigpen
|
|
51
|
|
Executive
Vice President and Chief Investment Officer
|
|
D.
Scott Adams
|
|
43
|
|
Senior
Vice President and Chief Human Resources Officer
|
|
Brent
E. Griggs
|
|
52
|
|
Senior
Vice President, Asset Protection
|
|
Carolyn
King
|
|
58
|
|
Senior
Vice President, Acquisitions and Corporate Development
|
|
Steven
G. Walker
|
|
48
|
|
Senior
Vice President, Controller, and Chief Accounting
Officer
|
|
Judy
Wilson
|
|
49
|
|
Senior
Vice President, Stable Value
Products
|
All
executive officers are elected annually and serve at the pleasure of the Board
of Directors. None of the executive officers are related to any
director of the Company or to any other executive officer.
Mr.
Johns has been Chairman of the Board of the Company since
January 2003, and President and Chief Executive Officer of the Company
since December 2001. He has been a Director of the Company since
May 1997. Mr. Johns has been employed by the Company and its
subsidiaries since 1993.
Mr.
Bielen has been Vice Chairman and Chief Financial Officer since June
2007. From August 2006 to June 2007, Mr. Bielen served as Executive
Vice President of the Company and as Chief Investment Officer and Treasurer from
January 2002 to June 2007. From January 2002 to September 2006, he was Senior
Vice President, Chief Investment Officer and Treasurer. Mr. Bielen has been
employed by the Company and its subsidiaries since 1991.
Ms.
Johnson has been Executive Vice President and Chief Operating Officer of the
Company since June 2007. From November 2006 to June 2007, she served as Senior
Vice President and Chief Operations and Technology Officer of the Company. Ms.
Johnson served as Senior Vice President, Chief Operating Officer, Life and
Annuity of the Company from May 2006 to November 2006. From August 2004 to May
2006, she served as Senior Vice President and Chief Operating Officer, Life and
Annuity of Protective Life Insurance Company. From 2003 to 2004, Ms. Johnson
served as Senior Vice President, Bankers Life and Casualty.
Ms. Long
has been Executive Vice President of the Company since May 2007 and Secretary
and General Counsel of the Company since November 1996. Ms. Long has been
employed by the Company and its subsidiaries since 1994.
Mr.
Thigpen has been Executive Vice President and Chief Investments Officer of the
Company since June 2007. From January 2002 to June 2007, Mr. Thigpen served as
Senior Vice President and Chief Mortgage and Real Estate Officer of the Company.
Mr. Thigpen has been employed by the Company and its subsidiaries since
1984.
Mr. Adams
has been Senior Vice President and Chief Human Resources Officer of the Company
since April 2006. From May 2005 to March 2006, he served as an
Executive Search Consultant for the wealth and investment management business
sector with Anderson & Associates in Charlotte, NC. From 1996 to
2004, Mr. Adams was Senior Vice President and Human Resource Executive for
the Wealth and Investment Management business of Bank of America.
Mr.
Griggs has been Senior Vice President, Asset Protection, of the Company since
February 2003. Mr. Griggs has been employed by the Company
and its subsidiaries since 1997.
Ms. King
has been Senior Vice President, Acquisitions and Corporate Development of the
Company since June 2007. From December 2003 to June 2007, she served
as Senior Vice President, Acquisitions of the Company. Ms. King served as Senior
Vice President, Life and Annuity of the Company from January 2003 until December
2003. Ms. King has been employed by the Company and its subsidiaries
since April 1995.
Mr.
Walker has been Senior Vice President, Controller, and Chief Accounting Officer
of the Company since March 2004. From September 2003 through March
2004, he served as Vice President, Controller, and Chief Accounting Officer of
the Company. From August 2002 to September 2003, he served as Vice
President and Chief Financial Officer of the Asset Protection Division of the
Company.
Ms.
Wilson has been Senior Vice President, Stable Value Products of the Company
since January 1995. Ms. Wilson has been employed by the Company
and its subsidiaries since 1989.
Certain
of these executive officers also serve as executive officers and/or directors of
various other of our subsidiaries.
The
operating results of companies in the insurance industry have historically been
subject to significant fluctuations. The factors which could affect
the Company’s future results include, but are not limited to, general economic
conditions and the known trends and uncertainties which are discussed more fully
below.
The
Company is exposed to the risks of natural disasters, pandemics, malicious and
terrorist acts that could adversely affect the Company’s
operations.
While the
Company has obtained insurance, implemented risk management and contingency
plans, and taken preventive measures and other precautions, no predictions of
specific scenarios can be made nor can assurance be given that there are not
scenarios that could have an adverse effect on the Company. A natural
disaster or pandemic could adversely affect the mortality or morbidity
experience of the Company or its reinsurers. A severe pandemic could result in a
substantial increase in mortality experience and have a significant negative
impact on the Company’s surplus capital. A pandemic could also have an adverse
effect on lapses and surrenders of existing policies, as well as sales of new
policies. In addition, a pandemic could result in large areas being
subject to quarantine, with the result that economic activity slows or ceases,
adversely affecting the marketing or administration of the Company’s business
within such area and/or the general economic climate, which in turn could have
an adverse affect on the Company. The possible macroeconomic effects
of a pandemic could also adversely affect the Company’s asset portfolio, as well
as many other variables.
The
Company operates in a mature, highly competitive industry, which could limit its
ability to gain or maintain its position in the industry and negatively affect
profitability.
Life and
health insurance is a mature and highly competitive industry. In
recent years, the industry has experienced little growth in life insurance
sales, though the aging population has increased the demand for retirement
savings products. The Company encounters significant competition in
all lines of business from other insurance companies, many of which have greater
financial resources than the Company and which may have a greater market share,
offer a broader range of products, services or features, assume a greater level
of risk, have lower operating or financing costs, or have different
profitability expectations than the Company. The Company also faces
competition from other providers of financial services. Competition
could result in, among other things, lower sales or higher lapses of existing
products.
The
Company’s move away from relying on reinsurance for newly written traditional
life products results in a net reduction of current taxes (but an increase in
deferred taxes). The Company allocates the benefits of reduced
current taxes to the life marketing segment and the profitability and
competitive position of certain products is dependent on the continuation of
existing tax rules and interpretations and the Company’s ability to generate
taxable income.
The
insurance industry is consolidating, with larger, potentially more efficient
organizations emerging from consolidation. Participants in certain of
the Company’s independent distribution channels are also consolidating into
larger organizations. Some mutual insurance companies have converted
to stock ownership, which gives them greater access to capital
markets. The ability of banks to increase their securities-related
business or to affiliate with insurance companies may materially and adversely
affect sales of all of the Company’s products by substantially increasing the
number and financial strength of potential competitors.
The
Company’s ability to compete is dependent upon, among other things, its ability
to attract and retain distribution channels to market its insurance and
investment products, its ability to develop competitive and profitable products,
its ability to maintain low unit costs, and its maintenance of strong ratings
from rating agencies.
As
technology evolves, comparison of a particular product of any company for a
particular customer with competing products for that customer is more readily
available, which could lead to increased competition as well as agent or
customer behavior, including persistency that differs from past
behavior.
A
ratings downgrade could adversely affect the Company’s ability to
compete.
Rating
organizations periodically review the financial performance and condition of
insurers, including the Company’s subsidiaries. A downgrade in the
rating of the Company’s subsidiaries could adversely affect the Company’s
ability to sell its products, retain existing business, and compete for
attractive acquisition opportunities. Specifically, a ratings
downgrade would materially harm the Company’s ability to sell certain products,
including guaranteed investment products, funding agreements, and certain types
of annuities.
Rating
organizations assign ratings based upon several factors. While most
of the factors relate to the rated company, some of the factors relate to the
views of the rating organization, general economic conditions and circumstances
outside the rated company’s control. In addition, rating
organizations use various models and formulas to assess the strength of a rated
company, and from time to time rating organizations have, in their discretion,
altered the models. Changes to the models could impact the rating
organizations’ judgment of the rating to be assigned to the rated
company. The Company cannot predict what actions the rating
organizations may take, or what actions the Company may be required to take in
response to the actions of the rating organizations, which could adversely
affect the Company.
The
Company’s policy claims fluctuate from period to period resulting in earnings
volatility.
The
Company’s results may fluctuate from period to period due to fluctuations in
policy claims received by the Company. Certain of the Company’s
businesses may experience higher claims if the economy is growing slowly or in
recession, or equity markets decline. Additionally, beginning in the
third quarter of 2005, the Company increased its retained amounts on newly
written traditional life products. This change will cause greater
variability in financial results due to fluctuations in mortality
results.
The
Company’s results may be negatively affected should actual experience differ
from management’s assumptions and estimates.
In the
conduct of business, the Company makes certain assumptions regarding the
mortality, persistency, expenses and interest rates, tax liability, business
mix, frequency of claims, contingent liabilities or other factors appropriate to
the type of business it expects to experience in future
periods. These assumptions are also used to estimate the amounts of
deferred policy acquisition costs, policy liabilities and accruals, future
earnings, and various components of the Company’s balance
sheet. These assumptions are used in the operations of the Company’s
business in making decisions crucial to the success of the Company, including
the pricing of products and expense structures relating to
products. The Company’s actual experience, as well as changes in
estimates, is used to prepare the Company’s statements of income. To
the extent the Company’s actual experience and changes in estimates differ from
original estimates, the Company’s financial condition is affected.
Mortality,
morbidity, and casualty expectations incorporate assumptions about many factors,
including for example, how a product is distributed, for what purpose the
product is purchased, the mix of customers purchasing the products, persistency
and lapses, future progress in the fields of health and medicine, and the
projected level of used vehicle values. Actual mortality, morbidity,
and/or casualty experience will differ from expectations if actual results
differ from those assumptions. In addition, continued activity in the
viatical, stranger-owned and/or life settlement industry, in which some
companies attempt to arbitrage the difference in lapse assumptions used in
pricing and actual lapse performance that they can control, could have an
adverse impact on the Company’s level of persistency and lapses, and thus
negatively impact the Company’s performance.
The
calculations the Company uses to estimate various components of its balance
sheet and statements of income are necessarily complex and involve analyzing and
interpreting large quantities of data. The Company currently employs
various techniques for such calculations and it from time to time will develop
and implement more sophisticated administrative systems and procedures capable
of facilitating the calculation of more precise estimates.
Assumptions
and estimates involve judgment, and by their nature are imprecise and subject to
changes and revisions over time. Accordingly, the Company’s results
may be affected, positively or negatively, from time to time, by actual results
differing from assumptions, by changes in estimates, and by changes resulting
from implementing more sophisticated administrative systems and procedures that
facilitate the calculation of more precise estimates.
The
use of reinsurance introduces variability in the Company’s statements of
income.
The
timing of premium payments to and receipt of expense allowances from reinsurers
may differ from the Company’s receipt of customer premium payments and
incurrence of expenses. These timing differences introduce
variability in certain components of the Company’s statements of income, and may
also introduce variability in the Company’s quarterly results.
The
Company could be forced to sell investments at a loss to cover policyholder
withdrawals.
Many of
the products offered by the Company and its insurance subsidiaries allow
policyholders and contract holders to withdraw their funds under defined
circumstances. The Company and its insurance subsidiaries manage
their liabilities and configure their investment portfolios so as to provide and
maintain sufficient liquidity to support anticipated withdrawal demands and
contract benefits and maturities. While the Company and its life
insurance subsidiaries own a significant amount of liquid assets, a certain
portion of their assets are relatively illiquid. If the Company or
its subsidiaries experience unanticipated withdrawal or surrender activity, the
Company or its subsidiaries could exhaust their liquid assets and be forced to
liquidate other assets, perhaps on unfavorable terms. If the Company
or its subsidiaries are forced to dispose of assets on unfavorable terms, it
could have an adverse effect on the Company’s financial condition.
Interest
rate fluctuations could negatively affect the Company’s spread income or
otherwise impact its business.
Significant
changes in interest rates expose insurance companies to the risk of not earning
anticipated spreads between the interest rate earned on investments and the
credited interest rates paid on outstanding policies and
contracts. Both rising and declining interest rates can negatively
affect the Company’s spread income. While the Company develops and
maintains asset/liability management programs and procedures designed to
mitigate the effect on spread income in rising or falling interest rate
environments, no assurance can be given that changes in interest rates will not
affect such spreads.
From time
to time, the Company has participated in securities repurchase transactions that
have contributed to the Company’s investment income. No assurance can
be given that such transactions will continue to be entered into and contribute
to the Company’s investment income in the future.
Changes
in interest rates may also impact its business in other ways. Lower
interest rates may result in lower sales of certain of the Company’s insurance
and investment products. In addition, certain of the Company’s
insurance and investment products guarantee a minimum credited interest rate,
and the Company could become unable to earn its spread income should interest
rates decrease significantly.
Higher
interest rates may create a less favorable environment for the origination of
mortgage loans and decrease the investment income the Company receives in the
form of prepayment fees, make-whole payments, and mortgage participation
income. Higher interest rates may also increase the cost of debt and
other obligations having floating rate or rate reset provisions and may result
in lower sales of variable products.
Additionally,
the Company’s 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) and relationships between
risk-adjusted and risk-free interest rates, market liquidity, and other
factors. The effectiveness of the Company’s asset/liability
management programs and procedures may be negatively affected whenever actual
results differ from these assumptions.
In
general, the Company’s results are improved when the yield curve is positively
sloped (i.e., when long-term interest rates are higher than short-term
interest rates), and will be adversely affected by a flat or negatively sloped
curve.
Equity
market volatility could negatively impact the Company’s business.
The
amount of policy fees received from variable products is affected by the
performance of the equity markets, increasing or decreasing as markets rise or
fall. Equity market volatility can also affect the profitability of
variable products in other ways, in particular as a result of options embedded
in these products.
The
amortization of deferred policy acquisition costs relating to variable products
and the estimated cost of providing guaranteed minimum death benefits and
guaranteed minimum withdrawal benefits incorporate various assumptions about the
overall performance of equity markets over certain time periods. The
rate of amortization of deferred policy acquisition costs and the estimated cost
of providing guaranteed minimum death benefits could increase if equity market
performance is worse than assumed.
Insurance
companies are highly regulated and subject to numerous legal restrictions and
regulations.
The
Company and its subsidiaries are subject to government regulation in each of the
states in which they conduct business. Such regulation is vested in
state agencies having broad administrative and in some instances discretionary
power dealing with many aspects of the Company’s business, which may include,
among other things, premium rates and increases thereto, reserve requirements,
marketing practices, advertising, privacy, policy forms, reinsurance reserve
requirements, acquisitions, mergers, and capital adequacy, and is concerned
primarily with the protection of policyholders and other customers rather than
shareowners. At any given time, a number of financial and/or market
conduct examinations of the Company’s subsidiaries may be
ongoing. From time to time, regulators raise issues during
examinations or audits of the Company’s subsidiaries that could, if determined
adversely, have a material impact on the Company. The Company’s
insurance subsidiaries are required to obtain state regulatory approval for rate
increases for certain health insurance products, and the Company’s profits may
be adversely affected if the requested rate increases are not approved in full
by regulators in a timely fashion.
The
purchase of life insurance products is limited by state insurable interest laws,
which generally require that the purchaser of life insurance name a beneficiary
that has some interest in the sustained life of the insured. To some
extent, the insurable interest laws present a barrier to the life settlement, or
“stranger-owned” industry, in which a financial entity acquires an interest in
life insurance proceeds, and efforts have been made in some states to liberalize
the insurable interest laws. To the extent these laws are relaxed,
the Company’s lapse assumptions may prove to be unduly optimistic.
The
Company cannot predict whether or when regulatory actions may be taken that
could adversely affect the Company or its operations. Interpretations
of regulations by regulators may change and statutes, regulations and
interpretations may be applied with retroactive impact, particularly in areas
such as accounting or reserve requirements. Although the Company and
its subsidiaries are subject to state regulation, in many instances the state
regulatory models emanate from the National Association of Insurance
Commissioners (“NAIC”). Some of the NAIC pronouncements,
particularly as they affect accounting issues, take effect automatically in the
various states without affirmative action by the states. Also,
regulatory actions with prospective impact can potentially have a significant
impact on currently sold products. As an example of both retroactive
and prospective impacts, in late 2005, the NAIC approved an amendment to
Actuarial Guideline 38, commonly known as AXXX, which interprets the
reserve requirements for universal life insurance with secondary
guarantees. This amendment retroactively increased the reserve
requirements for universal life insurance with secondary guarantee products
issued after July 1, 2005. This change to Actuarial
Guideline 38 (“AG38”) also affected the profitability of universal
life products sold after the adoption date. The NAIC is continuing to
study reserving methodology and has issued additional changes to AXXX and
Regulation XXX, which has had the effect of modestly decreasing the
reserves required for term 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 if changes were made, whether
they should 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 the statutory capital
of the Company. The NAIC is also currently working to reform state
regulation in various areas, including comprehensive reforms relating to life
insurance reserves.
At the
federal level, bills have been introduced in the U. S. Senate and the
U.S. House of Representatives that would provide for an optional federal
charter for life and property and casualty insurers, and another bill has been
introduced in the U. S. House of Representatives that would pre-empt state
law in certain respects with regard to the regulation of
reinsurance. Still another bill has been introduced in the House and
Senate that would remove the federal antitrust exemption from the insurance
industry. The Company cannot predict whether or in what form reforms
will be enacted and, if so, whether the enacted reforms will positively or
negatively affect the Company or whether any effects will be
material. Moreover, although with respect to some financial
regulations and guidelines, states sometimes defer to the interpretation of the
insurance department of the state of domicile; neither the action of the
domiciliary state nor action of the NAIC is binding on a
state. Accordingly, a state could choose to follow a different
interpretation.
The
Company’s subsidiaries may be subject to regulation by the United States
Department of Labor when providing a variety of products and services to
employee benefit plans governed by the Employee Retirement Income Security
Act (“ERISA”). Severe penalties are imposed for breach of duties
under ERISA.
Certain
policies, contracts, and annuities offered by the Company’s subsidiaries are
subject to regulation under the federal securities laws administered by the
Securities and Exchange Commission. The federal securities laws
contain regulatory restrictions and criminal, administrative, and private
remedial provisions.
Other
types of regulation that could affect the Company and its subsidiaries include
insurance company investment laws and regulations, state statutory accounting
practices, anti-trust laws, minimum solvency requirements, state securities
laws, federal privacy laws, insurable interest laws, federal anti-money
laundering and anti-terrorism laws, and because the Company owns and operates
real property, state, federal, and local environmental laws. The
Company cannot predict what form any future changes in these or other areas of
regulation affecting the insurance industry might take or what effect, if any,
such proposals might have on the Company if enacted into law.
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.
Under the
Internal Revenue Code of 1986, as amended (the “Code”), income tax
payable by policyholders on investment earnings is deferred during the
accumulation period of certain life insurance and annuity
products. This favorable tax treatment may give certain of the
Company’s products a competitive advantage over other non-insurance
products. To the extent that the Code is revised to reduce the
tax-deferred status of life insurance and annuity products, or to increase the
tax-deferred status of competing products, all life insurance companies,
including the Company and its subsidiaries, would be adversely affected with
respect to their ability to sell such products, and, depending upon
grandfathering provisions, would be affected by the surrenders of existing
annuity contracts and life insurance policies. For example, changes
in laws or regulations could restrict or eliminate the advantages of certain
corporate or bank-owned life insurance products. Changes in tax law,
which have reduced the federal income tax rates on corporate dividends in
certain circumstances, could make the tax advantages of investing in certain
life insurance or annuity products less attractive. Additionally,
changes in tax law based on proposals to establish new tax advantaged retirement
and life savings plans, if enacted, could reduce the tax advantage of investing
in certain life insurance or annuity products. In addition, life
insurance products are often used to fund estate tax
obligations. Legislation has been enacted that would, over time,
reduce and eventually eliminate the federal estate tax. Under the
legislation that has been enacted, the estate tax will be reinstated, in its
entirety, in 2011 and thereafter. President Bush and members of
Congress have expressed a desire to modify the existing legislation, which
modification could result in faster or more complete reduction or repeal of the
estate tax. If the estate tax is significantly reduced or eliminated,
the demand for certain life insurance products could be adversely
affected. Additionally, the Company is subject to the federal
corporation income tax. The Company cannot predict what changes to
tax law or interpretations of existing tax law may ultimately be enacted or
adopted or whether such changes could adversely affect the Company.
The
Company’s move away from relying on reinsurance for newly written traditional
life products results in a net reduction of current taxes (but an increase in
deferred taxes.) The resulting benefit of reduced current taxes is
attributed to the applicable life products and is an important component of the
profitability of these products. The profitability and competitive
position of these products is dependent on the continuation of current tax law
and the ability to generate taxable income.
Financial
services companies are frequently the targets of litigation, including class
action litigation, which could result in substantial judgments.
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 other 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 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.
Group
health coverage issued through associations and credit insurance coverages have
received some negative coverage in the media as well as increased regulatory
consideration and review and litigation. The Company has a small
closed block of group health insurance coverage that was issued to members of an
association; a purported class action lawsuit is currently pending against the
Company in connection with this business. The Company is also
defending purported class action litigation challenging its practices relating
to issuing refunds of unearned premiums upon termination of credit
insurance.
In
connection with our discontinued Lender’s 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 Lender’s Indemnity product. The reinsurer asserts
that it is entitled to a return of most of the Lender’s 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.
The
Company, like other financial services companies, in the ordinary course of
business is involved in litigation and arbitration. Although the
Company cannot predict the outcome of any litigation or arbitration, the Company
does not believe that any such outcome will have a material impact on the
financial condition or results of operations of the Company.
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.
Publicly
held companies in general and the financial services industry in particular are
sometimes the target of law enforcement investigations relating to the numerous
laws that govern publicly held companies and the financial services and
insurance business. The Company cannot predict the impact of any such
investigations on the Company or the industry.
The
financial services industry has become the focus of increased scrutiny by
regulatory and law enforcement authorities relating to allegations of improper
special payments, price-fixing, bid-rigging and other alleged misconduct,
including payments made by insurers and other financial services providers to
brokers and the practices surrounding the placement of insurance business and
sales of other financial products as well as practices related to finite
reinsurance. Some publicly held companies have been the subject of
enforcement or other actions relating to corporate governance and the integrity
of financial statements, most recently relating to the issuance of stock
options. Such publicity may generate inquiries to or litigation
against publicly held companies and/or financial service providers, even those
who do not engage in the business lines or practices currently at
issue. It is impossible to predict the outcome of these
investigations or proceedings, whether they will expand into other areas not yet
contemplated, whether they will result in changes in insurance regulation,
whether activities currently thought to be lawful will be characterized as
unlawful, or the impact, if any, of this increased regulatory and law
enforcement scrutiny of the financial services industry on the
Company. As some inquiries appear to encompass a large segment of the
financial services industry, it would not be unusual for large numbers of
companies in the financial services industry to receive subpoenas, requests for
information from regulatory authorities or other inquiries relating to these and
similar matters. From time to time, the Company receives subpoenas,
requests or other inquires and responds to them in the ordinary course of
business.
The
Company’s ability to maintain competitive unit costs is dependent upon the level
of new sales and persistency of existing business.
The
Company’s ability to maintain competitive unit costs is dependent upon a number
of factors, such as the level of new sales, persistency (continuation or
renewal) of existing business, and expense management. A decrease in
sales or persistency without a corresponding reduction in expenses may result in
higher unit costs.
Additionally,
a decrease in persistency may result in higher or more rapid amortization of
deferred policy acquisition costs and thus higher unit costs, and lower reported
earnings. Although many of the Company’s products contain surrender
charges, the charges decrease over time and may not be sufficient to cover the
unamortized deferred policy acquisition costs with respect to the insurance
policy or annuity contract being surrendered. Some of the Company’s
products do not contain surrender charge features and such products can be
surrendered or exchanged without penalty. A decrease in persistency
may also result in higher claims.
The
Company’s investments are subject to market and credit risks.
The
Company’s invested assets and derivative financial instruments are subject to
customary risks of credit defaults and changes in market values. The
value of the Company’s commercial mortgage loan portfolio depends in part on the
financial condition of the tenants occupying the properties which the Company
has financed. Factors that may affect the overall default rate on,
and market value of, the Company’s invested assets, derivative financial
instruments, and mortgage loans include interest rate levels, financial market
performance, and general economic conditions as well as particular circumstances
affecting the businesses of individual borrowers and tenants. In
addition, fair value changes can cause significant fluctuations to earnings and
equity.
The
Company may not realize its anticipated financial results from its acquisitions
strategy.
The
Company’s acquisitions have increased its earnings in part by allowing the
Company to enter new markets and to position itself to realize certain operating
efficiencies. There can be no assurance, however, that suitable
acquisitions presenting opportunities for continued growth and operating
efficiencies, or capital to fund acquisitions will continue to be available to
the Company, or that the Company will realize the anticipated financial results
from its acquisitions.
The
Company may be unable to complete an acquisition, or completion of an
acquisition may be more costly or take longer than expected or may have a
different financing structure than initially contemplated. The
Company may be unable to obtain regulatory approvals that may be required to
complete an acquisition. There may be unforeseen liabilities that
arise in connection with businesses that the Company acquires.
Additionally,
in connection with its acquisitions, the Company assumes or otherwise becomes
responsible for the obligations of policies and other liabilities of other
insurers. Any regulatory, legal, financial, or other adverse
development affecting the other insurer could also have an adverse effect on the
Company.
The
Company may not be able to achieve the expected results from its recent
acquisition.
On July 3,
2006, the Company completed its acquisition from JP Morgan Chase & Co.
of the stock of five life insurance companies and the stock of four related
non-insurance companies. Full integration of the acquisition may be
more expensive, more difficult, or take longer than expected. In
addition, the Company may not achieve the returns projected from its analysis of
the acquisition opportunity, and the effects of the purchase generally accepted
in the United States of America (“U.S. GAAP”) accounting on the Company’s
financial statements may be different than originally contemplated.
The
Company is dependent on the performance of others.
The
Company’s results may be affected by the performance of others because the
Company has entered into various arrangements involving other
parties. For example, most of the Company’s products are sold through
independent distribution channels, and variable annuity deposits are invested in
funds managed by third parties. Also, a substantial portion of the
business of the recently acquired Chase Insurance Group is being administered by
third party administrators. Additionally, the Company’s operations
are dependent on various technologies, some of which are provided and/or
maintained by other parties.
Certain
of these other parties may act on behalf of the Company or represent the Company
in various capacities. Consequently, the Company may be held
responsible for obligations that arise from the acts or omissions of these other
parties.
As with
all financial services companies, its ability to conduct business is dependent
upon consumer confidence in the industry and its products. Actions of
competitors and financial difficulties of other companies in the industry could
undermine consumer confidence and adversely affect retention of existing
business and future sales of the Company’s insurance and investment
products.
The
Company’s reinsurers could fail to meet assumed obligations, increase rates or
be subject to adverse developments that could affect the Company.
The
Company and its insurance subsidiaries cede material amounts of insurance and
transfer related assets to other insurance companies through
reinsurance. The Company may enter into third-party reinsurance
arrangements under which the Company will rely on the third party to collect
premiums, pay claims, and/or perform customer service
functions. However, notwithstanding the transfer of related assets or
other issues, the Company remains liable with respect to ceded insurance should
any reinsurer fail to meet the obligations assumed Therefore, the
failure of one or more of the Company’s reinsurers could negatively impact the
Company’s earnings and financial position.
The
Company’s ability to compete is dependent on the availability of reinsurance or
other substitute financing solutions. Premium rates charged by the
Company are based, in part, on the assumption that reinsurance will be available
at a certain cost. Under certain reinsurance agreements, the
reinsurer may increase the rate it charges the Company for the
reinsurance. Therefore, if the cost of reinsurance were to increase
or if reinsurance were to become unavailable or if alternatives to reinsurance
were not available to the Company, or if a reinsurer should fail to meet its
obligations, the Company could be adversely affected.
Recently,
access to reinsurance has become more costly for the Company as well as the
insurance industry in general. This could have a negative effect on
the Company’s ability to compete. In recent years, the number of life
reinsurers has decreased as the reinsurance industry has
consolidated. The decreased number of participants in the life
reinsurance market results in increased concentration risk for insurers,
including the Company. If the reinsurance market further contracts,
the Company’s ability to continue to offer its products on terms favorable to
the Company could be adversely impacted.
The
Company has implemented, and plans to continue to expand, a reinsurance program
through the use of captive reinsurers. Under these arrangements, an
insurer owned by the Company serves as the reinsurer, and the consolidated books
and tax returns of the Company reflects a liability consisting of the full
reserve amount attributable to the reinsured business. The success of
the Company’s captive reinsurance program and related marketing efforts is
dependent on a number of factors outside the control of the Company, including
continued access to financial solutions, a favorable regulatory environment, and
the overall tax position of the Company. If the captive reinsurance
program is not successful the Company’s ability to continue to offer its
products on terms favorable to the Company would be adversely
impacted.
Computer
viruses or network security breaches could affect the data processing systems of
the Company or its business partners and could damage our business and adversely
affect our financial condition and results of operations.
A
computer virus could affect the data processing systems of the Company or its
business partners, destroying valuable data or making it difficult to conduct
business. In addition, despite the Company’s implementation of
network security measures, its servers could be subject to physical and
electronic break-ins, and similar disruptions from unauthorized tampering with
its computer systems.
The
Company retains confidential information in its computer systems, and relies on
sophisticated commercial technologies to maintain the security of those
systems. Anyone who is able to circumvent the Company’s security
measures and penetrate the Company’s computer systems could access, view,
misappropriate, alter, or delete any information in the systems, including
personally identifiable customer information and proprietary business
information. In addition, an increasing number of states require that
customers be notified of unauthorized access, use or disclosure of their
information. Any compromise of the security of the Company’s computer
systems that result in inappropriate access, use or disclosure of personally
identifiable customer information could damage the Company’s reputation in the
marketplace, deter people from purchasing the Company’s products, subject the
Company to significant civil and criminal liability and require the Company to
incur significant technical, legal and other expenses.
The
Company’s ability to grow depends in large part upon the continued availability
of capital.
The
Company has recently deployed significant amounts of capital to support its
sales and acquisitions efforts. A recent amendment to Actuarial
Guideline 38 increased the reserve requirements for universal life
insurance with secondary guarantees for products issued after July 1,
2005. This amendment, along with the continued reserve requirements
of Regulation XXX for traditional life insurance products, has caused the
sale of these products to consume additional capital. Future
marketing plans are dependent on access to financing solutions. A
disruption in the financing arena, or the Company’s inability to access capital
through these transactions, could have a negative impact on the Company’s
ability to grow. Capital has also been consumed as the Company
increased its reserves on the residual value and lenders indemnity product
lines. Although positive performance in the equity markets has
recently allowed the Company to decrease its guaranteed minimum death benefit
related policy liabilities and accruals, deterioration in these markets could
lead to further capital consumption. Although the Company believes it
has sufficient capital to fund its immediate growth and capital needs, the
amount of capital available can vary significantly from period to period due to
a variety of circumstances, some of which are neither predictable nor
foreseeable, nor within the Company’s control. A lack of sufficient
capital could impair the Company’s ability to grow.
New
accounting rules or changes to existing accounting rules could negatively impact
the Company.
Like all
publicly traded companies, the Company is required to comply with
U.S. GAAP. A number of organizations are instrumental in the
development and interpretation of U.S. GAAP such as the United States
Securities and Exchange Commission (the “SEC”), the Financial
Accounting Standards Board (“FASB”), and the American Institute of
Certified Public Accountants (“AICPA”). U.S. GAAP is
subject to constant review by these organizations and others in an effort to
address emerging accounting rules and issue interpretative accounting guidance
on a continual basis. The Company can give no assurance that future
changes to U.S. GAAP will not have a negative impact on the
Company. U.S. GAAP includes the requirement to carry certain
investments and insurance liabilities at fair value. These fair values are
sensitive to various factors including, but not limited to, interest rate
movements, credit spreads, and various other factors. Because of this, changes
in these fair values may cause increased levels of volatility in the Company’s
financial statements.
In
addition, the Company’s insurance subsidiaries are required to comply with
statutory accounting principles (“SAP”). SAP and various
components of SAP (such as actuarial reserving methodology) are subject to
constant review by the NAIC and its task forces and committees as well as state
insurance departments in an effort to address emerging issues and otherwise
improve or alter financial reporting. Various proposals either are
currently or have previously been pending before committees and task forces of
the NAIC, some of which, if enacted, would negatively affect the Company,
including one that relates to certain reinsurance credits, and some of which
could positively impact the Company. The NAIC is also currently
working to reform state regulation in various areas, including comprehensive
reforms relating to life insurance reserves and the accounting for such
reserves. The Company cannot predict whether or in what form reforms
will be enacted and, if so, whether the enacted reforms will positively or
negatively affect the Company. Moreover, although in general with
respect to regulations and guidelines, states defer to the interpretation of the
insurance department of the state of domicile, neither the action of the
domiciliary state nor action of the NAIC is binding on a
state. Accordingly, a state could choose to follow a different
interpretation. The Company can give no assurance that future changes
to SAP or components of SAP will not have a negative impact on the
Company.
The
Company’s risk management policies and procedures may leave it exposed to
unidentified or unanticipated risk, which could negatively affect our business
or result in losses.
The
Company has developed risk management policies and procedures and expects to
continue to enhance these in the future. Nonetheless, the Company’s
policies and procedures to identify, monitor, and manage both internal and
external risks may not predict future exposures, which could be different or
significantly greater than expected.
These may
not be the only risks facing the Company. Additional risks and
uncertainties not currently known to us, or that we currently deem to be
immaterial, may adversely affect our business, financial condition and/or
operating results.
Credit
market volatility or the inability to access financing solutions could adversely
impact the Company’s financial condition or results from
operations.
Significant
volatility in credit markets could have an adverse impact on either the
Company’s financial condition or results from operations in several
ways. Changes in interest rates and credit spreads could cause market
price and cash flow variability in the fixed income instruments in the Company’s
investment portfolio. Additionally, significant volatility and lack
of liquidity in the credit markets could cause issuers of the fixed-income
securities in the Company’s investment portfolio to default on either principal
or interest payments on these securities. Volatility could also
impact the Company’s ability to efficiently access financial solutions for
purposes of issuing long term debt for financing purposes or obtain financial
solutions for purposes of supporting term and universal life insurance products
for capital management purposes or result in an increase in the cost of existing
securitization structures.
The
ability of the Company to implement financing solutions designed to fund excess
statutory reserves on both the term and universal life blocks of business is
dependent upon factors such as the ratings of the Company, the size of the
blocks of business affected, the mortality experience of the Company, the credit
market and other factors. The Company cannot predict the continued
availability of such solutions to the Company or the form that the market may
dictate. To the extent that such financing solutions are not
available, the Company’s 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.
None.
Our home
office is located at 2801 Highway 280 South, Birmingham, Alabama. We own two
buildings consisting of 310,000 square feet constructed in two phases. Building
1 was constructed in 1974 and Building 2 was constructed in 1982. Additionally,
we lease a third 310,000 square-foot building constructed in 2004. Parking is
provided for approximately 2,594 vehicles.
We lease
administrative and marketing office space in 21 cities, including
21,667 square feet in Birmingham (excluding the home office building), with
most leases being for periods of three to ten years. The aggregate
annualized rent is approximately $6.8 million.
We
believe our properties are adequate and suitable for our business as currently
conducted and are adequately maintained. The above properties do not
include properties we own for investment only.
To the
knowledge and in the opinion of management, there are no material pending legal
proceedings, other than ordinary routine litigation incidental to the business
of our company, to which the Company or any of its subsidiaries is a party or of
which any of our properties is the subject. For additional
information regarding legal proceedings see “Risk Factors and Cautionary Factors
that may Affect Future Results” included herein.
No matter
was submitted during the fourth quarter of 2007 to a vote of our security
holders.
Our
Common Stock is listed and principally traded on the New York Stock Exchange
(NYSE symbol: PL). The following table sets forth the
highest and lowest closing prices of our Common Stock, $0.50 par value, as
reported by the New York Stock Exchange during the periods indicated, along with
the dividends paid per share of Common Stock during the same
periods.
|
|
|
Range
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Dividends
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
First
Quarter………………..
|
|
$ |
50.35 |
|
|
$ |
43.04 |
|
|
$ |
0.215 |
|
|
Second
Quarter……………..
|
|
|
50.83 |
|
|
|
44.19 |
|
|
|
0.225 |
|
|
Third
Quarter……………….
|
|
|
48.35 |
|
|
|
39.80 |
|
|
|
0.225 |
|
|
Fourth
Quarter……………..
|
|
|
45.02 |
|
|
|
39.82 |
|
|
|
0.225 |
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter………………..
|
|
$ |
49.74 |
|
|
$ |
44.20 |
|
|
$ |
0.195 |
|
|
Second
Quarter……………..
|
|
|
50.40 |
|
|
|
43.44 |
|
|
|
0.215 |
|
|
Third
Quarter………………
|
|
|
47.16 |
|
|
|
43.04 |
|
|
|
0.215 |
|
|
Fourth
Quarter……………..
|
|
|
47.55 |
|
|
|
43.97 |
|
|
|
0.215 |
|
On
February 15, 2008, there were approximately 1,318 owners of record of
our Common Stock.
The
Company (or its predecessor) has paid cash dividends each year since 1926 and
each quarter since 1934. We expect to continue to pay cash dividends,
subject to our earnings and financial condition and other relevant
factors. Our ability to pay cash dividends is dependent in part on
cash dividends received by the Company from our life insurance
subsidiaries. See Item 7, Management’s Discussion and Analysis
of Financial Condition and Results of Operations –Liquidity and Capital
Resources included herein. Such subsidiary dividends are
restricted by the various insurance laws of the states in which the subsidiaries
are incorporated. See Item 1 – “Business –
Regulation”.
On May 7, 2007, our Board of Directors extended the Company’s previously
authorized $100 million share repurchase program. The current
authorization extends through May 6, 2010. There was no activity under this
program in 2007. The Company announced on February 12, 2008 that it had
commenced execution of this repurchase plan. Future activity will be dependent
upon many factors, including capital levels, rating agency expectations, and the
relative attractiveness of alternative uses for capital.
|
|
|
For
The Year Ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars
In Thousands, Except Per Share Amounts)
|
|
INCOME
STATEMENT DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
and policy fees
|
|
$ |
2,727,023 |
|
|
$ |
2,317,337 |
|
|
$ |
1,955,780 |
|
|
$ |
1,821,094 |
|
|
$ |
1,667,725 |
|
|
Reinsurance
ceded
|
|
|
(1,600,684 |
) |
|
|
(1,371,215 |
) |
|
|
(1,226,857 |
) |
|
|
(1,125,646 |
) |
|
|
(934,435 |
) |
|
Net
of reinsurance ceded
|
|
|
1,126,339 |
|
|
|
946,122 |
|
|
|
728,923 |
|
|
|
695,448 |
|
|
|
733,290 |
|
|
Net
investment income
|
|
|
1,675,934 |
|
|
|
1,419,778 |
|
|
|
1,180,502 |
|
|
|
1,084,217 |
|
|
|
1,030,752 |
|
|
Realized
investment gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
financial instruments
|
|
|
8,469 |
|
|
|
(21,516 |
) |
|
|
(30,881 |
) |
|
|
19,591 |
|
|
|
12,550 |
|
|
All
other investments
|
|
|
8,602 |
|
|
|
104,084 |
|
|
|
49,393 |
|
|
|
28,305 |
|
|
|
58,064 |
|
|
Other
income
|
|
|
232,357 |
|
|
|
230,665 |
|
|
|
181,267 |
|
|
|
161,014 |
|
|
|
122,869 |
|
|
Total
revenues
|
|
|
3,051,701 |
|
|
|
2,679,133 |
|
|
|
2,109,204 |
|
|
|
1,988,575 |
|
|
|
1,957,525 |
|
|
Benefits
and expenses
|
|
|
2,615,613 |
|
|
|
2,247,225 |
|
|
|
1,732,191 |
|
|
|
1,603,374 |
|
|
|
1,632,113 |
|
|
Income
tax expense
|
|
|
146,522 |
|
|
|
150,347 |
|
|
|
130,446 |
|
|
|
134,820 |
|
|
|
108,362 |
|
|
Change
in accounting principle(1)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(15,801 |
) |
|
|
- |
|
|
Net
income
|
|
$ |
289,566 |
|
|
$ |
281,561 |
|
|
$ |
246,567 |
|
|
$ |
234,580 |
|
|
$ |
217,050 |
|
|
PER
SHARE DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income from continuing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations(2)
- basic
|
|
$ |
4.07 |
|
|
$ |
3.98 |
|
|
$ |
3.49 |
|
|
$ |
3.56 |
|
|
$ |
3.10 |
|
|
Net
income - basic
|
|
$ |
4.07 |
|
|
$ |
3.98 |
|
|
$ |
3.49 |
|
|
$ |
3.34 |
|
|
$ |
3.10 |
|
|
Average
share outstanding - basic
|
|
|
71,061,152 |
|
|
|
70,795,453 |
|
|
|
70,562,186 |
|
|
|
70,299,470 |
|
|
|
70,033,288 |
|
|
Net
income from continuing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations(2)
- diluted
|
|
$ |
4.05 |
|
|
$ |
3.94 |
|
|
$ |
3.46 |
|
|
$ |
3.52 |
|
|
$ |
3.07 |
|
|
Net
income - diluted
|
|
$ |
4.05 |
|
|
$ |
3.94 |
|
|
$ |
3.46 |
|
|
$ |
3.30 |
|
|
$ |
3.07 |
|
|
Average
share outstanding - diluted
|
|
|
71,478,021 |
|
|
|
71,390,513 |
|
|
|
71,350,541 |
|
|
|
71,064,539 |
|
|
|
70,644,642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends
|
|
|
0.89 |
|
|
$ |
0.84 |
|
|
$ |
0.76 |
|
|
$ |
0.685 |
|
|
$ |
0.63 |
|
|
Shareowners'
equity
|
|
$ |
35.02 |
|
|
$ |
33.06 |
|
|
$ |
31.33 |
|
|
$ |
31.19 |
|
|
$ |
29.02 |
|
|
(1) Cumulative
effect of change in accounting principle, net of income tax - amount in
2004 relates to SOP 03-1.
|
|
|
|
|
|
|
(2) Net
income excluding change in accounting principle.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
BALANCE
SHEET DATA
|
(Dollars
In Thousands)
|
|
Total
assets
|
|
$ |
41,786,041 |
|
|
$ |
39,795,294 |
|
|
$ |
28,966,993 |
|
|
$ |
27,211,378 |
|
|
$ |
24,517,615 |
|
|
Total
stable value contracts and annuity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
account
balances(3)
|
|
|
13,879,021 |
|
|
|
14,330,909 |
|
|
|
9,490,007 |
|
|
|
8,342,334 |
|
|
|
7,336,341 |
|
|
Non-recourse
funding obligations
|
|
|
1,375,000 |
|
|
|
425,000 |
|
|
|
125,000 |
|
|
|
- |
|
|
|
- |
|
|
Liabilities
related to variable interest entities
|
|
|
400,000 |
|
|
|
420,395 |
|
|
|
448,093 |
|
|
|
482,434 |
|
|
|
400,000 |
|
|
Long-term
debt
|
|
|
559,852 |
|
|
|
479,132 |
|
|
|
482,532 |
|
|
|
451,433 |
|
|
|
461,329 |
|
|
Subordinated
debt securities
|
|
|
524,743 |
|
|
|
524,743 |
|
|
|
324,743 |
|
|
|
324,743 |
|
|
|
221,650 |
|
|
Shareowners'
equity
|
|
|
2,456,761 |
|
|
|
2,313,075 |
|
|
|
2,183,660 |
|
|
|
2,166,327 |
|
|
|
2,002,144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) Includes
stable value contract account balances and annuity account balances which
do not pose significant mortality risk.
|
|
The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operations (“MD&A”) should be read in conjunction with our
consolidated audited financial statements and related notes included
herein.
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. Please refer to “Risk Factors and Cautionary Factors that
may Affect Future Results” herein for more information about factors which could
affect future results.
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 of Financial
Accounting Standards (“SFAS”) No. 131, Disclosures about Segments of an
Enterprise and Related Information, and makes adjustments to our segment
reporting as needed.
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 investor’s 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.
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. For the year ended
December 31, 2007, our Life Marketing segment had operating income of
$189.2 million.
|
|
·
|
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 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. We
completed our acquisition of the Chase Insurance Group during the third
quarter of 2006, which consisted of five insurance companies that
manufacture and administer traditional life insurance and annuity products
and four related non-insurance companies (which collectively are referred
to as the “Chase Insurance Group”). The Chase Insurance Group’s
results of operations are included in our consolidated results of
operations beginning July 3, 2006. For the year ended
December 31, 2007, our Acquisitions segment had operating income of
$129.2 million.
|
|
·
|
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. For the year ended December 31, 2007,
our Annuities segment had operating income of
$23.1 million.
|
|
·
|
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. For the year ended December 31, 2007, our
Stable Value Products segment had operating income of
$50.2 million.
|
|
·
|
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”). On
July 14, 2006, we completed our acquisition of the vehicle extended
service contract business of Western General. Western General
is headquartered in Calabasas, California and is a provider of vehicle
service contracts nationally, focusing primarily on the west coast
market. In addition, Western General currently provides
extended service contract administration for several automobile
manufacturers and provides used car service contracts for a
publicly-traded national dealership group. Western General’s
results of operations are included in our Asset Protection segment’s
results beginning on July 1, 2006. For the year ended December 31,
2007, our Asset Protection segment had operating income of $41.6
million.
|
|
·
|
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. For the year ended
December 31, 2007, our Corporate and Other segment had an operating
loss of $3.4 million.
|
Revenues
and expenses
Our revenues consist primarily of:
|
·
|
net
premiums earned on insurance
policies;
|
|
·
|
net
investment income and net investment gains (losses);
and
|
|
·
|
policy
fees and other income, including mortality and surrender charges related
primarily to UL insurance policies, investment management fees and
commissions, and fees from contract underwriting
services.
|
Our expenses principally consist of:
|
·
|
benefits
provided to policyholders and contract
holders;
|
|
·
|
interest
credited on general account balances; dividends to policyholders;
and
|
|
·
|
operating
expenses, including commissions and other costs of selling and servicing
the various products we sell, marketing expenses, policy and contract
servicing costs and other general business
expenses.
|
EXECUTIVE
SUMMARY
In a year that presented numerous challenges for the financial services
industry, we achieved record net and operating earnings for 2007. We achieved
growth in operating earnings during 2007 in our Life Marketing, Acquisitions,
Stable Value Products and Asset Protection segments. Operating
earnings were down in 2007 compared to the prior year in our Annuities segment
primarily due to less favorable mortality and tighter spreads in the single
premium immediate annuity line.
The interest rate environment represented a significant challenge during 2007.
Historically low interest rates 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.
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 year.
The completion of the Chase Insurance Group acquisition in July 2006
represents the most significant acquisition in our history. This
acquisition provided access to a bank distribution channel for our fixed annuity
sales and created significant success in this area during 2007.
Increasing costs of reinsurance continues 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. Our maximum retention for
newly issued universal life products is $1,000,000. During 2008, the
Company increased its retention limit to $2,000,000 on certain of its
traditional life products.
During 2005 and 2007, we entered into securitization structures to fund the
additional statutory reserves required as a result of Regulation
XXX. 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,
earnings emerge more slowly under a securitization structure relative to the
previous reinsurance structure. Additionally, Actuarial
Guideline 38, also known as AXXX, sets forth the reserve requirements for
universal life insurance with secondary guarantees (“ULSG”). These
requirements 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 financing solutions may emerge to reduce the
impact of the amendment. During 2007, we entered into a
securitization structure to fund the additional statutory reserves required as a
result of Actuarial Guideline 38. Through December 31, 2007, we
have issued an aggregate amount of approximately $1.4 billion of
non-recourse funding obligations to fund the statutory reserves required as a
result of Regulation XXX.
Significant financial information related to each of our segments is as
follows:
|
·
|
Operating
earnings from the Life Marketing segment increased $15.0 million, or
8.6%, for the year ended December 31, 2007 compared to the year ended
December 31, 2006 due to favorable mortality results and a gain
recognized during 2007 on the sale of the segment’s direct marketing
subsidiary, offsetting favorable unlocking in 2006 and lower allocated
investment income as a result of the universal life securitization
transaction in 2007. The segment continued to focus on
strengthening its relationships with high quality distributors of life
insurance products. An increase in retention levels on certain
newly written traditional life products during 2005 allowed the segment to
improve its competitive position with respect to these products, resulting
in increased sales of traditional life products in 2006 and 2007. Sales of
universal life products remained flat in 2007, as we responded to the
higher reserve levels required under Actuarial
Guideline 38 (“AG38”) by implementing structural product changes
on certain UL products.
|
|
·
|
Operating
earnings from the Acquisitions segment increased $24.7 million, or
23.6%, for the year ended December 31, 2007 compared to the year
ended December 31, 2006 due to the completion of the Chase Insurance
Group acquisition during the third quarter of 2006. This
acquisition contributed $58.6 million to 2007’s operating earnings,
compared to a contribution of $29.0 million to 2006’s operating earnings.
This transaction consisted of the acquisition from JP Morgan Chase
& Co. of the stock of five life insurance companies that manufacture
and distribute traditional life insurance and annuities and the stock of
four related non-insurance companies. Our acquisition
capabilities have historically given us a unique competitive
advantage. Policies acquired through the Acquisitions segment
are typically “closed” blocks of business, so unless new acquisitions are
made, earnings are expected to decline as a result of lapses, deaths, and
other terminations in the closed
blocks.
|
|
·
|
Operating
earnings from the Annuities segment declined $1.6 million, or 6.5%,
for the year ended December 31, 2007 compared to the year ended
December 31, 2006 primarily due to unfavorable mortality results and
a tightening of spreads in the immediate annuity
line. Offsetting these unfavorable results were increases in
operating income in the market value adjusted annuity line and the single
premium deferred annuity line. The increase in the market value
adjusted annuity line was due to favorable DAC unlocking, slightly offset
by a decline in spread. The single premium deferred annuity
line of business was added in the third quarter of 2006 and only had two
quarters of results in the prior year compared to a full year in
2007. Operating income was also favorably impacted in 2007
compared to the prior year by increasing account
values. Additionally, during 2007, the segment experienced
unfavorable fair value changes (net of DAC amortization) in the equity
indexed annuity and variable annuity product lines of $3.3
million.
|
|
·
|
Operating
earnings from the Stable Value Products segment increased
$3.2 million, or 6.7%, for the year ended December 31, 2007
compared to the year ended December 31, 2006, primarily due to an
increased operating spread, which was partially offset by a decline in
average account values. 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. We expect operating earnings for this segment to
stabilize as we continue to access the institutional funding
agreement-backed note market while focusing on maintaining higher yielding
investments and reducing liability
costs.
|
|
·
|
Operating
earnings from the Asset Protection segment increased $31.7 million,
or 323.6%, for the year ended December 31, 2007 compared to the year
ended December 31, 2006. 2006 results included bad debt charges of
$27.1 million in the discontinued Lender’s Indemnity product line.
The service contract line and credit insurance line increased $7.5 million
and $4.0 million, respectively, which were partially offset by a decrease
in the other product lines. Improved loss ratios, higher volumes, and
proactive expense management resulted in increased earnings from the
segment’s service contract lines. Price increases implemented
over the last several years and improvements in the underwriting process
continue to improve results by reducing loss ratios. Lower
volume and higher loss ratios caused earnings to decline in the other
products line.
|
|
·
|
Operating
earnings from the Corporate and Other segment declined $15.2 million,
or 129.0%, for the year ended December 31, 2007 compared to the year
ended December 31, 2006 due primarily to the mark-to-market on a $422
million portfolio of securities designated for trading. This trading
portfolio negatively impacted full year 2007 by $10.2
million. In addition, the segment experienced lower investment
income resulting from lower levels of unallocated capital 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.
|
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
that 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;
|
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.
|
CRITICAL
ACCOUNTING POLICIES
Our
accounting policies inherently require the use of judgments relating to a
variety of assumptions and estimates, in particular expectations of current and
future mortality, morbidity, persistency, expenses, and interest
rates. Because of the inherent uncertainty when using the assumptions
and estimates, the effect of certain accounting policies under different
conditions or assumptions could be materially different from those reported in
the consolidated financial statements. A discussion of the various
critical accounting policies is presented below.
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 issuer’s 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. Our specific accounting policies
related to our invested assets are discussed in Note 2, Summary of Significant Accounting
Policies, and Note 4, Investment Operations, to the
Consolidated Financial Statements. As of December 31, 2007, we
held $19.5 billion of available-for-sale investments, including
$9.8 billion in investments with a gross unrealized loss of
$391.8 million.
Derivatives
- We utilize derivative transactions primarily in order to reduce our exposure
to interest rate risk, inflation risk, equity market risk, and currency exchange
risk. We have also entered into certain credit default swaps to
enhance the return on our investment portfolio. Assessing the effectiveness
of the hedging programs and evaluating the carrying values of the related
derivatives often involve a variety of assumptions and estimates. We
employ a variety of methods for determining the fair value of our derivative
instruments. The fair values of swaps, interest rate swaptions, and
options are based upon industry standard models which calculate the
present-value of the projected cash flows of the derivatives using current and
implied future market conditions. These models include estimated
volatility and interest rates in the determination of fair value where quoted
market values are not available. The use of different assumptions may
have a material effect on the estimated fair value amounts, as well as the
amount of reported net income. In addition, measurements of
ineffectiveness of hedging relationships are subject to interpretations and
estimations, and any differences may result in material changes to our results
of operations. As of December 31, 2007, the fair value of
derivatives reported on our balance sheet in “other long-term investments” and
“other liabilities” was $27.3 million and $79.5 million,
respectively.
Reinsurance -
For each of our reinsurance contracts, we must determine if the contract
provides indemnification against loss or liability relating to insurance risk,
in accordance with applicable accounting standards. We must review all
contractual features, particularly those that may limit the amount of insurance
risk to which we are subject or features that delay the timely reimbursement of
claims. If we determine that the possibility of a significant loss from
insurance risk will occur only under remote circumstances, we record the
contract under a deposit method of accounting with the net amount
payable/receivable reflected in other reinsurance assets or liabilities on our
consolidated balance sheets. Fees earned on the contracts are reflected as other
revenues, as opposed to premiums, on our consolidated statements of
income.
The balance of the reinsurance is due from a diverse group of reinsurers. The
collectability of reinsurance is largely a function of the solvency of the
individual reinsurers. We perform periodic credit reviews on our reinsurers,
focusing on, among other things, financial capacity, stability, trends and
commitment to the reinsurance business. We also require assets in trust, letters
of credit or other acceptable collateral to support balances due from reinsurers
not authorized to transact business in the applicable jurisdictions. Despite
these measures, a reinsurer’s insolvency, inability or unwillingness to make
payments under the terms of a reinsurance contract, could have a material
adverse effect on our results of operations and financial
condition. As of December 31, 2007 our third-party reinsurance
receivables amounted to $5.1 billion. These amounts include ceded
reserve balances and ceded benefit payments.
Deferred acquisition costs and Value of business acquired - We incur
significant costs in connection with acquiring new insurance
business. These costs, which vary with and are primarily related to
the production of new business and coinsurance of blocks of policies, are
deferred. The recovery of such costs is dependent on the future
profitability of the related policies. The amount of future profit is
dependent principally on investment returns, mortality, morbidity, persistency,
and expenses to administer the business and certain economic variables, such as
inflation. These costs are amortized over the expected lives of the
contracts, based on the level and timing of either gross profits or gross
premiums, depending on the type of contract. Revisions to estimates
result in changes to the amounts expensed in the reporting period in which the
revisions are made and could result in the impairment of the asset and a charge
to income if estimated future profits are less than the unamortized deferred
amounts. As of December 31, 2007, we had DAC/VOBA of $3.4
billion.
We had a DAC/VOBA asset
of approximately $191.6 million related to our variable annuity product
line with an account balance of $4.3 billion as of December 31,
2007. These amounts include $57.7 million and $1.4 billion,
respectively, of DAC/VOBA asset and account balances associated with the
variable annuity business of the Chase insurance Group which has been 100%
reinsured to Commonwealth Annuity and Life Insurance Company (formerly known as
Allmerica Financial Life Insurance and Annuity Company) (“CALIC”), under a
modified coinsurance agreement. We monitor the rate of amortization
of DAC/VOBA associated with our variable annuity product line. Our
monitoring methodologies employ varying assumptions about how much and how
quickly the stock markets will appreciate. The primary assumptions
used to project future profits as part of the analysis include: a long-term
equity market growth rate of 8%, reversion to the mean methodology with a
reversion to the mean with no cap, reversion to the mean period of 6 years,
and an amortization period of 25 years. A recovery in equity
markets, or the use of methodologies and assumptions that anticipate a recovery,
results in lower amounts of amortization, and a worsening of equity markets
results in higher amounts of amortization. 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”.
Goodwill
- Accounting for goodwill requires an estimate of the future
profitability of the associated lines of business. Goodwill is tested
for impairment at least annually. We evaluate the carrying value of
goodwill during the fourth quarter of each year and between annual evaluations
if events occur or circumstances change that would more likely than not reduce
the fair value of the reporting unit below its carrying amount. Such
circumstances could include, but are not limited to: (1) a significant
adverse change in legal factors or in business climate, (2) unanticipated
competition, or (3) an adverse action or assessment by a
regulator. When evaluating whether goodwill is impaired, we compare
the fair value of the reporting unit to which the goodwill is assigned to the
reporting unit’s carrying amount, including goodwill. At December 31,
2007 and 2006, we evaluated our goodwill and determined that the fair value had
not decreased below the carrying value and no adjustment to impair goodwill was
necessary in accordance with FASB SFAS No. 142, Goodwill and Other Intangible
Assets. As of December 31, 2007, we had goodwill of
$117.4 million.
Insurance liabilities and reserves - Establishing
an adequate liability for our 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 our historical experience, modified as necessary to reflect
anticipated trends and to include provisions for possible adverse
deviation. Determining liabilities for our 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. Our results depend significantly upon the extent to which our
actual claims experience is consistent with the assumptions we used in
determining our reserves and pricing our products. Our reserve
assumptions and estimates require significant judgment and, therefore, are
inherently uncertain. We cannot determine with precision the ultimate
amounts that we will pay for actual claims or the timing of those
payments. In addition, effective January 1, 2007, we adopted
SFAS No. 155, Accounting
for Certain Hybrid Financial Instruments – an amendment of FASB Statements
No. 133 and 140, related to our equity indexed annuity product. SFAS
155 requires that we fair value 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 of December 31, 2007, we had total policy
liabilities and accruals of $17.4 billion.
Guaranteed
minimum death benefits - We also establish liabilities for guaranteed
minimum death benefits (“GMDB”) on our variable annuity
products. The methods used to estimate the liabilities employ
assumptions about mortality and the performance of equity markets. We
assume mortality of 65% of the National Association of Insurance Commissioners
1994 Variable Annuity GMDB Mortality Table. Future declines in
the equity market would increase our GMDB liability. Differences
between the actual experience and the assumptions used result in variances in
profit and could result in losses. Our GMDB as of December 31,
2007, are subject to a dollar-for-dollar reduction upon withdrawal of related
annuity deposits on contracts issued prior to January 1,
2003. As of December 31, 2007, our net GMDB liability held was
$0.6 million.
Guaranteed
minimum withdrawal benefits - We also establish liabilities for
guaranteed minimum withdrawal benefits (“GMWB”) on our variable annuity
products. The GMWB is valued in accordance with SFAS 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 and market volatility. We assume 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.
Pension
Benefits - Determining our obligations to employees under our defined
benefit pension plan requires the use of estimates. The calculation
of the liability related to our defined benefit pension plan requires
assumptions regarding the appropriate weighted average discount rate, estimated
rate of increase in the compensation of its employees and the expected long-term
rate of return on the plan’s assets. See Note 12, Shareowners’ Equity and Stock-Based
Compensation, to the Consolidated Financial Statements for further
information on this plan.
Stock-Based
Payments - Accounting for other stock-based compensation plans may
require the use of option pricing models to estimate our
obligations. Assumptions used in such models relate to equity market
volatility, the risk-free interest rate at the date of grant, expected dividend
rates, as well as expected exercise dates. See Note 12, Shareowners’ Equity and Stock-Based
Compensation, to the Consolidated Financial Statements for further
information on this plan.
Deferred
taxes and uncertain tax
positions - Deferred federal income taxes arise from the recognition of
temporary differences between the basis of assets and liabilities determined for
financial reporting purposes and the basis determined for income tax
purposes. Such temporary differences are principally related to the
marking to market value of investment assets, the deferral of policy acquisition
costs, and the provision for future policy benefits and
expenses. Deferred tax assets and liabilities are measured using the
enacted tax rates expected to be in effect when such benefits are
realized. Under U.S. GAAP, we test the value of deferred tax assets
for impairment on a quarterly basis at the taxpaying component level within each
tax jurisdiction, consistent with our filed tax returns. Deferred tax
assets are reduced by a valuation allowance if, based on the weight of available
evidence, it is more likely than not that some portion, or all, of the deferred
tax assets will not be realized. In determining the need for a
valuation allowance we consider carryback capacity, reversal of existing
temporary differences, future taxable income, and tax planning
strategies. The determination of the allowance for our deferred tax
assets requires management to make certain judgments and assumptions regarding
future operations that are based on our historical experience and our
expectations of future performance. FASB Interpretation (“FIN”)
No. 48, Accounting for
Uncertainty in Income Taxes – an Interpretation of FASB
Statement 109. FIN 48 prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of an income tax position taken or expected to be taken in an income
tax return and provides guidance on disclosure. Additionally, this
interpretation requires, in order for us to recognize a benefit in our 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 position. In making this analysis, we must assume that
the taxing authority is fully informed of all of the facts regarding this
issue. Our judgments and assumptions are subject to change given the
inherent uncertainty in predicting future performance, which is impacted by such
things as policyholder behavior, competitor pricing, new product introductions,
and specific industry and market conditions. As of December 31,
2007, we had a gross deferred tax liability of $49.6 million.
Contingent
liabilities - The assessment of potential obligations for tax,
regulatory, and litigation matters inherently involves a variety of estimates of
potential future outcomes. We make such estimates after consultation
with our advisors and a review of available facts. However, there can
be no assurance that future outcomes will not differ from management’s
assessments.
RESULTS OF OPERATIONS
The
following table presents a summary of results and reconciles segment operating
income (loss) to consolidated net income:
|
|
|
For
The Year Ended December 31,
|
|
|
Change
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars
In Thousands)
|
|
Segment
Operating Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
Marketing
|
|
$ |
189,186 |
|
|
$ |
174,189 |
|
|
$ |
163,661 |
|
|
|
8.6
|
% |
|
|
6.4
|
% |
|
Acquisitions
|
|
|
129,247 |
|
|
|
104,534 |
|
|
|
80,611 |
|
|
|
23.6 |
|
|
|
29.7 |
|
|
Annuities
|
|
|
23,051 |
|
|
|
24,645 |
|
|
|
31,933 |
|
|
|
(6.5 |
) |
|
|
(22.8 |
) |
|
Stable
Value Products
|
|
|
50,231 |
|
|
|
47,073 |
|
|
|
54,798 |
|
|
|
6.7 |
|
|
|
(14.1 |
) |
|
Asset
Protection
|
|
|
41,559 |
|
|
|
9,811 |
|
|
|
24,901 |
|
|
|
323.6 |
|
|
|
(60.6 |
) |
|
Corporate
and Other
|
|
|
(3,417 |
) |
|
|
11,776 |
|
|
|
47,229 |
|
|
|
(129.0 |
) |
|
|
(75.1 |
) |
|
Total
segment operating income
|
|
|
429,857 |
|
|
|
372,028 |
|
|
|
403,133 |
|
|
|
15.5 |
|
|
|
(7.7 |
) |
|
Realized
investment gain (losses) - investments(1)
|
|
|
(1,485 |
) |
|
|
81,386 |
|
|
|
15,803 |
|
|
|
|
|
|
|
|
|
|
Realized
investment gain (losses) - derivatives(2)
|
|
|
7,716 |
|
|
|
(21,506 |
) |
|
|
(41,923 |
) |
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
(146,522 |
) |
|
|
(150,347 |
) |
|
|
(130,446 |
) |
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
289,566 |
|
|
$ |
281,561 |
|
|
$ |
246,567 |
|
|
|
2.8 |
|
|
|
14.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)Realized
investment gains (losses) - investments
|
|
|
8,602 |
|
|
|
104,084 |
|
|
|
49,393 |
|
|
|
|
|
|
|
|
|
|
Less:
participating income from real estate ventures
|
|
|
6,857 |
|
|
|
13,494 |
|
|
|
8,684 |
|
|
|
|
|
|
|
|
|
|
Less:
related amortization of DAC
|
|
|
3,230 |
|
|
|
9,204 |
|
|
|
24,906 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1,485 |
) |
|
$ |
81,386 |
|
|
$ |
15,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)Realized
investment gains (losses) - derivatives
|
|
$ |
8,469 |
|
|
$ |
(21,516 |
) |
|
$ |
(30,881 |
) |
|
|
|
|
|
|
|
|
|
Less:
settlements on certain interest rate swaps
|
|
|
821 |
|
|
|
2,737 |
|
|
|
11,393 |
|
|
|
|
|
|
|
|
|
|
Less:
derivative losses related to certain annuities
|
|
|
(68 |
) |
|
|
(2,747 |
) |
|
|
(351 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
7,716 |
|
|
$ |
(21,506 |
) |
|
$ |
(41,923 |
) |
|
|
|
|
|
|
|
|
2007
compared to 2006
Net income for the year ended December 31, 2007 reflects a
$57.8 million, or 15.5%, increase in segment operating income compared to
the year ended December 31, 2006. The increase was primarily related to a
$31.7 million increase in operating earnings in the Asset Protection segment
resulting from a $27.1 million bad debt charge that occurred during 2006, a
$24.7 million increase in the Acquisitions segment resulting primarily from the
prior year acquisition of the Chase Insurance Group, and a $15.0 million
increase in the Life Marketing segment resulting primarily from a $15.7 million
gain before taxes on the sale of the direct marketing
subsidiary. These favorable items were partially offset by a decline
in operating earnings for the Corporate & Other segment of
$15.2 million resulting primarily from the mark-to-market on a $422 million
portfolio of securities designated for trading. This trading portfolio
negatively impacted full year 2007 by $10.2 million. Net realized
investment gains were $6.2 million for the year ended December 31,
2007 compared to $59.9 million for the year ended December 31, 2006, a
decrease of $53.6 million, or 89.6%. Following the acquisition
of the Chase Insurance Group, the investment portfolio associated with that
acquisition was rebalanced to conform to our overall investment and
asset/liability matching strategies, resulting in an increase in realized
investment gains for the year ended December 31, 2006 compared to the year
ended December 31, 2007.
|
·
|
Life
Marketing segment operating income was $189.2 million for the year
ended December 31, 2007, representing an increase of $15.0 million,
or 8.6 %, over the year ended December 31, 2006. The
increase was primarily due to a gain recognized during the first quarter
of 2007 on the sale of the segment’s direct marketing subsidiary combined
with favorable mortality results , which was offset by $14 million of
favorable unlocking that occurred in the second quarter of
2006.
|
|
·
|
Acquisitions
segment operating income was $129.2 million and increased
$24.7 million, or 23.6%, for the year ended December 31, 2007
compared to the year ended December 31, 2006. The increase
was due primarily to the acquisition of the Chase Insurance Group
completed in the third quarter of 2006. This acquisition
contributed $58.6 million to the Acquisition segment’s operating
income for the year ended December 31, 2007 compared to $29.0 million
for the year ended December 31,
2006.
|
|
·
|
Annuities
segment operating income was $23.1 million for the year ended December 31,
2007, representing a decrease of $1.6 million, or 6.5%, compared to the
year ended December 31, 2006. This decline was primarily the
result of unfavorable mortality results and a tightening of spreads in the
immediate annuity line. Offsetting the unfavorable results were
increases in operating income in the market value adjusted annuity line
and the single premium deferred annuity line. The increase in
the market value adjusted annuity line was due to favorable DAC unlocking,
slightly offset by a decline in spread. The single premium
deferred annuity line of business was added in the third quarter of 2006
and only had two quarters of results in the prior year compared to a full
year in 2007. Operating income was also favorably impacted in
2007 compared to the prior year by increasing account
values. Additionally, during 2007, the segment experienced
unfavorable fair value changes (net of DAC amortization) in the equity
indexed annuity and variable annuity product lines of $3.3
million.
|
|
·
|
Stable
Value Products segment operating income was $50.2 million and increased
$3.2 million, or 6.7%, for the year ended December 31, 2007
compared to the year ended December 31, 2006. The increase
was the result of an increase in operating spreads, partially offset by a
decline in average account values.
|
|
·
|
Asset
Protection segment operating income was $41.6 million, representing an
increase of $31.7 million, or 323.6%, for the year ended
December 31, 2007 compared to the year ended December 31,
2006. The increase was primarily the result of bad debt charges
of $27.1 million in 2006. These charges related to the
Lenders Indemnity product line we are no longer
marketing. Favorable results from the service contract line are
also contributing to the increase in operating earnings and are partially
offset by unfavorable results from other product
lines.
|
|
·
|
Corporate
and Other segment operating income declined $15.2 million, or 129.0%,
for the year ended December 31, 2007 compared to the year ended
December 31, 2006 due primarily to the mark-to-market on a $422
million portfolio of securities designated for trading. This trading
portfolio negatively impacted full year 2007 by $10.2
million. In addition, the segment experienced lower investment
income resulting from lower levels of unallocated capital 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.
|
2006
compared to 2005
Net income for the year ended December 31, 2006 reflects net realized
investment gains (compared to net losses in 2005), partially offset by lower
overall segment operating income. Net realized investment gains were
$59.9 million for the year ended December 31, 2006 compared to net
realized investment losses of $26.1 million for the year ended
December 31, 2005, a favorable change of
$86.0 million. Following the acquisition of the Chase Insurance
Group, the investment portfolio associated with that acquisition was rebalanced
to conform to our overall investment and asset/liability matching strategies,
resulting in an increase in realized investment gains for the year ended
December 31, 2006 compared to the year ended December 31,
2005.
|
·
|
Life
Marketing’s operating income increased due to growth in business in-force
and favorable DAC unlocking.
|
|
·
|
Earnings
in the Acquisitions segment increased 30% for the year ended
December 31, 2006 compared to the prior year, as a result of the
Chase Insurance Group acquisition which was completed effective
July 3, 2006, and which contributed $29.0 million to the
segment’s operating income for the year ended December 31,
2006. The increase resulting from this acquisition was
partially offset by the normal runoff of the segment’s previously acquired
closed blocks of business.
|
|
·
|
Earnings
in the Annuities segment were down for the year ended December 31,
2006 compared to the year ended December 31, 2005 due to favorable
DAC unlocking in 2005 that increased prior year earnings by
$16.2 million. Excluding the DAC unlocking, Annuities
segment earnings increased 57.8% for the year ended December 31, 2006
compared to the year ended December 31, 2005, due to increasing
account values, higher interest spreads, and improvement in the equity
markets.
|
|
·
|
Spread
compression caused by higher short term interest rates combined with
slightly lower average account values resulted in a decline in earnings in
the Stable Value Products segment.
|
|
·
|
The
Asset Protection segment’s continued focus on pricing and underwriting
initiatives continue to yield steady reductions in loss ratios in all core
product lines. Excluding the $27.1 million impact of bad
debt charges in the Lender’s Indemnity product the segment is no longer
marketing, operating income for the Asset Protection Segment increased
48.2% for the year ended December 31, 2006 compared to the year ended
December 31, 2005, due to these improved loss ratios and continued
expense management.
|
|
·
|
Lower
investment income resulting from a decrease in unallocated capital, lower
participating income and prepayment fees from mortgages and real estate,
and higher interest expense caused the decline in operating income for the
Corporate and Other segment for the year ended December 31, 2006
compared to the year ended December 31,
2005.
|
RESULTS
BY BUSINESS SEGMENT
In the
following segment discussions, various statistics and other key data we use to
evaluate our segments are presented. Sales statistics are used to
measure the relative progress in our 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 our various sales tracking and
administrative systems, and are not derived from our financial reporting systems
or financial statements.
Life
Marketing
Segment
results of operations
Segment
results were as follows:
|
|
|
For
The Year Ended December 31,
|
|
|
Change
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(Dollars
In Thousands)
|
|
|
|
|
|
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
premiums and policy fees
|
|
$ |
1,453,027 |
|
|
$ |
1,327,865 |
|
|
$ |
1,190,623 |
|
|
|
9.4
|
% |
|
|
11.5
|
% |
|
Reinsurance
ceded
|
|
|
(913,250 |
) |
|
|
(906,590 |
) |
|
|
(902,055 |
) |
|
|
0.7 |
|
|
|
0.5 |
|
|
Net
premiums and policy fees
|
|
|
539,777 |
|
|
|
421,275 |
|
|
|
288,568 |
|
|
|
28.1 |
|
|
|
46.0 |
|
|
Net
investment income
|
|
|
325,118 |
|
|
|
308,497 |
|
|
|
261,859 |
|
|
|
5.4 |
|
|
|
17.8 |
|
|
Other
income
|
|
|
138,356 |
|
|
|
137,891 |
|
|
|
111,202 |
|
|
|
0.3 |
|
|
|
24.0 |
|
|
Total
operating revenues
|
|
|
1,003,251 |
|
|
|
867,663 |
|
|
|
661,629 |
|
|
|
15.6 |
|
|
|
31.1 |
|
|
BENEFITS
AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits
and settlement expenses
|
|
|
635,063 |
|
|
|
535,940 |
|
|
|
392,448 |
|
|
|
18.5 |
|
|
|
36.6 |
|
|
Amortization
of deferred policy acquisition costs
|
|
|
106,094 |
|
|
|
60,227 |
|
|
|
55,688 |
|
|
|
76.2 |
|
|
|
8.2 |
|
|
Other
operating expenses
|
|
|
72,908 |
|
|
|
97,307 |
|
|
|
49,832 |
|
|
|
(25.1 |
) |
|
|
95.3 |
|
|
Total
benefits and expenses
|
|
|
814,065 |
|
|
|
693,474 |
|
|
|
497,968 |
|
|
|
17.4 |
|
|
|
39.3 |
|
|
OPERATING
INCOME
|
|
|
189,186 |
|
|
|
174,189 |
|
|
|
163,661 |
|
|
|
8.6 |
|
|
|
6.4 |
|
|
INCOME
BEFORE INCOME TAX
|
|
$ |
189,186 |
|
|
$ |
174,189 |
|
|
$ |
163,661 |
|
|
|
8.6 |
|
|
|
6.4 |
|
The
following table summarizes key data for the Life Marketing segment:
|
|
|
For
The Year Ended December 31,
|
|
Change
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(Dollars
In Thousands)
|
|
|
|
|
|
|
|
Sales
By Product
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional
|
|
$ |
145,317 |
|
|
$ |
145,380 |
|
|
$ |
123,882 |
|
|
|
(0.0 |
)
% |
|
|
17.4
|
% |
|
Universal
life
|
|
|
75,763 |
|
|
|
75,715 |
|
|
|
165,368 |
|
|
|
0.1 |
|
|
|
(54.2 |
) |
|
Variable
universal life
|
|
|
7,685 |
|
|
|
6,524 |
|
|
|
5,465 |
|
|
|
17.8 |
|
|
|
19.4 |
|
|
|
|
$ |
228,765 |
|
|
$ |
227,619 |
|
|
$ |
294,715 |
|
|
|
0.5 |
|
|
|
(22.8 |
) |
|
Sales
By Distribution Channel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brokerage
general agents
|
|
$ |
138,258 |
|
|
$ |
133,995 |
|
|
$ |
140,575 |
|
|
|
3.2 |
|
|
|
(4.7 |
) |
|
Independent
agents
|
|
|
39,261 |
|
|
|
40,762 |
|
|
|
75,564 |
|
|
|
(3.7 |
) |
|
|
(46.1 |
) |
|
Stockbrokers/banks
|
|
|
36,356 |
|
|
|
35,748 |
|
|
|
65,967 |
|
|
|
1.7 |
|
|
|
(45.8 |
) |
|
BOLI
/ other
|
|
|
14,890 |
|
|
|
17,114 |
|
|
|
12,609 |
|
|
|
(13.0 |
) |
|
|
35.7 |
|
|
|
|
$ |
228,765 |
|
|
$ |
227,619 |
|
|
$ |
294,715 |
|
|
|
0.5 |
|
|
|
(22.8 |
) |
|
Average
Life Insurance In-Force(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional
|
|
$ |
432,662,417 |
|
|
$ |
380,212,243 |
|
|
$ |
340,799,613 |
|
|
|
13.8 |
|
|
|
11.6 |
|
|
Universal
Life
|
|
|
52,607,678 |
|
|
|
50,296,333 |
|
|
|
45,366,295 |
|
|
|
4.6 |
|
|
|
10.9 |
|
|
|
|
$ |
485,270,095 |
|
|
$ |
430,508,576 |
|
|
$ |
386,165,908 |
|
|
|
12.7 |
|
|
|
11.5 |
|
|
Average
Account Values
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Universal
life
|
|
$ |
5,001,487 |
|
|
$ |
4,744,606 |
|
|
$ |
4,110,434 |
|
|
|
5.4 |
|
|
|
15.4 |
|
|
Variable
universal life
|
|
|
335,447 |
|
|
|
277,988 |
|
|
|
230,412 |
|
|
|
20.7 |
|
|
|
20.6 |
|
|
|
|
$ |
5,336,934 |
|
|
$ |
5,022,594 |
|
|
$ |
4,340,846 |
|
|
|
6.3 |
|
|
|
15.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional
Life Mortality Experience(2)
|
|
$ |
8,701 |
|
|
$ |
(5,493 |
) |
|
$ |
(1,166 |
) |
|
|
|
|
|
|
|
|
|
Universal
Life Mortality Experience(2)
|
|
$ |
3,453 |
|
|
$ |
1,577 |
|
|
$ |
1,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
|
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:
|
|
|
For
The Year Ended December 31,
|
|
|
Change
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(Dollars
In Thousands)
|
|
|
|
|
|
|
|
|
Insurance
Companies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
year commissions
|
|
$ |
262,054 |
|
|
$ |
249,484 |
|
|
$ |
339,899 |
|
|
|
5.0
|
% |
|
|
(26.6 |
)
% |
|
Renewal
commissions
|
|
|
37,768 |
|
|
|
37,308 |
|
|
|
33,218 |
|
|
|
1.2 |
|
|
|
12.3 |
|
|
First
year ceded allowances
|
|
|
(18,804 |
) |
|
|
(38,141 |
) |
|
|