Item 1. Business Protective Life and Annuity Insurance Company (“the Company’), a stock life insurance company, was founded in 1978. Since 1983, all outstanding shares of the Company’s common stock have been owned by Protective Life Insurance Company (“Protective”), which is a wholly-owned subsidiary of Protective Life Corporation (“PLC”), an insurance holding company whose common stock is traded on the New York Stock Exchange under the symbol “PL”. All outstanding shares of the Company’s preferred stock are owned by PLC. The Company is authorized to transact insurance business, as an insurance company or a reinsurance company, in 49 states, including New York.
PLC through its subsidiaries provides financial services through the production, distribution, and administration of insurance and investment products. PLC through its subsidiaries operates seven divisions each having a strategic focus which can be grouped into three general categories: life insurance, specialty insurance products, and retirement savings and investment products. The life insurance category includes the Acquisitions, Individual Life, and West Coast Divisions. The specialty insurance products category includes the Dental Benefits and Financial Institutions Divisions. The retirement savings and investment products category includes the Stable Value Products and Investment Products Divisions.
The Company, since it is licensed in the State of New York, is the entity through which PLC markets, distributes, and services insurance and annuity products in New York. As of December 31, 2000, the Company was involved in the businesses of four of PLC’s seven divisions: the Acquisitions Division, the Dental Benefits Division, the Financial Institutions Division and the Investment Products Division. The Company has an additional business segment which is described herein as Corporate and Other.
Protective has entered into an intercompany guaranty agreement, enforceable by the Company or its successors, whereby Protective has guaranteed the Company’s payment of claims made by the holders of Company policies according to the terms of such policies. The guarantee will remain in force until the earlier of (a) when the Company achieves a claims-paying rating equal to or better than Protective without the benefit of any inter-company guaranty agreement or (b) 90 days after the guaranty agreement is revoked by written instrument; provided, however, even after any revocation or termination by such notice, the guarantee shall remain effective as to policies issued during the existence of the guaranty agreement.
Item 2.
Item 2. Properties The Company has no properties. The Company has contracts with PLC and Protective under which it receives investment, legal, and data processing on a fee basis and other managerial and administrative services on a shared cost basis.
Protective’s administrative office building is located at 2801 Highway 280 South, Birmingham, Alabama 35223.
Item 3.
Item 3. Legal Proceedings There are no material pending legal proceedings, other than routine litigation incidental to the business of the Company, to which the Company or any of its affiliates is a party or of which any of its affiliates’ properties is subject. For additional information regarding legal proceedings see Note F to the financial statements included herein.
Item 4.
Item 4.Submission of Matters to a Vote of Security Holders Not required in accordance with General Instruction I(2)(c).
PART II
Item 5.
Item 5. Market for the Registrant's Common Stock and Related Share-Owner Matters The Company is a wholly-owned subsidiary of Protective. All of the preferred stock issued by the Company is owned by PLC. Therefore, neither the Company’s common stock nor its preferred stock is publicly traded.
At December 31, 2000, $96.2 million of share-owners’ equity excluding net unrealized gains and losses represented net assets of the Company that cannot be transferred to Protective in the form of dividends, loans, or advances.
Insurers are subject to various state statutory and regulatory restrictions on the insurers’ ability to pay dividends. In general, dividends up to specific levels are considered ordinary and may be paid thirty days after written notice to the insurance commissioner of the state of domicile unless such commissioner objects to the dividend prior to the expiration of such period. Dividends in larger amounts are considered extraordinary and are subject to affirmative prior approval by such commissioner. The maximum amount that would qualify as ordinary dividends to Protective by the Company in 2001 is estimated to be $12.9 million.
In 2000, the Company declared and paid a cash dividend on common stock of approximately $12.8 million. In 1999, the Company declared and paid a cash dividend on common stock of $5.0 million. No preferred dividends were paid in either 2000 or 1999. The Company expects to continue to be able to pay cash dividends, subject to its earnings, financial condition and other relevant factors.
Item 6.
Item 6. Selected Financial Data Not required in accordance with General Instruction I(2)(a).
Item 7.
Item 7. Management's Narrative Analysis of the Results of Operations In accordance with General Instruction I(2)(a), the Company includes the following analysis with the reduced disclosure format.
Revenues The following table sets forth revenues by source for the periods shown:
Year Ended Percentage December 31 Increase -------------------------------- (Decrease) 2000 1999 ----------- ------------ -----------
Premiums and policy fees.......................... $31,205,079 $36,130,966 (13.6)% Net investment income............................. 31,692,497 28,714,951 10.4 Realized investment gains......................... 42,148 89,550 (52.9) Other income (loss)............................... (6,551) 90,289 - ------------ ----------- $62,933,173 $65,025,756 ============ ===========
Premiums and policy fees, net of reinsurance (“premiums and policy fees”) decreased $4.9 million or 13.6% in 2000 as compared to 1999. Premiums and policy fees in the Acquisition Division are expected to decline with time unless new acquisitions are made. There were no new acquisitions made in 2000, therefore resulting in a decrease of $4.8 million. Premiums and policy fees from the Financial Institutions Division were $0.9 million higher in 2000 as compared to 1999 due to increased marketing efforts and sales momentum. Premiums and policy fees related to the Dental Benefits Division decreased $1.1 million in 2000 as compared to 1999, primarily due to the termination of a group life customer effective December 31, 1999. The Investment Products Division experienced a small increase in premiums in 2000 as compared to1999.
Net investment income for 2000 was $3.0 million or 10.4% higher than for the preceding year primarily due to increases in the average amount of invested assets. The percentage earned on average cash and investments was 6.5% in 2000 and 6.4% in 1999.
The Company generally purchases its investments with the intent to hold to maturity by purchasing investments that match future cash flow needs. However, the Company may sell any of its investments to maintain proper matching of assets and liabilities. Accordingly, the Company has classified its fixed maturities and certain other securities as “available for sale.” The sales of investments that have occurred generally result from portfolio management decisions to maintain proper matching of assets and liabilities.
The Company maintains an allowance for uncollectible amounts on investments, which totaled $0.5 million at December 31, 2000. There were no additions or reductions to the allowance during 2000. Realized investment gains in 2000 were approximately $27 thousand and realized investment losses were approximately $98 thousand.
Income Before Income Tax The following table sets forth operating income or loss and income or loss before income tax by business segment for the periods shown:
Operating Income (Loss) and Income (Loss) Before Income Tax Year Ended December 31 --------------------------------------------------- 2000 1999 ---------------------- -------------------
Operating Income (Loss)(1) Life Insurance Acquisitions........................ $11,605,470 $12,159,598 Specialty Insurance Products Dental Benefits..................... (77,872) 489,179 Financial Institutions.............. 603,586 910,419 Retirement Savings and Investment Products Investment Products................. 870,329 (714,839) Corporate and Other...................... 305,451 123,278 ------------------- ----------------- Total operating income................... 13,306,964 12,967,635 ------------------- ----------------- Realized Investment Gains Unallocated Realized Investment Gains.... 42,148 89,550 ------------------- ----------------- Total.................................... 42,148 89,550 ------------------- ----------------- Income (Loss) Before Income Tax Life Insurance Acquisitions........................ 11,605,470 12,159,598 Specialty Insurance Products Dental Benefits..................... (77,872) 489,179 Financial Institutions.............. 603,586 910,419 Retirement Savings and Investment Products Investment Products................. 870,329 (714,839) Corporate and Other...................... 305,451 123,278 Unallocated Realized Investment Gains.... 42,148 89,550 -------------- -------------- Total income before income tax............................. $13,349,112 $13,057,185 ============== ===============
(1) Income before income tax excluding realized investment gains and losses and related amortization of deferred policy acquisition costs.
Pretax earnings from the Acquisitions Division decreased $0.6 million in 2000 as compared to 1999. Earnings from the Acquisitions Division are normally expected to decline over time (due to the lapsing of policies resulting from deaths of insureds or terminations of coverage) unless new acquisitions are made. There were no new acquisitions made in 2000.
The Dental Benefits Division’s 2000 pretax earnings decreased $0.6 million as compared to 1999 primarily due to the termination of a group life customer effective December 31, 1999.
The Financial Institutions Division’s 2000 pretax earnings decreased $0.3 million as compared to 1999 primarily due to an unfavorable increase in mortality rates within the Division.
The Investment Products Division’s 2000 pretax earnings increased $1.6 million primarily due to continued sales momentum and marketing efforts in the state of New York.
The Corporate and Other segment consists of net investment income and expenses not identified with the preceding business segments. Pretax earnings in 2000 increased $0.2 million over 1999, primarily due to increased net investment income on capital.
Income Tax Expense The following table sets forth the effective income tax rates for the periods shown:
Year Ended Effective Income December 31 Tax Rates ----------- ---------------- 2000.................................. 34.5% 1999.................................. 28.0
Management’s current estimate of the effective income tax rate for 2001 is 34.5%.
Net Income The following table sets forth net income for the periods shown:
Net Income ---------------------------------- Percentage Year Ended Increase December 31 Amount (Decrease) ----------- ------------ -----------
2000.................................. $8,743,668 (7.0)% 1999.................................. 9,401,173 289.4
Net income in 2000 decreased 7.0%, compared to 1999, reflecting improved operating earnings in the Investment Products Division and the Corporate and Other segment, offset by lower operating earnings in the Acquisitions, Financial Institutions and Dental Benefits Divisions and lower realized investment gains.
Recently Issued Accounting Standards For information regarding recently issued accounting standards see Note A to the financial statements included herein.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Investments The Company’s investments in debt securities are reported at market value, and investments in mortgage loans are reported at amortized cost. At December 31, 2000, the Company’s fixed maturity investments (bonds) had a market value of $418.8 million, which is 2.2% below amortized cost (less allowances for uncollectible amounts on investments) of $428.4 million. The Company had $3.2 million in mortgage loans at December 31, 2000. While the Company’s mortgage loans do not have quoted market values, at December 31, 2000, the Company estimates the market value of its mortgage loans to be $3.4 million (using discounted cash flows from the next call date), which is 6.3% above amortized cost.
The approximate percentage distribution of the Company's fixed maturity investments by quality rating at December 31 is as follows:
Rating 2000 1999 -------- -------- -------- AAA.................................................... 4.9% 6.0% AA..................................................... 5.6 4.1 A...................................................... 44.5 46.8 BBB.................................................... 42.2 39.9 BB or Less............................................. 2.8 3.2 -------- -------- 100.0% 100.0% ======== ========
At December 31, 1999, the Company's fixed maturity investments had a market value of $366.8 million, which was 4.6% below amortized cost of $384.3 million. The Company estimated the market value of its mortgage loans to be $3.8 million at December 31, 1999, which was 3.0% above amortized cost of $3.7 million.
The following table sets forth the estimated market values of the Company's fixed maturity investments and mortgage loans resulting from a hypothetical immediate 1 percentage point increase in interest rates from levels prevailing at December 31, and the percent change in market value the following estimated market values would represent.
Estimated Market Values Resulting From An Immediate 1 Percentage Point Increase In Interest Rates Percent At December 31, 2000 Amount Change ----------------------- -------------- --------- Fixed maturities........................... $402,006,412 (4.0)% Mortgage loans............................. 3,294,017 (2.1)
At December 31, 1999 ----------------------- -------------- --------- Fixed maturities........................... $351,797,930 (4.1)% Mortgage loans............................. 3,626,456 (4.4)
Estimated market values were derived from the durations of the Company’s fixed maturities and mortgage loans. Duration measures the relationship between changes in market value to changes in interest rates. While these estimated market values generally provide an indication of how sensitive the market values of the Company’s fixed maturities and mortgage loans are to changes in interest rates, they do not represent management’s view of future market changes, and actual market results may differ from these estimates.
Liabilities Many of the Company’s products contain surrender charges and other features that reward persistency and penalize the early withdrawal of funds. Surrender charges for these products generally are sufficient to cover the Company’s unamortized deferred policy acquisition costs with respect to the policy being surrendered. Certain stable value and annuity contracts have market-value adjustments that protect the Company against investment losses if interest rates are higher at the time of surrender than at the time of issue.
At December 31, 2000, the Company had policy liabilities and accruals of $460.4 million. The Company’s life insurance products have a weighted average minimum credited interest rate of approximately 4.4%.
At December 31, 2000, the Company had $28.1 million of annuity account balances with an estimated fair value of $27.5 million (using surrender value).
At December 31, 1999, the Company had $12.3 million of annuity account balances with an estimated fair value of $11.9 million.
The following table sets forth the estimated fair values of the Company’s annuity account balances resulting from a hypothetical immediate 1 percentage point decrease in interest rates from levels prevailing at December 31, and the percent change in fair value the following estimated fair values would represent.
Estimated Fair Values Resulting From An Immediate 1 Percentage Point Decrease In Interest Rates
Percent December 31, 2000 Amount Change ----------------------- ------------ --------- Annuity account balances.................. $28,690,049 4.3%
At December 31, 1999 ------------------------- ------------- --------- Annuity account balances.................. $12,366,372 3.7%
Estimated fair values were derived from the durations of the Company's annuity account balances. While these estimated fair values generally provide an indication of how sensitive the fair values of the Company's stable value and annuity account balances are to changes in interest rates, they do not represent management's view of future market changes, and actual market results may differ from these estimates.
Approximately one-fourth of the Company's liabilities relate to products (primary whole life insurance), the profitability of which could be affected by changes in interest rates. The effect of such changes in any one year is not expected to be material.
Item 8.
Item 8. Financial Statements and Supplementary Data
Report of Independent Accountants............................................................................. 9 Statements of Income for the years ended December 31, 2000, 1999, and 1998.................................... 10 Balance Sheets as of December 31, 2000 and 1999............................................................... 11 Statements of Share-Owners' Equity for the years ended December 31, 2000, 1999, and 1998.......................................................................... 12 Statements of Cash Flows for the years ended December 31, 2000, 1999, and 1998................................ 13 Notes to Financial Statements................................................................................. 14 Financial Statement Schedules: Schedule III-- Supplementary Insurance Information........................................................... 28 Schedule IV-- Reinsurance ................................................................................... 29
All other schedules to the financial statements required by Article 7 of Regulation S-X are not required under the related instructions or are inapplicable and therefore have been omitted.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Share Owners
Protective Life and Annuity Insurance Company
Birmingham, Alabama
In our opinion, the financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Protective Life and Annuity Insurance Company at December 31, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related financial statements. These financial statements and financial statement schedules are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Birmingham, Alabama
March 1, 2001
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
STATEMENTS OF INCOME
Year Ended December 31 ------------------------------------- 2000 1999 1998 ------------ ------------ -----------
REVENUES Premiums and policy fees............................................... $49,266,966 $ 56,989,060 $ 23,242,432 Reinsurance ceded...................................................... (18,061,887) (20,858,094) (13,475,288) ------------ ------------ ------------ Net of reinsurance ceded............................................. 31,205,079 36,130,966 9,767,144 Net investment income.................................................. 31,692,497 28,714,951 10,678,166 Realized investment gains.............................................. 42,148 89,550 127,769 Other income (loss).................................................... (6,551) 90,289 (598) ------------ ------------ ----------- 62,933,173 65,025,756 20,572,481 ------------ ------------ ----------- BENEFITS AND EXPENSES Benefits and settlement expenses (net of reinsurance ceded: 2000-$15,454,285; 1999-$17,399,370;1998-$18,523,397)................................. 33,502,040 32,207,147 9,261,000 Amortization of deferred policy acquisition costs...................... 6,765,446 6,835,492 1,711,138 Other operating expenses (net of reinsurance ceded: 2000-$286,602; 1999-$291,274; 1998-$247,095)...................................... 9,316,575 12,925,932 6,246,819 ------------ ------------ ---------- 49,584,061 51,968,571 17,218,957 ------------ ------------ ----------
INCOME BEFORE INCOME TAX.................................................. 13,349,112 13,057,185 3,353,524 ------------ ----------- ----------
INCOME TAX EXPENSE Deferred............................................................... 4,605,444 3,656,012 938,986 ------------ ------------ ---------
NET INCOME................................................................ 8,743,668 9,401,173 2,414,538
PREFERRED STOCK DIVIDENDS................................................. 0 0 100,000 ------------ ------------ ---------
INCOME AVAILABLE TO COMMON SHARE OWNER.................................... $ 8,743,668 $ 9,401,173 $ 2,314,538 ============ ============ =========
See notes to financial statements.
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
BALANCE SHEETS
December 31 ------------------------------- 2000 1999 ------------ ------------- ASSETS Investments: Fixed maturities, at market (amortized cost:2000-$428,392,599; 1999-$384,291,937) $418,756,679 $366,838,300 Mortgage loans on real estate.................................................... 3,215,344 3,683,311 Investment real estate, net of accumulated depreciation (1999 - $3,750).......... 1,096,250 Policy loans..................................................................... 54,465,893 54,824,429 Short-term investments........................................................... 4,000,000 7,493,877 ------------ ------------- Total investments............................................................ 480,437,916 433,936,167 Cash................................................................................. 1,165,410 4,021,839 Accrued investment income............................................................ 8,914,306 7,718,388 Accounts and premiums receivable, net of allowance for uncollectible amounts (2000 - $7,000; 1999 - $7,000)........................................... 1,952,449 4,256,931 Reinsurance receivables.............................................................. 23,136,896 26,779,589 Deferred policy acquisition costs.................................................... 128,228,360 127,792,025 Other assets......................................................................... 27,333 41,731 Assets related to separate accounts Variable annuity................................................................. 9,037,035 4,951,159 ------------ ------------- $652,899,705 $609,497,829 ============ ============= LIABILITIES Policy liabilities and accruals: Future policy benefits and claims............................................... $452,212,971 $445,284,973 Unearned premiums............................................................... 8,154,233 7,852,424 ------------ ------------- 460,367,204 453,137,397 Annuity deposits..................................................................... 28,059,246 12,253,056 Other policyholders' funds........................................................... 5,794,289 5,410,510 Other liabilities.................................................................... 21,209,531 18,338,059 Deferred income taxes................................................................ 9,063,941 109,523 Liabilities related to separate accounts Variable annuity................................................................ 9,037,035 4,951,159 ------------ ------------- Total liabilities............................................................ 533,531,246 494,199,704 ------------ -------------
COMMITMENTS AND CONTINGENT LIABILITIES-- NOTE F
SHARE-OWNERS' EQUITY Preferred Stock, $1.00 par value, shares authorized, issued and outstanding: 2,000....................................... 2,000 2,000 Common Stock, $10.00 par value Shares authorized: 2000 and 1999 - 500,000 Shares issued and outstanding: 2000 and 1999 - 250,000........................... 2,500,000 2,500,000 Additional paid-in capital........................................................... 101,386,324 101,386,324 Retained earnings.................................................................... 18,748,333 22,754,665 Accumulated other comprehensive income Net unrealized losses on investments (net of income tax: 2000 - ($1,759,799);1999 - ($6,108,773)) .................... (3,268,198) (11,344,864) ------------ ------------- Total share-owners' equity.................................................... 119,368,459 115,298,125 ------------ ------------- $652,899,705 $609,497,829 ============ =============
See notes to financial statements.
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
STATEMENTS OF SHARE-OWNERS' EQUITY
Net Unrealized Additional Gains Total Preferred Common Paid-In Retained (Losses) On Share-Owners' Stock Stock Capital Earnings Investments Equity ------------ ---------- ------------- ----------- ------------- ---------------
Balance, December 31, 1997.............. $2,000 $2,000,000 $ 6,200,000 $ 16,538,954 $709,187 $ 25,450,141 --------------- Net income for 1998................... 2,414,538 2,414,538 Increase in net unrealized gains on investments (net of income tax: $4,405,946)...... 8,182,472 8,182,472 Reclassification adjustment for amounts included in net income (net of income tax: ($44,719))....... (83,050) (83,050) ------------- Comprehensive income for 1998......... 10,513,960 ------------- Common stock dividend (50,000 shares). 500,000 (500,000) Preferred dividends ($50 per share)... (100,000) (100,000) Capital contribution from Protective.. 95,374,516 95,374,516 ------------ ---------- ------------- ------------ ------------- --------------- Balance, December 31, 1998.............. 2,000 2,500,000 101,574,516 18,353,492 8,808,609 131,238,617 --------------- Net income for 1999................... 9,401,173 9,401,173 Decrease in net unrealized gains on investments (net of income tax: ($(10,820,527)).. Reclassification adjustment for amounts (20,095,265) (20,095,265) included in net income (net of income tax: ($31,342))....... (58,208) (58,208) -------------- Comprehensive loss for 1999........... (10,752,300) -------------- Reduction in paid in capital.......... (188,192) (188,192) Common dividends ($20 per share)...... (5,000,000) (5,000,000) ------- ----------- ------------- ------------ ------------- -------------- Balance, December 31, 1999.............. 2,000 2,500,000 101,386,324 22,754,665 (11,344,864) $115,298,125 -------------- Net income for 2000................... 8,743,668 8,743,668 Decrease in net unrealized losses on investments (net of income tax: $4,363,726)..... 8,104,062 8,104,062 Reclassification adjustment for amounts included in net income (net of income tax: ($14,752))...... (27,396) (27,396) -------------- Comprehensive income for 2000......... 16,820,334 -------------- Common dividends ($51 per share)...... (12,750,000) (12,750,000) ------- ----------- ------------- -------------- ------------- -------------- Balance, December 31, 2000.............. $2,000 $2,500,000 $101,386,324 $ 18,748,333 $ (3,268,198) $119,368,459 ======= =========== ============= ============== ============= ==============
See notes to financial statements.
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
December 31 ------------------------------------------- 2000 1999 1998 ------------ ----------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income.........................................................................$ 8,743,668 $ 9,401,173 $ 2,414,538 Adjustments to reconcile net income to net cash provided by operating activities: Realized investment(gains)...................................................... (42,148) (89,550) (127,769) Amortization of deferred policy acquisition costs............................... 6,765,446 6,835,492 1,711,138 Capitalization of deferred policy acquisition costs............................. (2,593,858) (1,352,066) (783,304) Deferred income taxes........................................................... 4,605,444 3,656,012 938,986 Interest credited to universal life and investment products..................... 33,753,870 18,114,354 2,422,680 Policy fees assessed on universal life and investment products.................. (37,777,093) (18,758,319) (1,004,958) Change in accrued investment income and other receivables....................... 4,751,257 (8,078,299) (19,671,587) Change in policy liabilities and other policyholder funds of traditional life and health products............................................................ 3,848,851 (12,255,924) 12,188,685 Change in other liabilities..................................................... 2,871,472 10,396,783 (1,023,377) Other (net)..................................................................... 432,557 14,237 14,841 ------------ ----------- ------------- Net cash provided by (used in) operating activities.................................... 25,359,466 7,883,893 (2,920,127) ------------ ----------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES Maturities and principal reduction of investments: Investments available for sale.................................................. 401,392,138 256,525,416 1,164,896,631 Other........................................................................... 845,893 2,701,003 3,018,788 Sale of investments: Investments available for sale.................................................. 11,251,538 17,961,720 210,129,485 Other........................................................................... 1,197,324 435,000 Cost of investments acquired: Investments available for sale.................................................. (453,746,936) (301,844,318)(1,371,845,622) ------------ ----------- ------------- Net cash (used in) provided by investing activities.................................... (39,060,043) (24,656,179) 6,634,282 ------------ ----------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES Dividends to share owners.......................................................... (12,750,000) (5,000,000) (100,000) Investment product deposits and change in universal life deposits.................. 47,248,477 36,600,618 7,980,628 Investment product withdrawals..................................................... (23,654,329) (10,806,493) (13,812,984) ------------ ----------- ------------- Net cash provided by (used in) financing activities.................................... 10,844,148 20,794,125 (5,932,356) ------------ ----------- -------------
INCREASE (DECREASE) IN CASH............................................................ (2,856,429) 4,021,839 (2,218,201) CASH AT BEGINNING OF YEAR.............................................................. 4,021,839 0 2,218,201 ------------ ----------- ------------- CASH AT END OF YEAR....................................................................$ 1,165,410 $ 4,021,839 $ 0 ============ =========== =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year: Income taxes....................................................................$ 0 $ 0 $ 350,000
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Acquisitions and bulk reinsurance assumptions: Assets acquired................................................................. $ 247,894,180 Liabilities assumed............................................................. (380,405,180) --------------- Net............................................................................. $ (132,511,000) ===============
See notes to financial statements.
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
Note A-- SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION The accompanying financial statements of Protective Life and Annuity Insurance Company ("the Company") are prepared on the basis of accounting principles generally accepted in the United States of America. Such accounting principles differ from statutory reporting practices used by insurance companies in reporting to state regulatory authorities. (See also Note B.)
The Company was founded in 1978 as American Foundation Life Insurance Company. Effective March 1, 1999, the Company's name was changed to Protective Life and Annuity Insurance Company. Since 1983, all outstanding shares of the Company's common stock have been owned by Protective Life Insurance Company ("Protective"), which is a wholly-owned subsidiary of Protective Life Corporation ("PLC"), an insurance holding company domiciled in the state of Delaware. All outstanding shares of the Company's preferred stock are owned by PLC.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make various estimates that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities, as well as the reported amounts of revenues and expenses. Actual results could differ from these estimates.
NATURE OF OPERATIONS The Company, since it is licensed in the State of New York, is the entity through which PLC markets, distributes, and services insurance and annuity products in New York. The operating results of companies in the insurance industry have historically been subject to significant fluctuations due to changing competition, economic conditions, interest rates, investment performance, insurance ratings, and other factors.
RECENTLY ISSUED ACCOUNTING STANDARDS In 1999, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise," and Statement of Position 98-1, "Accounting for the Costs of Computer software Developed or Obtained for Internal Use," and Statement of Positions 97-3, "Accounting by Insurance and Other Enterprises for Insurance Related Assessments" issued by the American Institute of Certified Public Accountants. The adoption of these accounting standards did not have a material effect on the Company's financial statements.
The Financial Accounting Standards Board (FASB) has issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." Effective January 1, 2001, SFAS No. 133 (as amended by SFAS Nos. 137 and 138) requires the Company to record derivative financial instruments, including certain derivative instruments embedded in other contracts, on its balance sheet and to carry such derivatives at fair value. Derivatives that are not designated to be part of a qualifying hedging relationship must be adjusted to fair value each period through net income. If the derivative is a hedge, its change in fair value is either offset against the change in fair value of the hedged item through net income or recorded in share-owners' equity until the hedged item is recognized in net income. The fair value of derivatives increases or decreases as interest rates and general economic conditions change. The adoption of SFAS No. 133 on January 1, 2001, will result in a cumulative after-tax charge to net income of approximately $0.3 million and a cumulative after-tax increase to other comprehensive income of approximately $0.3 million in the first quarter of fiscal 2001. The adoption will also impact assets and liabilities recorded on the balance sheet. Prospectively, the adoption may introduce volatility into the Company's reported net income and other comprehensive income depending on future market conditions and the Company's hedging activities.
Note A-- SIGNIFICANT ACCOUNTING POLICIES (Continued)
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of SFAS No. 125". SFAS No. 140 revises the standards of accounting for securitizations and other transfers of financial assets. The statement is effective for recognition and reclassification of collateral relating to securitization transactions and collateral for fiscal years ended after December 15, 2000. This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001.
INVESTMENTS The Company has classified all of its investments in fixed maturities and short-term investments as "available for sale."
Investments are reported on the following bases less allowances for uncollectible amounts on investments, if applicable:
• Fixed maturities (bonds and redeemable preferred stocks) - at current market value. Where market values are unavailable, the Company obtains estimates from independent pricing services or estimates market value based upon a comparison to quoted issues of the same issuer or issues of other issuers with similar terms and risk characteristics.
• Mortgage loans - at unpaid balances, adjusted for loan origination costs, net of fees, and amortization of premium or discount.
• Investment real estate - at cost, less allowances for depreciation computed on the straight-line method. With respect to real estate acquired through foreclosure, cost is the lesser of the loan balance plus foreclosure costs or appraised value.
•Policy loans- at unpaid balances.
• Short-term investments - at cost, which approximates current market value.
Substantially all short-term investments have maturities of three months or less at the time of acquisition.
As prescribed by SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” certain investments are recorded at their market values with the resulting unrealized gains and losses, net of income tax, reported as a component of share-owners’ equity. The market values of fixed maturities increase or decrease as interest rates fall or rise. Therefore, although the application of SFAS No. 115 does not affect the Company’s operations, its reported share-owners’ equity will fluctuate significantly as interest rates change.
Note A-- SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company's balance sheets at December 31, prepared on the basis of reporting investments at amortized cost rather than at market values, are as follows:
2000 1999 ------------- -----------
Total investments..................................... $490,073,836 $451,389,804 Deferred policy acquisition costs..................... 123,620,437 127,792,025 All other assets...................................... 44,233,429 47,769,637 -------------- ------------- $657,927,702 $626,951,466 ============== =============
Deferred income taxes................................. $ 10,823,740 $ 6,218,296 All other liabilities................................. 524,467,305 494,090,181 -------------- ------------- 535,291,045 500,308,477 Share-owners' equity.................................. 122,636,657 126,642,989 -------------- ------------- $657,927,702 $626,951,466 ============== =============
Realized gains and losses on sales of investments are recognized in net income using the specific identification basis.
CASH Cash includes all demand deposits reduced by the amount of outstanding checks and drafts. The Company has deposits with certain financial institutions which exceed federally insured limits. The Company has reviewed the credit worthiness of these financial institutions and believes there is minimal risk of a material loss.
DEFERRED POLICY ACQUISITION COSTS Commissions and other costs of acquiring traditional life and health insurance, credit insurance, universal life insurance, and investment products that vary with and are primarily related to the production of new business have been deferred. Traditional life and health insurance acquisition costs are being amortized over the premium-payment period of the related policies in proportion to the ratio of annual premium income to the present value of the total anticipated premium income. Credit insurance acquisition costs are being amortized in proportion to earned premium. Acquisition costs for universal life and investment products are amortized over the lives of the policies in relation to the present value of estimated gross profits before amortization. Under SFAS No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments," the Company makes certain assumptions regarding the mortality, persistency, expenses, and interest rates it expects to experience in future periods. These assumptions are to be best estimates and are to be periodically updated whenever actual experience and/or expectations for the future change from that assumed. Additionally, relating to SFAS No. 115, these costs have been adjusted by an amount equal to the amortization that would have been recorded if unrealized gains or losses on investments associated with the Company's universal life and investment products had been realized.
The cost to acquire blocks of insurance representing the present value of future profits from such blocks of insurance is also included in deferred policy acquisition costs. The Company amortizes the present value of future profits over the premium payment period, including accrued interest of up to approximately 8.0%. The unamortized present value of future profits was approximately $119.8 million and $125.6 million at December 31, 2000 and 1999, respectively. During 2000, $5.8 million of present value of future profits was amortized. No amounts were capitalized during 2000. During 1999, $6.4 million of present value of future profits was amortized and $0.8 million was capitalized.
SEPARATE ACCOUNTS The assets and liabilities related to separate accounts in which the Company does not bear the investment risk are valued at market and reported separately as assets and liabilities related to separate accounts in the accompanying financial statements.
Note A-- SIGNIFICANT ACCOUNTING POLICIES (Continued)
REVENUES AND BENEFITS EXPENSE
Traditional Life, Health, and Credit Insurance Products - Traditional life insurance products consist principally of those products with fixed and guaranteed premiums and benefits and include whole life insurance policies, term and term-like life insurance policies, limited-payment life insurance policies, and certain annuities with life contingencies. Life insurance and immediate annuity premiums are recognized as revenue when due. Health and credit insurance premiums are recognized as revenue over the terms of the policies. Benefits and expenses are associated with earned premiums so that profits are recognized over the life of the contracts. This is accomplished by means of the provision for liabilities for future policy benefits and the amortization of deferred policy acquisition costs.
Liabilities for future policy benefits on traditional life insurance products have been computed using a net level method including assumptions as to investment yields, mortality, persistency, and other assumptions based on the Company’s experience, modified as necessary to reflect anticipated trends and to include provisions for possible adverse deviation. Reserve investment yield assumptions are graded and range from 2.5 to 7.0%. The liability for future policy benefits and claims on traditional life, health, and credit insurance products includes estimated unpaid claims that have been reported to the Company and claims incurred but not yet reported. Policy claims are charged to expense in the period in which the claims are incurred.
Activity in the liability for unpaid claims is summarized as follows:
2000 1999 1998 ----------- ---------- ---------
Balance beginning of year................................ $ 9,557,627 $4,089,659 $3,724,904 Less reinsurance..................................... 4,924,705 494,064 203,199 ----------- ----------- ----------
Net balance beginning of year............................ 4,632,922 3,595,595 3,521,705 ----------- ----------- ----------
Incurred related to: Current year............................................. 11,780,396 10,485,712 7,178,869 Prior year............................................... (213,798) (501,227) (173,472) ------------ ----------- ---------- Total incurred....................................... 11,566,598 9,984,485 7,005,397 ------------ ----------- ----------
Acquisitions and reserve transfers................... 338,940
Paid related to: Current year............................................. 9,504,618 8,999,287 5,904,526 Prior year............................................... 1,276,856 286,811 1,026,981 ------------ ------------ ---------- Total paid........................................... 10,781,474 9,286,098 6,931,507 ------------ ------------ ----------
Net balance end of year.................................. 5,418,046 4,632,922 3,595,595 Plus reinsurance..................................... 1,954,392 4,924,705 494,064 ----------- ------------ ---------- Balance end of year...................................... $ 7,372,438 $9,557,627 $4,089,659 =========== ============ ===========
Universal Life and Investment Products - Universal life and investment products include universal life insurance, deferred annuities, and annuities without life contingencies. Premiums and policy fees for universal life and investment products consist of policy fees that have been assessed against policy account balances for the costs of insurance, policy administration, and surrenders. Benefit reserves for universal life and investment products represent policy account balances before applicable surrender charges plus certain deferred policy initiation fees that are recognized in income over the term of the policies. Policy benefits and claims that are charged to expense include benefit claims incurred in the period in excess of related policy account balances and interest credited to policy account balances. Interest credit rates for universal life and investment products ranged from 3.6% to 9.4% in 2000.
The Company’s accounting policies with respect to variable universal life and variable annuities are identical except that policy account balances (excluding account balances that earn a fixed rate) are valued at market and reported as components of assets and liabilities related to separate accounts.
Note A-- SIGNIFICANT ACCOUNTING POLICIES (Continued)
INCOME TAXES The Company uses the asset and liability method of accounting for income taxes. Income tax provisions are generally based on income reported for financial statement purposes. 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 deferral of policy acquisition costs and the provision for future policy benefits and expenses.
Note B-- RECONCILIATION WITH STATUTORY REPORTING PRACTICES
Financial statements prepared in conformity with accounting principles generally accepted in the United States of America differ in some respects from the statutory accounting practices prescribed or permitted by insurance regulatory authorities. The most significant differences are as follows: (a) acquisition costs of obtaining new business are deferred and amortized over the approximate life of the policies rather than charged to operations as incurred; (b) benefit liabilities are computed using a net level method and are based on realistic estimates of expected mortality, interest, and withdrawals as adjusted to provide for possible unfavorable deviation from such assumptions; (c) deferred income taxes are provided for temporary differences between financial and taxable earnings; (d) the Asset Valuation Reserve and Interest Maintenance Reserve are restored to share-owners’ equity; (e) agents’ debit balances and prepaid expenses are reported as assets rather than being charged directly to surplus (referred to as nonadmitted items); (f) certain items of interest income, such as mortgage and bond discounts, are amortized differently; and (g) bonds are recorded at their market values instead of amortized cost.
The reconciliations of net income and share-owners’ equity prepared in conformity with statutory reporting practices to that reported in the accompanying financial statements are as follows:
Net Income Share-Owners' Equity ----------------------------------------------------------------------------------
2000 1999 1998 2000 1999 1998 -------------- ------------ ---------- ------------ ----------- -----------
In conformity with statutory reporting practices: $13,006,859 $12,659,788 $ 5,365,091 $ 31,878,162 $ 32,146,507 $ 26,256,416 Additions (deductions) by adjustment: Deferred policy acquisition costs, net of amortization............... (4,700,240) (6,133,391) (1,711,138) 128,228,360 127,792,025 133,275,451 Deferred income tax................. (4,605,444) (3,656,012) (938,986) (9,063,941) (109,523) (7,305,381) Asset Valuation Reserve............. 2,797,912 2,051,489 1,334,584 Interest Maintenance Reserve........ 118,604 93,585 (82,982) 247,870 366,474 460,059 Nonadmitted items................... 25,902 26,068 15,671 Other timing and valuation adjustments...................... 4,923,889 6,437,203 (217,447) (34,745,806) (46,974,915) (22,798,183) --------------- ----------- ----------- ------------- ------------ ------------ In conformity with generally accepted accounting principles $ 8,743,668 $ 9,401,173 $ 2,414,538 $119,368,459 $115,298,125 $131,238,617 =============== ========== ============ ============= ============ ============
As of December 31, 2000, the Company had on deposit with regulatory authorities, fixed maturity and short-term investments with a market value of approximately $7.5 million.
The National Association of Insurance Commissioners has adopted the Codification of Statutory Accounting Principles (Codification). Codification changes current statutory accounting rules in several areas and is effective January 1, 2001. Although the Company has not estimated the potential effect, it does not believe Codification will have a material effect on the financial position, results of operations, or liquidity of the Company.
Note C-- INVESTMENT OPERATIONS
Major categories of net investment income for the years ended December 31 are summarized as follows:
2000 1999 1998 ------------- ------------ ------------
Fixed maturities................................... $28,814,204 $25,258,034 $ 7,525,336 Mortgage loans..................................... 314,376 89,178 952,437 Investment real estate............................ 211,521 15,713 72,318 Policy loans...................................... 3,625,750 4,362,037 656,623 Other, principally short-term investments.......... 556,879 458,761 2,083,693 ------------ ------------ ------------- 33,522,730 30,183,723 11,290,407 Investment expenses............................... (1,830,233) (1,468,772) (612,241) ------------- ------------ ------------- $31,692,497 $28,714,951 $ 10,678,166 ============= ============ =============
Note C-- INVESTMENT OPERATIONS ( Continued)
Realized investment gains (losses) for the years ended December 31 are summarized as follows:
2000 1999 1998 ----------- ------------ -----------
Fixed maturities.................................... $ (70,176) $ 194,374 $ 87,677 Mortgage loans and other investments................ 112,324 (104,824) 40,092 ---------- ------------ ----------- $ 42,148 $ 89,550 $ 127,769 =========== ============ ===========
The Company recognizes certain permanent impairments through charges to an allowance for uncollectible amounts on investments. The allowance totaled $500,000 at December 31, 2000 and 1999. Additions and reductions to the allowance are included in realized investment gains (losses). There were no such additions/reductions to the allowance in 2000 or 1999. Without such additions/reductions, the Company had net realized investment gains of $627,769 in 1998.
In 2000, gross gains on the sale of investments available for sale (fixed maturities and short-term investments) were approximately $27,500 and gross losses were approximately $97,700. In 1999, gross gains were approximately $298,700 and gross losses were approximately $104,300. In 1998, gross gains were approximately $600,000 and gross losses were approximately $500,000.
The amortized cost and estimated market values of the Company’s investments classified as available for sale at December 31 are as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Market 2000 Cost Gains Losses Values ---------- ------------- ------------ ------------ -----------
Fixed maturities: Bonds: Mortgage-backed securities.................. $ 4,979,867 $ 125,349 $ 0 $ 5,105,216 United States Government and authorities................................. 8,108,623 229,091 2,534 8,335,180 States, municipalities, and political subdivisions...................... 3,035,053 26,882 0 3,061,935 Public utilities............................ 68,417,417 811,070 1,404,149 67,824,338 Convertibles and bonds with warrants.................................... 689,811 0 152,561 537,250 All other corporate bonds................... 343,161,828 3,187,729 12,456,797 333,892,760 --------------- ------------ ----------- ----------- 428,392,599 4,380,121 14,016,041 418,756,679 Short-term investments.............................. 4,000,000 0 0 4,000,000 --------------- ------------ ----------- ------------ $ 432,392,599 $ 4,380,121 $ 14,016,041 $ 422,756,679 =============== ============ =========== ============
Gross Gross Estimated Amortized Unrealized Unrealized Market 1999 Cost Gains Losses Values ---------- --------------- ------------ ------------ -----------
Fixed maturities: Bonds: Mortgage-backed securities................. $ 6,008,883 $ 74,844 $ 34,384 $ 6,049,343 United States Government and authorities................................ 10,206,255 52,292 238,867 10,019,680 States, municipalities, and political subdivisions...................... 3,056,009 0 26,039 3,029,970 Public utilities........................... 54,683,099 120,250 2,193,490 52,609,859 Convertibles and bonds with warrants.................................... 694,978 0 155,978 539,000 All other corporate bonds................... 309,642,713 71,357 15,123,622 294,590,448 --------------- ------------ ------------ ------------ 384,291,937 318,743 17,772,380 366,838,300 Short-term investments............................. 7,493,877 0 0 7,493,877 --------------- ------------ ------------ ------------- $ 391,785,814 $ 318,743 $17,772,380 $374,332,177 =============== ============ ============ =============
Note C-- INVESTMENT OPERATIONS (Continued)
The amortized cost and estimated market value of fixed maturities at December 31, by expected maturity, are shown below. Expected maturities are derived from rates of prepayment that may differ from actual rates of prepayment.
Estimated Amortized Market Cost Values --------------- -------------- ------------ Due in one year or less.......................... $ 22,378,168 $ 22,297,943 Due after one year through five years............ 242,691,368 241,833,504 Due after five years through ten years........... 96,301,480 93,244,384 Due after ten years.............................. 67,021,583 61,380,848 --------------- -------------- $ 428,392,599 $ 418,756,679 =============== ==============
Estimated Amortized Market Cost Values --------------- -------------- ------------ Due in one year or less.......................... $ 11,793,662 $ 11,745,441 Due after one year through five years............ 188,297,459 184,541,652 Due after five years through ten years........... 117,246,221 110,568,151 Due after ten years.............................. 66,954,595 59,983,056 ---------------- -------------- $ 384,291,937 $ 366,838,300 ================ ==============
At December 31, 2000 and 1999, the Company had bonds which were rated less than investment grade of $11.6 million and $11.9 million, respectively, having an amortized cost of $13.7 million and $12.7 million, respectively. Approximately $53.8 million of bonds are not publicly traded.
The change in unrealized gains (losses), net of income tax on fixed maturities for the years ended December 31 is summarized as follows:
2000 1999 1998 -------- ------- --------
Fixed maturities....................................... $5,081,516 $(20,153,473) $8,099,422
At December 31, 2000, all of the Company’s mortgage loans were commercial loans of which 61% were retail, 38% were office buildings, and 1% other. The Company specializes in making mortgage loans on either credit-oriented or credit-anchored commercial properties, most of which are strip shopping centers in smaller towns and cities. All of the mortgage loans are on properties located in the following states listed in decreasing order of significance: Tennessee, Alabama, Florida, Colorado, Texas and Arkansas.
Some of the mortgage loans have call provisions. Assuming these loans are called at their next call dates, approximately $0.2 million would become due in 2001.
At December 31, 2000, the average mortgage loan was $0.3 million, and the weighted average interest rate was 8.4%. The largest single mortgage loan was $1.3 million.
At December 31, 2000, the Company’s problem mortgage loans (over ninety days past due) and foreclosed properties totaled less than $0.1 million. At December 31, 1999, the Company’s problem mortgage loans and foreclosed properties totaled $1.1 million. Since the Company’s mortgage loans are collateralized by real estate, any assessment of impairment is based upon the estimated fair value of the real estate. Based on the Company’s evaluation of its mortgage loan portfolio, the Company does not expect any material losses on its mortgage loans.
Policy loan interest rates generally range from 4.0% to 8.0%.
Note D-- FEDERAL INCOME TAXES
The Company’s effective income tax rate varied from the maximum federal income tax rate as follows:
2000 1999 1998 ------- -------- ------- Statutory federal income tax rate applied to pretax income............ 35.0% 35.0% 35.0% Tax-exempt interest................................................... (0.2) (4.0) Other adjustments..................................................... (0.5) (6.8) (3.0) ------- -------- ------- Effective income tax rate............................................. 34.5% 28.0% 28.0% ======= ======== =======
The provision for federal income tax differs from amounts currently payable due to certain items reported for financial statement purposes in periods which differ from those in which they are reported for income tax purposes.
Details of the deferred income tax provision for the years ended December 31 are as follows:
2000 1999 1998 ------------- ------------ ------------- Deferred policy acquisition costs..................................... $ 6,202,088 $ 5,095,750 $ 14,616,912 Benefit and other policy liability changes............................ (3,129,276) 395,046 (11,991,104) Temporary differences of investment income............................ 1,532,632 (1,834,784) 398,620 Other items........................................................... - - (2,085,442) ------------- ------------ -------------- $ 4,605,444 $ 3,656,012 $ 938,986 ============= ============ ==============
The components of the Company’s net deferred income tax liability as of December 31 were as follows:
2000 1999 ---------- ---------
Deferred income tax assets: Policy and policyholder liability reserves.......... $15,126,970 $11,997,694 Unrealized loss on investments...................... 1,528,259 7,409,865 -------------- ------------ 16,655,229 19,407,559 ============== ============ Deferred income tax liabilities: Deferred policy acquisition costs................... 25,719,170 19,517,082 -------------- ------------ 25,719,170 19,517,082 -------------- ------------ Net deferred income tax liability................... $ 9,063,941 $ 109,523 ============== ============
The Company's income tax returns are included in the consolidated income tax returns of PLC. The allocation of income tax liabilities among affiliates is based upon separate income tax return calculations. At December 31, 2000 and 1999 no amounts were payable to PLC for income tax liabilities.
Note E-- RECENT ACQUISITIONS
In October 1998, the Company coinsured a block of life insurance policies from Lincoln National Corporation. In September 1999, the Company recaptured a block of credit life and disability policies which it had previously ceded.
These transactions have been accounted for as purchases, and the results of the transactions have been included in the accompanying financial statements since the effective dates of the agreements.
Note F-- COMMITMENTS AND CONTINGENT LIABILITIES
Under insurance guaranty fund laws, in most states, insurance companies doing business therein can be assessed up to prescribed limits for policyholder losses incurred by insolvent companies. The Company does not believe such assessments will be materially different from amounts already provided for in the financial statements. Most of these laws do provide, however, that an assessment may be excused or deferred if it would threaten an insurer’s own financial strength.
Note F-- COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
A number of civil jury verdicts have been returned against insurers and other providers of financial services involving sales practices, alleged agent misconduct, failure to properly supervise representatives, and other matters. Increasingly these lawsuits have resulted in the award of substantial judgments that are disproportionate to the actual damages, including material amounts of punitive damages. In some states, including Alabama (where the Company maintains its headquarters), juries have substantial discretion in awarding punitive and non-economic compensatory damages which creates the potential for unpredictable material adverse judgments in any given lawsuit. In addition, in some class action and other lawsuits, companies have made material settlement payments. The Company, like other financial service companies, in the ordinary course of business, is involved in such litigation, or alternatively, in arbitration. Although the outcome of any such litigation or arbitration cannot be predicted, the Company believes that at the present time there are no pending or threatened lawsuits that are reasonably likely to have a material adverse effect on the financial position, results of operations, or liquidity of the Company.
Note G-- SHARE-OWNERS' EQUITY AND RESTRICTIONS
Dividends on common stock are noncumulative and are paid as determined by the Board of Directors. At December 31, 2000, approximately $96.6 million of share-owners’ equity excluding net unrealized gains and losses represented net assets of the Company that cannot be transferred to Protective. In general, dividends up to specified levels are considered ordinary and may be paid thirty days after written notice to the insurance commissioner of the state of domicile unless such commissioner objects to the dividend prior to the expiration of such period. Dividends in larger amounts are considered extraordinary and are subject to affirmative prior approval by such commissioner. The maximum amount that would qualify as ordinary dividends to Protective by the Company in 2001 is estimated to be $12.9 million.
Note H-- PREFERRED STOCK
Prior to November 1998, the Company’s preferred stock had a provision for an annual minimum cumulative dividend, when and if declared, of $50.00 per share, and additional dividends to the extent the Company’s statutory earnings for the immediately preceding year exceeded $1.0 million. The minimum dividend and any accumulation was to be paid before any dividend on any other class of capital stock was paid. The additional dividends were noncumulative and were in preference to any other dividend on any other class of capital stock. Dividends of $100,000 were declared and paid in 1998 on the preferred stock. Effective November 3, 1998, the Company’s articles of incorporation were amended such that the provision for an annual minimum cumulative dividend was removed. No preferred dividends were paid in either 2000 or 1999.
Note I-- RELATED PARTY MATTERS
The Company has no employees; therefore, the Company purchases data processing, legal, investment, and other management services from PLC and other affiliates. The cost of such services was $7.8 million in 2000, $6.3 million in 1999, and $1.2 million in 1998.
Receivables from and payables to related parties consisted of receivables from and payables to affiliates under control of PLC in the amount of a $1,666,742 payable at December 31, 2000 and a $5,582,845 receivable at December 31, 1999. The Company routinely receives from or pays to affiliates under the control of PLC reimbursements for expenses incurred on one another’s behalf. Receivables and payables among affiliates are generally settled monthly.
Protective and the Company entered into a guaranty agreement on October 27, 1993, whereby Protective guaranteed the payment of all insurance policy claims made by the holders or beneficiaries of any of the Company’s policies which were issued after the date of the guaranty agreement in accordance with the terms of said policies. Total liabilities for policies covered by this agreement were $43.9 million and $10.2 million at December 31, 2000 and 1999, respectively.
Note I-- RELATED PARTY MATTERS (Continued)
Protective and the Company also entered into a guaranty agreement on December 31, 1995, whereby Protective guaranteed that the Company will perform all of the obligations of Protective pursuant to the terms and conditions of an indemnity coinsurance agreement between Protective and an unaffiliated life insurance company. Total liabilities related to this coinsurance agreement were $10.4 million and $10.3 million at December 31, 2000 and 1999, respectively.
Note J-- OPERATING SEGMENTS
PLC, through its subsidiaries, operates divisions each having a strategic focus which can be grouped into three general categories: life insurance, specialty insurance products, and retirement savings and investment products. Each division has a senior officer of Protective responsible for its operations. A division is generally distinguished by products and/or channels of distribution. A brief description of each division the Company operates in follows.
Life Insurance
The Acquisitions Division focuses on acquiring, converting, and servicing policies acquired from other companies. The Division’s primary focus is on life insurance policies sold to individuals.
Specialty Insurance Products The Dental Benefits Division’s primary focus is on indemnity and prepaid dental products.
The Financial Institutions Division specializes in marketing credit life and disability insurance products through banks, consumer finance companies and automobile dealers. The Division also offers automobile and recreational marine extended service contracts.
Retirement Savings and Investment Products
The Investment Products Division manufactures, sells, and supports fixed and variable annuity products. These products are primarily sold through stockbrokers, but are also sold through financial institutions and the Individual Life Division’s sales force.
Corporate and Other
The Company has an additional business segment herein referred to as Corporate and Other. The Corporate and Other segment primarily consists of net investment income and expenses not attributable to the Divisions above (including net investment income on unallocated capital).
The Company uses the same accounting policies and procedures to measure operating segment income and assets as it uses to measure its consolidated net income and assets. Operating segment income is generally income before income tax. Premiums and policy fees, other income, benefits and settlement expenses, and amortization of deferred policy acquisition costs are attributed directly to each operating segment. Net investment income is allocated based on directly related assets required for transacting the business of that segment. Realized investment gains (losses) and other operating expenses are allocated to the segments in a manner which most appropriately reflects the operations of that segment. Unallocated realized investment gains (losses) are deemed not to be associated with any specific segment.
Assets are allocated based on policy liabilities and deferred policy acquisition costs directly attributable to each segment.
There are no significant intersegment transactions. Note J-- OPERATING SEGMENTS (Continued)
The following table sets forth total operating segment income and assets for the periods shown. Adjustments represent the inclusion of unallocated realized investment gains (losses), the reclassification and tax effecting of pretax minority interest, and the recognition of income tax expense. There are no asset adjustments.
Dental Financial Investment Corporate Operating Segment Income Acquisitions Benefits Institutions Products and Other Adjustments(1) Total ------------------------- ------------- ----------- ------------ ----------- ----------- ------------- ------------
---- Premiums and policy fees, net....... $27,443,897 $ 647,946 $2,997,130 $ 116,106 $31,205,079 Net investment income............... 29,275,899 6,049 628,572 1,416,117 $ 365,860 31,692,497 Realized investment gains........... $ 42,148 42,148 Other income (loss)................. (4,486) (2,065) (6,551) ------------- ----------- ------------ ----------- ----------- ------------- ----------- Total revenues.............. 56,715,310 653,995 3,625,702 1,530,158 365,860 42,148 62,933,173 ------------- ----------- ------------ ----------- ----------- ------------- ----------- Benefits and settlement expenses.... 29,247,353 737,005 2,250,237 1,267,445 33,502,040 Amortization of deferred policy acquisition costs........... 5,871,420 714,278 179,748 6,765,446 Other operating expenses............ 9,991,067 (5,138) 57,601 (787,364) 60,409 9,316,575 ------------- ----------- ------------ ----------- ----------- ------------- ----------- Total benefits and expenses. 45,109,840 731,867 3,022,116 659,829 60,409 49,584,061 ------------- ----------- ------------ ----------- ----------- ------------- ----------- Income before income tax............ 11,605,470 (77,872) 603,586 870,329 305,451 42,148 13,349,112 Income tax expense.................. 4,605,444 4,605,444 ------------- ----------- Net income ....................... $ 8,743,668 ===========
---- Premiums and policy fees, net....... $32,290,715 $1,750,639 $2,059,410 $ 30,202 $36,130,966 Net investment income............... 27,604,825 442,048 269,670 250,000 $ 148,408 28,714,951 Realized investment gains........... $ 89,550 89,550 Other income (loss)................ (8,718) 89,757 9,250 90,289 ------------- ----------- ------------ ----------- ---------- ------------- ----------- Total revenues.............. 59,886,822 2,192,687 2,418,837 289,452 148,408 89,550 65,025,756 ------------- ----------- ------------ ----------- ---------- ------------- ----------- Benefits and settlement expenses.... 29,333,105 1,657,675 974,013 242,354 32,207,147 Amortization of deferred policy acquisition costs........... 6,334,661 500,831 6,835,492 Other operating expenses............ 12,059,458 45,833 33,574 761,937 25,130 12,925,932 ------------- ----------- ------------ ----------- ---------- ------------- ----------- Total benefits and expenses. 47,727,224 1,703,508 1,508,418 1,004,291 25,130 51,968,571 ------------- ----------- ------------ ----------- ---------- ------------- ----------- Income before income tax............ 12,159,598 489,179 910,419 (714,839) 123,278 89,550 13,057,185 Income tax expense.................. 3,656,012 3,656,012 ------------- ----------- Net income ....................... $ 9,401,173 =========== ----- Premiums and policy fees, net....... $ 7,414,597 $1,503,364 $ 848,682 $ 501 $ 9,767,144 Net investment income............... 11,071,366 718,492 136,472 $(1,248,164) 10,678,166 Realized investment gains........... $ 127,769 127,769 Other income (loss)................. (598) (598) ------------- ----------- ------------ ----------- ---------- ------------- ----------- Total revenues.............. 18,485,963 2,221,856 985,154 (97) (1,248,164) 127,769 20,572,481 ------------- ----------- ------------ ----------- ---------- ------------- ----------- Benefits and settlement expenses.... 7,594,508 1,340,838 316,900 8,754 9,261,000 Amortization of deferred policy acquisition costs........... 1,535,385 175,753 1,711,138 Other operating expenses............ 5,947,115 144,257 105,307 50,140 6,246,819 ------------- ----------- ------------ ----------- ---------- ------------- ----------- Total benefits and expenses. 15,077,008 1,485,095 597,960 58,894 17,218,957 ------------- ----------- ------------ ----------- ---------- ------------- ----------- Income before income tax............ 3,408,955 736,761 387,194 (58,991) (1,248,164) 127,769 3,353,524 Income tax expense.................. 938,986 938,986 ------------- ---------- Net income ....................... $ 2,414,538 ==========
(1) Adjustments represent the inclusion of unallocated realized investment gains (losses) and the recognition of income tax expense. There are no asset adjustments.
Note J-- OPERATING SEGMENTS (continued) Dental Financial Investment Corporate Acquisitions Benefits Institutions Products and Other Total ------------ ----------- ------------ ------------ ------------ ----------
Operating Segment Assets ----- Investments and other assets........ $453,999,198 $4,034,632 $11,462,251 $ 25,799,102 $29,376,162 $524,671,345 Deferred policy acquisition costs... 124,984,368 1,596,654 1,647,338 128,228,360 ------------- ----------- ------------ ------------ ----------- ------------ Total assets ....................... $578,983,566 $4,034,632 $13,058,905 $ 27,446,440 $29,376,162 $652,899,705 ============= =========== ============ ============ =========== ============
----- Investments and other assets........ $424,265,907 $3,871,844 $11,815,617 $ 9,812,824 $31,939,612 $481,705,804 Deferred policy acquisition costs... 126,247,865 1,544,160 127,792,025 ------------- ---------- ----------- ------------ ----------- ------------ Total assets ....................... $550,513,772 $3,871,844 $13,359,777 $ 9,812,824 $31,939,612 $609,497,829 ============= ========== =========== ============ =========== ============
Investments and other assets........ $434,928,613 $6,642,241 $ 2,658,668 $ 774,504 $26,350,089 $471,354,115 Deferred policy acquisition costs... 132,582,526 692,925 133,275,451 ------------- ---------- ------------ ------------ ----------- ------------ Total assets ....................... $567,511,139 $6,642,241 $ 3,351,593 $ 774,504 $26,350,089 $604,629,566 ============= ========== ============ ============ =========== ============
Note K-- REINSURANCE The Company reinsures certain of its risks with, and assumes risks from, other insurers under yearly renewable term, coinsurance, and modified coinsurance agreements. Under yearly renewable term agreements, the Company generally pays specific premiums to the reinsurer as reimbursement for certain expenses. Coinsurance agreements are accounted for by passing a portion of the risk to the reinsurer. Generally, the reinsurer receives a proportionate part of the premiums less commissions and is liable for a corresponding part of all benefit payments. Modified coinsurance is accounted for similarly to coinsurance except that the liability for future policy benefits is held by the original company, and settlements are made on a net basis between the companies. A substantial portion of the Company’s new life insurance and credit insurance sales is being reinsured. The Company reviews the financial condition of its reinsurers and monitors the amount of reinsurance it has with its reinsurers.
The Company has reinsured approximately $5.3 billion, $5.8 billion, and $7.6 billion in face amount of life insurance risks with other insurers representing $17.4 million, $20.1 million, and $12.6 million of premium income for 2000, 1999, and 1998, respectively. The Company has also reinsured accident and health risks representing $0.7 million, $0.8 million, and $0.9 million of premium income for 2000, 1999, and 1998, respectively. In 2000 and 1999, policy and claim reserves relating to insurance ceded of $21.2 million and $21.9 million respectively are included in reinsurance receivables. Should any of the reinsurers be unable to meet its obligation at the time of the claim, obligation to pay such claim would remain with the Company. At December 31, 2000 and 1999, the Company had paid $2.0 million and $4.9 million, respectively, of ceded benefits which are recoverable from reinsurers.
Approximately 58% and 60% of the reinsurance receivable balances at December 31, 2000 and 1999, respectively, relate to one insurance company rated “A+” (Superior) by the A. M. Best Company, an independent rating organization.
Note L-- ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS The carrying amount and estimated fair values of the Company’s financial instruments at December 31 are as follows:
2000 1999 -------------------------------- ----------------------------
Estimated Estimated Carrying Fair Carrying Fair Amount Values Amount Values ---------- -------------- ----------- ----------- Assets (see Notes A and C): Investments: Fixed maturities................... $418,756,679 $418,756,679 $366,838,300 $366,838,300 Mortgage loans on real estate...... 3,215,344 3,364,675 3,683,311 3,793,364 Short-term investments............. 4,000,000 4,000,000 7,493,877 7,493,877 Cash .................................. 1,165,410 1,165,410 4,021,839 4,021,839 Liabilities (see Note A): Annuity deposits................... 28,059,246 27,507,238 12,253,056 11,925,142
Except as noted below, fair values were estimated using quoted market prices.
The Company estimates the fair value of its mortgage loans using discounted cash flows from the next call date. The Company believes the fair value of its short-term investments approximates book value due to being short-term. The Company estimates the fair value of its annuities using surrender values. The Company believes it is not practicable to determine the fair value of its policy loans since there is no stated maturity, and policy loans are often repaid by reductions to policy benefits.
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
--------------------------------------------------------------------------------------------------------------------------------------------------- COL. A COL. B COL. C COL. D COL. E COL. F COL. G COL. H COL. I COL. J ---------------------------------------------------------------------------------------------------------------------------------------------------
Future Annuity Amortization Deferred Policy Deposits Premiums Benefits of Deferred Policy Benefits and Other and Net and Policy Other Acquisition and Unearned Policyholders' Policy Investment Settlement Acquisition Operating Segment Costs Claims Premiums Funds Fees Income (1) Expenses Costs Expenses (1) ------------ ------------ ------------ ----------- ------------ -------- ------------ ----------- ------------ ------------
Year Ended December 31, 2000: Life Insurance Acquisitions...... $124,984,368 $447,949,295 $ 50,335 $ 4,925,125 $27,443,897 $29,275,899 $29,247,353 $5,871,420 $ 9,991,067 Specialty Insurance Products Dental Benefits... 0 607,136 2,665 3,424,830 647,946 6,049 737,005 0 (5,138) Financial Institutions 1,596,654 3,037,218 8,101,233 323,800 2,997,130 628,572 2,250,237 714,278 57,601 Retirement Savings and Investment Products Investment Products 1,647,338 619,322 0 25,179,780 116,106 1,416,117 1,267,445 179,748 (787,364) Corporate and Other.. 0 0 0 0 0 365,860 0 0 60,409 ------------- ------------ ---------- ----------- ----------- ----------- ----------- ---------- ------------ TOTAL........ $128,228,360 $452,212,971 $8,154,233 $33,853,535 $31,205,079 $31,692,497 $33,502,040 $6,765,446 $ 9,316,575 ============= ============ ========== ============ =========== =========== =========== ========== =========== Year Ended December 31, 1999: Life Insurance Acquisitions...... $126,247,865 $440,688,572 $ 54,704 $ 4,730,918 $32,290,715 $27,604,825 $29,333,105 $6,334,661 $ 12,059,458 Specialty Insurance Products Dental Benefits... 0 105,162 1,242 3,441,818 1,750,639 442,048 1,657,675 0 45,833 Financial Institutions 1,544,160 4,086,816 7,796,478 18,864 2,059,410 269,670 974,013 500,831 33,574 Retirement Savings and Investment Products Investment Products 0 404,423 0 9,471,966 30,202 250,000 242,354 0 761,937 Corporate and Other.. 0 0 0 0 0 148,408 0 0 25,130 ------------ ------------ ---------- ----------- ----------- ----------- ----------- ---------- ----------- TOTAL........ $127,792,025 $445,284,973 $7,852,424 $17,663,566 $36,130,966 $28,714,951 $32,207,147 $6,835,492 $ 12,925,932 ============ ============ ========== =========== =========== =========== =========== ========== ===========
Year Ended December 31, 1998: Life Insurance Acquisitions...... $132,582,526 $439,215,364 $ 54,170 $ 8,600,060 $ 7,414,597 $11,071,366 $ 7,594,508 $1,535,385 $5,947,115 Specialty Insurance Products Dental Benefits... 0 172,903 189 6,445,537 1,503,364 718,492 1,340,838 0 144,257 Financial Institutions 692,925 213,835 2,432,918 0 848,682 136,472 316,900 175,753 105,307 Retirement Savings and Investment Products Investment Products 0 240,000 0 531,751 501 0 8,754 0 50,140 Corporate and Other.. 0 0 0 0 0 (1,248,164) 0 0 0 ------------- ------------ ----------- ----------- ------------ ------------ ----------- ----------- ---------- TOTAL........ $133,275,451 $439,842,102 $ 2,487,277 $15,577,348 $ 9,767,144 $10,678,166 $ 9,261,000 $1,711,138 $6,246,819 ============= ============ =========== =========== ============ ============ =========== =========== ==========
(1) Allocations of Net Investment Income and Other Operating Expenses are based on a number of assumptions and estimates and results would change if different methods were applied.
SCHEDULE IV - REINSURANCE PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
------------------------------------------------------------------------------------------------------------------------------------- COL. A COL. B COL. C COL. D COL. E COL. F -------------------------------------------------------------------------------------------------------------------------------------
Percentage Ceded to Assumed of Amount Gross Other from Other Net Assumed Amount Companies Companies Amount to Net ------------ ------------ ------------- ----------- ------------
Year Ended December 31, 2000: Life insurance in force(1)........................ $ 324,167 $ 5,287,046 $ 6,600,096 $ 1,637,217 403.1% ============= ============= =========== ============ ========
Premiums and policy fees: Life insurance.................................... $ 4,472,372 $17,343,933 $41,747,694 $ 28,876,133 144.6% Accident and health insurance..................... 3,042,534 717,954 4,366 2,328,946 0.2% ------------ ------------ ----------- ------------ TOTAL......................................... $ 7,514,906 $18,061,887 $41,752,060 $ 31,205,079 ============ ============ =========== ============
Year Ended December 31,1999: Life insurance in force(1)........................ $ 308,419 $ 5,833,675 $ 7,260,439 $ 1,735,183 418.4% ============ =========== =========== ============ =========
Premiums and policy fees: Life insurance.................................... $ 7,207,635 $20,061,073 $47,053,071 $ 34,199,633 137.6% Accident and health insurance..................... 2,698,776 797,021 29,578 1,931,333 1.5% ------------ ----------- ----------- ------------ TOTAL......................................... $ 9,906,411 $20,858,094 $47,082,649 $ 36,130,966 ============ =========== =========== ============
Year Ended December 31,1998: Life insurance in force(1)........................ $ 282,231 $ 7,575,418 $ 7,914,524 $ 621,337 1,273.8% =========== =========== =========== ============ =========
Premiums and policy fees: Life insurance.................................... $ 4,195,074 $12,616,610 $17,462,742 $ 9,041,206 193.1% Accident and health insurance...................... 1,542,679 858,678 41,937 725,938 5.8% ----------- ----------- ----------- ------------ TOTAL......................................... $ 5,737,753 $13,475,288 $17,504,679 $ 9,767,144 =========== =========== =========== ============
(1) Dollars in thousands
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures None
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant Not required in accordance with General Instruction I(2)(c).
Item 11.
Item 11. Executive Compensation Not required in accordance with General Instruction I(2)(c).
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Not required in accordance with General Instruction I(2)(c).
Item 13.
Item 13. Certain Relationships and Related Transactions
Not required in accordance with General Instruction I(2)(c).
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) The following documents are filed as part of this report:
1. Financial Statements (Item 8)
2. Financial Statement Schedules (see index annexed)
3. Exhibits:
The exhibits listed in the Exhibit Index on page 32 of this Form 10-K are filed herewith or are incorporated herein by reference. No management contract or compensatory plan or arrangement is required to be filed as an exhibit to this form. The Registrant will furnish a copy of any of the exhibits listed upon the payment of $5.00 per exhibit to cover the cost of the Registrant in furnishing the exhibit.
(b) Reports on Form 8-K:
None
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Birmingham, State of Alabama on March 27, 2001.
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
By: /s/ WAYNE E. STUENKEL March 27, 2001 President
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated:
Signature Title Date
(i) Principal Executive Officer /s/ WAYNE E. STUENKEL President and March 27, 2001 Wayne E. Stuenkel Director
(ii) Principal Accounting Officer /s/ JERRY W. DEFOOR Vice President and Controller, March 27, 2001 Jerry W. DeFoor and Chief Accounting Officer
(iii) Board of Directors:
* Director March 27, 2001 Drayton Nabers, Jr.
* Director March 27, 2001 John D. Johns
* Director March 27, 2001 Richard J. Bielen
* Director March 27, 2001 R. Stephen Briggs
* Director March 27, 2001 Carolyn King
* Director March 27, 2001 Deborah J. Long
* Director March 27, 2001 Jim E. Massengale
* Director March 27, 2001 Steven A. Schultz
* Director March 27, 2001 A. S. Williams III
* Director March 27, 2001 T. Davis Keyes
* Director March 27, 2001 Chris T. Calos
*By: /s/ JERRY W. DEFOOR Jerry W. DeFoor Attorney-in-fact
EXHIBIT INDEX
Item Number Document
* 3 (a) (1) - 1998 Amended and Restated Articles of Incorporation * 3 (a) (2) - Articles of Amendment to 1998 Amended and Restated Articles of Incorporation 3(b) - Amended and Restated Bylaws Effective August 1, 2000 ** 4(a) - Tax-Sheltered Annuity Endorsement ** 4(b) - Qualified Retirement Plan Endorsement ** 4(c) - Individual Retirement Annuity Endorsement *** 4(d) - Group Modified Guaranteed Annuity Contract *** 4(e) - Application for Group Modified Guaranteed Annuity Contract *** 4(f) - Individual Modified Guaranteed Annuity Certificate **** 10 (a) - Guaranty Agreement from Protective Life Insurance Company **** 10 (a) (1) - Amendment to Guaranty Agreement from Protective Life Insurance Company 24 - Power of Attorney 99 - Safe Harbor for Forward-Looking Statements
* Incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998. ** Incorporated herein by reference to the Registrant's Form N-4 Registration Statement, Registration No. 333-41577, filed on December 5, 1997. *** Incorporated herein by reference to the Registrant's Pre-Effective Amendment No. 1 to Form S-1 Registration Statement, Registration No. 333-42425, filed on April 16, 1998. **** Incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999.