CORRESP 1 filename1.htm Response to Comment Letter 8/17/06



                                                               ]
Protective Life Corporation
Post Office Box 2606
Birmingham, AL 35202
205-268-1000

Steven G. Walker
Senior Vice President, Controller
and Chief Accounting Officer
205-268-6775
Fax: 205-268-3541
Toll Free 800-866-3555
Email: steve.walker@protective.com


 
August 17, 2006




Jim B. Rosenberg
Senior Assistant Chief Accountant
Securities and Exchange Commission
100 F Street, NW
Washington, DC 20549

RE: Protective Life Corporation
     Form 10-K for fiscal year ended December 31, 2005
 Form 8-K as filed on June 26, 2006
 File No. 001-11339

Dear Mr. Rosenberg:

This letter provides the response of Protective Life Corporation (“Protective”) to the comments from the staff of the Securities and Exchange Commission (the “Commission”) on the Annual Report on Form 10-K for the year ended December 31, 2005 (“2005 Annual Report”) and on the Current Report on Form 8-K as filed on June 26, 2006 contained in your letter dated August 3, 2006 addressed to Mr. John D. Johns. For your convenience, we have included your comments in bold type along with our responses thereto.

Form 10-K for fiscal year ended December 31, 2005

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations 
 
Comment 1:
 
Your presentation of segment revenues in MD&A appears to be inconsistent with disclosure in Note 9, Operating Segments. For example, in MD&A you disclose the financial measure, “operating revenues”, instead of “revenues” as presented in the consolidated statements of income and Note 9. Revenues for the annuities and stable value segments shown in MD&A differ from the corresponding amounts shown in Note 9. Please provide us a revised discussion in disclosure-type format that removes or explains these inconsistencies. Also, your MD&A excludes a discussion of revenues for the corporate and other segment, which approximated 10% of total revenues. Please provide us a discussion of the changes in corporate and other segment revenues in a disclosure-type format.


Response 1: 

Segment operating revenues represent total revenues excluding net realized investment gains and losses. The following tables reconcile operating revenues to total revenues for the Annuities, Stable Value Products, and Corporate and Other segments. The Company supplementally advises the staff that it will conform its presentation of operating results for the Annuities, Stable Value Products, and Corporate and Other segments to the following format in future filings.

Annuities:

       
   
2005
 
2004
 
2003
 
 
REVENUES
 
(Dollars in thousands)
 
Gross premiums and policy fees
 
$
31,810
 
$
30,341
 
$
26,265
 
Reinsurance ceded
   
0
   
0
   
0
 
Net premiums and policy fees
   
31,810
   
30,341
   
26,265
 
Net investment income
   
218,700
   
210,888
   
224,332
 
Realized gains (losses) - derivatives
   
(351
)
 
0
   
0
 
Other income
   
7,772
   
7,004
   
8,745
 
Total operating revenues
   
257,931
   
248,233
   
259,342
 
Realized gains (losses) - investments
   
30,980
   
9,873
   
22,733
 
Total revenues
   
288,911
   
258,106
   
282,075
 
BENEFITS AND EXPENSES
                   
Benefits and settlement expenses
   
187,791
   
183,271
   
197,955
 
Amortization of deferred policy acquisition costs
   
12,606
   
25,336
   
19,249
 
Other operating expenses
   
25,601
   
23,159
   
28,765
 
Operating benefits and expenses
   
225,998
   
231,766
   
245,969
 
Amortization of DAC related to realized gains (losses) - investments
   
24,906
   
6,935
   
18,947
 
Total benefits and expenses
   
250,904
   
238,701
   
264,916
 
INCOME BEFORE INCOME TAX
   
38,007
   
19,405
   
17,159
 
Less realized gains (losses) - investments
   
30,980
   
9,873
   
22,733
 
Less related amortization of DAC
   
(24,906
)
 
(6,935
)
 
(18,947
)
OPERATING INCOME
 
$
31,933
 
$
16,467
 
$
13,373
 


Stable Value Products:

       
   
2005
 
2004
 
2003
 
 
REVENUES
 
(Dollars in thousands)
 
Net investment income
 
$
310,715
 
$
268,184
 
$
233,104
 
Realized gains (losses)
   
(16,065
)
 
13,225
   
9,756
 
Total revenues
   
294,650
   
281,409
   
242,860
 
BENEFITS AND EXPENSES
                   
Benefits and settlement expenses
   
246,134
   
205,168
   
186,565
 
Amortization of deferred policy acquisition costs
   
4,694
   
3,480
   
2,279
 
Other operating expenses
   
5,089
   
6,377
   
5,349
 
Total benefits and expenses
   
255,917
   
215,025
   
194,193
 
INCOME BEFORE INCOME TAX
   
38,733
   
66,384
   
48,667
 
Less realized gains (losses)
   
(16,065
)
 
13,225
   
9,756
 
OPERATING INCOME
 
$
54,798
 
$
53,159
 
$
38,911
 


Corporate and Other:

       
   
2005
 
2004
 
2003
 
 
REVENUES
 
(Dollars in thousands)
 
Gross premiums and policy fees
 
$
42,441
 
$
48,376
 
$
56,507
 
Reinsurance ceded
   
(173
)
 
(1,017
)
 
(4,229
)
Net premiums and policy fees
   
42,268
   
47,359
   
52,278
 
Net investment income
   
133,638
   
103,514
   
59,283
 
Realized gains (losses) - investments
   
8,684
   
0
   
0
 
Realized gains (losses) - derivatives
   
11,393
   
19,222
   
21,087
 
Other income
   
14,452
   
17,363
   
6,698
 
Total operating revenues
   
210,435
   
187,458
   
139,346
 
Realized gains (losses) - investments
   
26,045
   
6,366
   
26,550
 
Realized gains (losses) - derivatives
   
(42,174
)
 
(790
)
 
(9,512
)
Total revenues
   
194,306
   
193,034
   
156,384
 
BENEFITS AND EXPENSES
                   
Benefits and settlement expenses
   
51,891
   
59,051
   
79,335
 
Amortization of deferred policy acquisition costs
   
4,063
   
4,484
   
5,544
 
Other operating expenses
   
107,252
   
102,363
   
86,419
 
Total benefits and expenses
   
163,206
   
165,898
   
171,298
 
INCOME BEFORE INCOME TAX
   
31,100
   
27,136
   
(14,914
)
Less realized gains (losses) - investments
   
26,045
   
6,366
   
26,550
 
Less Realized gains (losses) - derivatives
   
(42,174
)
 
(790
)
 
(9,512
)
OPERATING INCOME
 
$
47,229
 
$
21,560
 
$
(31,952
)


Operating revenue for the Corporate and Other segment is primarily comprised of net investment income on unallocated capital and net premiums and policy fees related to several small non-strategic lines of business. Net investment income for the Corporate and Other segment increased $30.1 million and $44.2 million for 2005 and 2004, respectively, compared to the prior year periods, while net premiums and policy fees declined $5.1 million and $4.9 million for 2005 and 2004, respectively, compared to the prior year periods.

Approximately $18.4 million of the $30.1 million increase in net investment income in 2005 as compared to 2004 is the result of higher amounts of unallocated capital. A $22.5 million increase in participating income and prepayment fees from mortgages and real estate was partially offset by lower income on trading securities of $10.8 million.

The $44.2 million increase in net investment income in 2004 over 2003 includes higher mark-to-market gains on trading securities of $4.9 million, a $5.0 million increase in prepayment fees from mortgages, and a $9.5 million increase in participating mortgage income. The increases in prepayment fees from mortgages and participating mortgage income reflect the increased transaction activity within the Company’s mortgage portfolio. The remaining $24.8 million increase was primarily the result of an increase in unallocated capital.

The declines in net premiums and policy fees in both 2005 and 2004 compared to the prior year periods are the expected result of the runoff of business in the non-strategic lines of business which are no longer being marketed by the Company.

In addition, the Company supplementally advises the staff that it will provide a discussion of the changes in Corporate and Other segment revenue in future filings when such revenues are material.



Life Marketing

Comment 2:

You state that a portion of allowances for ceded reinsurance are deferred and a portion is recognized immediately. Please provide in disclosure-type format an expanded discussion of how you determine reinsurance allowances that are deferred. Quantify the amount of these allowances, distinguishing between the portion deferred and recognized immediately, for each period presented. Also, quantify the net impact on your operating results from reinsurance ceded activities for each period presented.

Response 2:

The Company's practice is to defer as a part of deferred acquisitions costs (“DAC”) reinsurance allowances in excess of the ultimate allowance. Ultimate reinsurance allowances are defined as the total allowance amount paid by the reinsurer over the lifetime of a universal life policy (or through the end of the level term period for a term policy). This practice is consistent with the Company's practice of capitalizing direct commissions. The following table summarizes reinsurance allowances paid for each period presented, including the portion deferred as a part of DAC and the portion recognized immediately as a reduction of other operating expenses. As the non-deferred portion of reinsurance allowances reduce operating expenses in the period received, these amounts represent a net increase to operating income during that period.

       
Change
 
   
2005
 
2004
 
2003
 
2005
 
2004
 
   
(dollars in thousands)
         
Allowances received
 
$
336,442
 
$
327,988
 
$
314,150
   
2.6
%
 
4.4
%
Less amount deferred
   
(198,817
)
 
(199,766
)
 
(201,289
)
 
(0.5
)
 
0.0
 
Allowances recognized (reduction in other operating expenses)
 
$
137,625
 
$
128,222
 
$
112,861
   
7.3
   
13.6
 

The net positive impact on operating results from reinsurance ceded activities was $21.8 million, $103.6 million, and $35.2 million, for 2005, 2004, and 2003, respectively.



Liquidity and Capital Resources

Contractual Obligations

Comment 3:

“Policyholder obligations” as presented in your table of contractual obligations, total $13,863,096 and appear to approximate “policy liabilities and accruals” in the consolidated balance sheet, which you compute using the net level method. Since this method considers future net premiums in the reserve determination, we are unable to determine if the “policyholder obligation” amounts represent only future payment obligations or an amount reduced by future net premiums which we do not believe would be appropriate given the intent of Item 303(a)(5) of Regulation S-K. Please explain to us in disclosure-type format how you determined the “policyholder obligation” amounts presented in this table. Also, in your response, confirm to us that you will revise the format of this table to the guidance in Item 303(a)(5) by adding a total column and revising the column headings.

Response 3:

The “policyholder obligations” line item in the Company’s contractual obligations table includes future obligations associated with insurance contracts (policy liabilities and accruals), annuity account balances, and liabilities related to separate accounts. “Policyholder obligations” are not reduced by future net premiums. A significant portion of these liabilities reflected on the Company’s balance sheet represent policies and contracts that do not have stated contractual maturity dates and may not result in any future payment obligation. For these policies and contracts (i) we are not currently making payments and will not make payments in the future until the occurrence of an insurable event, such as death or disability or (ii) the occurrence of a payment triggering event, such as a surrender of a policy or contract, which is outside of our control. Contractual obligations associated with annuity account balances and liabilities related to separate accounts are based on current balance sheet values and do not incorporate an expectation of future market growth, interest crediting, or future deposits. With respect to the obligations associated with policy liabilities and accruals, we have made significant assumptions to determine the estimated undiscounted cash flows of these policies and contracts which include mortality, morbidity, and lapse assumptions.

The Company supplementally advises the staff that it will revise the format of its contractual obligations table by adding a total column and revising the column headings in accordance with Item 303(a)(5) of Regulation S-K. The Company will also expand the table footnote disclosures to include the additional information provided above related to the determination of the policyholder obligation amounts.


Form 8-K as filed on June 26, 2006

Exhibit 99.2 Unaudited Pro Forma Financial Information

Comment 4:

Please confirm for us, if true, that in management’s opinion the preliminary allocation of cost is not expected to materially differ from the final allocation. Otherwise, provide us with information that shows the range of possible results. Refer to Rule 11-02(b)(8) of Regulation S-X.

Response 4:

The Company is currently in the process of determining the fair values of the assets and liabilities acquired from the Chase Insurance Group as of July 3, 2006, the acquisition date. Under the purchase method of accounting, this determination of fair values will provide the basis for the allocation of cost to the acquired assets and liabilities. Although this process is incomplete, the Company does not currently believe that its final allocation of cost will differ materially from its preliminary allocation.

Note 3. Pro Forma Adjustments, page 6

Comment 5:

Please provide a schedule showing the calculation of the purchase price and its allocation to specific identifiable tangible and intangible assets and liabilities.

Response 5:

The purchase price of $880.7 million, included in Note 3 - Pro Forma Adjustments, represents the aggregate purchase price derived from the estimated fair value of Chase Insurance Group’s net assets at March 31, 2006, adjusted for pre-closing dividends and estimated transaction costs. The following table reconciles the net purchase price of $880.7 million to the aggregate purchase price of $1,157.3 million:

   
  (Dollars in thousands)
 
Net purchase price
 
$
880,709
 
Estimated transaction costs
   
4,620
 
Pre-closing dividends
   
272,000
 
Aggregate purchase price
 
$
1,157,329
 

The preliminary allocation of the $1,157.3 million aggregate purchase price to the specific identifiable tangible and intangible assets and liabilities is as follows:

   
  (Dollars in thousands)
 
ASSETS
     
Investments
 
$
6,666,691
 
Policy loans
   
383,278
 
Cash
   
481,145
 
Accrued investment income
   
87,411
 
Accounts and premiums receivable, net
   
16,071
 
Reinsurance receivable
   
986,756
 
Value of business acquired
   
934,683
 
Other assets
   
37,289
 
Assets related to separate accounts
   
107,343
 
Total assets
   
9,700,667
 
         
LIABILITIES
       
Policy liabilities and accruals
   
1,332,025
 
Annuity account balances
   
6,722,842
 
Other policyholders’ funds
   
234,568
 
Other liabilities
   
140,106
 
Accrued income taxes
   
6,454
 
Liabilities related to separate accounts
   
107,343
 
Total liabilities
   
8,543,338
 
         
Net assets acquired
 
$
1,157,329
 

Comment 6:

Pro forma footnote disclosures should be sufficiently detailed to understand your basis for the adjustment and how the adjustment was computed. You do not appear to have described the basis for the assumptions involved in determining certain pro forma adjustments. Please explain to us and quantify these assumptions particularly those relating to your determination of VOBA at March 31, 2006, including the pro forma adjustments for related amortization.

Response 6:

The value of business acquired (“VOBA”) reflects the estimated fair value of in-force contracts and represents the portion of the purchase price that is allocated to the value of the right to receive future cash flows from the life insurance and annuity contracts in force at the acquisition date. The historical deferred acquisition costs (“DAC”) of the acquired companies as of March 31, 2006, of $593.8 million ($159.6 million of which was recorded in the deferred policy acquisition costs line on the balance sheet of the acquired companies while $434.1 million was recorded as an offset to policy liabilities and accruals on the balance sheet of the acquired companies) was eliminated through a pro forma adjustment. The pro forma adjustment of $934.7 million to establish VOBA at March 31, 2006, was derived from actuarially determined projections, by each line of business, of future policy and contract charges, premiums, mortality and morbidity, separate account performance, surrenders, operating expenses, investment returns, and other factors.

VOBA is amortized in relation to estimated gross profits or premiums, depending on product type, which the Company estimated would equate to approximately 8% per year. The pro forma adjustment of $2.6 million represents the amortization expense associated with net change in DAC and VOBA of the acquired companies resulting from the fair value adjustments discussed above and the reduction in VOBA resulting from ceding commissions received from the Wilton Re Group. The following table presents the Company’s calculation of the pro forma adjustment for amortization of VOBA:

   
(dollars in thousands)
 
       
Historical DAC of acquired companies (a)
 
$
584,300
 
         
Estimated VOBA (a)
   
843,371
 
Reduced by ceding commissions
   
(127,100
)
Adjusted VOBA
   
716,271
 
         
Net increase in DAC/VOBA of acquired companies
 
$
131,971
 
         
Estimated amortization resulting from net increase in DAC/VOBA:
       
Net increase in DAC/VOBA of acquired companies
 
$
131,971
 
Estimated quarterly amortization at 8% per year
 
$
2,639
 
         
(a) The pro forma condensed combined financial statements were prepared as if the acquisition and the related reinsurance arrangements had been completed as of January 1, 2005, with respect to pro forma results of operations data, and as of March 31, 2006, with respect to the pro forma balance sheet data. As a result, the historical DAC and estimated VOBA amounts used to compute the pro forma adjustment for DAC/VOBA for the results of operations for the three months ended March 31, 2006 differ from the amounts recorded in the pro forma adjustments for the balance sheet as of March 31, 2006.


Comment 7:

Please provide to us an expanded description of pro forma adjustment (c), particularly the $434.1 million adjustment to policy liabilities and accruals. Quantify the amount of pro forma VOBA at March 31, 2006. Explain why VOBA was reduced for the ceding commission received from Wilton Re but not those received from AFLIAC. Quantify the adjustments to sales inducement assets and liabilities and the respective pro forma balance at March 31, 2006.

Response 7:

Pro forma adjustment (c) includes estimated VOBA at March 31, 2006 of $934.7 million. The $434.1 million adjustment to policy liabilities and accruals eliminates the historical VOBA of the acquired companies (as noted in Response 6 above, VOBA was historically recorded as an offset to policy liabilities and accruals by the acquired companies.) VOBA was reduced for the ceding commission received from the Wilton Re Group related to the term and non-term insurance business subject to reinsurance arrangements with the Wilton Re Group. VOBA was not reduced for the ceding commission received from AFLIAC since this ceding commission related to variable annuities which are subject to the accounting guidance under SOP 98-7 “Deposit Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk”. The pro forma adjustment to eliminate the historical deferred sales inducement asset of the acquired companies was $17.7 million and is included in the pro forma adjustment to historical DAC.


Comment 8:

Please provide to us an expanded description of your planned reinsurance arrangements with AFLIAC and Wilton Re, including the effective date and primary terms of these reinsurance arrangements (e.g. retention limits for excess of loss reinsurance). Describe in greater detail your accounting for these reinsurance arrangements (e.g. retention limits for excess of loss reinsurance). Describe in greater detail your accounting for these reinsurance arrangements as reflected in your pro forma adjustments, e.g. adjustments (l), (v), (z) and (ab). For example, you do not describe the basis for recognizing ceding commission revenue or why no adjustment appears to have been made to reinsurance recoverables to reflect these arrangements. Describe your basis for determining these pro forma adjustments, including the applicable technical guidance upon which you relied.

Response 8:

The Company’s subsidiary, Protective Life Insurance Company (“Protective Life”), has separate coinsurance arrangements with Allmerica Financial Life Insurance and Annuity Company ("AFLIAC"), a subsidiary of The Goldman Sachs Group, Inc., and with Wilton Reassurance Company and Wilton Reinsurance Bermuda Limited (collectively, the "Wilton Re Group") as follows:

The reinsurance arrangement with AFLIAC is a modified coinsurance agreement for 100% of the variable annuity business of the Acquired Companies.

The reinsurance arrangement with the Wilton Re Group consists of a co-insurance agreement for up to 49% of the term insurance business of the Acquired Companies and modified coinsurance agreements for up to 49% of the non-term insurance business and 49% of the fixed annuity business of the Acquired Companies. The pro forma adjustments assume that 40% of the term and non-term insurance business will be reinsured and that 49% of the fixed annuity business will be reinsured.

These reinsurance arrangements are expected to be effective as of the closing date of the acquisition.

Adjustment (l) - The amount cited ($359.7 million) represents the amount of cash estimated to be received in ceding commissions from AFLIAC ($87.5 million) and the Wilton Re Group ($255.2 million) and an additional $17.0 million expected to be received from the Wilton Re Group related to the coinsurance of the term life insurance business.

Adjustment (v) - These income statement pro forma adjustments for the three month period ended March 31, 2006 give effect to the reinsurance arrangements referenced above as if the arrangements had been in effect at January 1, 2006.

Adjustment (z) - These income statement pro forma adjustments for the year ended December 31, 2005 give effect to the reinsurance arrangements reference above as if the arrangements had been in effect at January 1, 2005.

Adjustment (ab) - This adjustment ($100.7 million) represents the net settlement with the Wilton Re Group ($36.2 million) for 49% of the fixed annuity business of the acquired companies and with AFLIAC ($64.5 million) for 100% of the variable annuity business of the acquired companies under the modified coinsurance agreements reference above. This net settlement is recorded as a “deposit payable” in accordance with the SOP 98-7 “Deposit Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk”.

The Company supplementally advises the staff that no significant reinsurance receivable adjustments were deemed necessary since most of the reinsurance arrangements are in the form of modified coinsurance agreements (assets and liabilities related to the underlying business are not transferred to the assuming company.) A pro forma adjustment to reinsurance receivable was recorded related to the term insurance business subject to a coinsurance agreement. Additionally, we supplementally advise the staff that the reinsurance arrangements discussed above were effective as of the closing date of the acquisition (July 3, 2006) as expected at the time of the filing of the Form 8-K on June 26, 2006.


* * * * *


In connection with our response, we acknowledge that:

·  
The Company is responsible for the adequacy and accuracy of the disclosure in the filings;

·  
staff comments or changes to disclosure in response to staff comments do not foreclose the Commission from taking any action with respect to the filing; and

·  
the Company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States.

We hope that this response addresses your questions. As always, we look forward to continued dialogue on financial reporting issues. If you have any questions concerning this response, please do not hesitate to contact me at (205) 268-6775 or Charles Evers, Vice President, Corporate Accounting, at (205) 268-3596.



Sincerely,



/s/ Steven G. Walker___________
Steven G. Walker
Senior Vice President, Controller
and Chief Accounting Officer