10-Q 1 a12-8611_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 


 

FORM 10-Q

 

x  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 31, 2012

 

or

 

o  Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from                 to                 

 

Commission File Number 001-11339

 

Protective Life Corporation

(Exact name of registrant as specified in its charter)

 

Delaware

 

95-2492236

(State or other jurisdiction of incorporation or organization)

 

(IRS Employer Identification Number)

 

2801 Highway 280 South

Birmingham, Alabama 35223

(Address of principal executive offices and zip code)

 

(205) 268-1000

(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

 

Accelerated Filer o

 

 

 

Non-accelerated filer o

 

Smaller Reporting Company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o  No x

 

Number of shares of Common Stock, $0.50 Par Value, outstanding as of April 25, 2012: 81,005,509

 

 

 



Table of Contents

 

PROTECTIVE LIFE CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR QUARTERLY PERIOD ENDED MARCH 31, 2012

 

TABLE OF CONTENTS

 

 

 

Page

PART I

 

 

 

 

Item 1.

Financial Statements (unaudited):

 

 

Consolidated Condensed Statements of Income For The Three Months Ended March 31, 2012 and 2011

3

 

Consolidated Condensed Statement of Comprehensive Income For The Three Months Ended March 31, 2012 and 2011

4

 

Consolidated Condensed Balance Sheets as of March 31, 2012 and December 31, 2011

5

 

Consolidated Condensed Statement of Shareowners’ Equity For The Three Months Ended March 31, 2012

6

 

Consolidated Condensed Statements of Cash Flows For The Three Months Ended March 31, 2012 and 2011

7

 

Notes to Consolidated Condensed Financial Statements

8

Item 2.

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

47

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

100

Item 4.

Controls and Procedures

100

 

 

 

PART II

 

 

 

 

Item 1A.

Risk Factors and Cautionary Factors that may Affect Future Results

102

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

106

Item 6.

Exhibits

107

 

Signature

108

 

2



Table of Contents

 

PROTECTIVE LIFE CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)

 

 

 

For The Three Months Ended March 31,

 

 

 

2012

 

2011(2)

 

 

 

(Dollars In Thousands, Except Per Share Amounts)

 

Revenues

 

 

 

 

 

Premiums and policy fees

 

$

696,305

 

$

666,343

 

Reinsurance ceded

 

(304,558

)

(331,808

)

Net of reinsurance ceded

 

391,747

 

334,535

 

Net investment income

 

462,121

 

444,213

 

Realized investment gains (losses):

 

 

 

 

 

Derivative financial instruments

 

(29,909

)

(12,686

)

All other investments

 

35,726

 

4,472

 

Other-than-temporary impairment losses

 

(34,420

)

(16,021

)

Portion recognized in other comprehensive income (before taxes)

 

15,656

 

10,358

 

Net impairment losses recognized in earnings

 

(18,764

)

(5,663

)

Other income

 

111,260

 

72,209

 

Total revenues

 

952,181

 

837,080

 

Benefits and expenses

 

 

 

 

 

Benefits and settlement expenses, net of reinsurance ceded:
(three months: 2012 - $281,807; 2011 - $313,106)

 

589,629

 

536,369

 

Amortization of deferred policy acquisition costs and value of business acquired

 

56,836

 

65,226

 

Other operating expenses, net of reinsurance ceded:
(three months: 2012 - $46,631; 2011 - $45,260)

 

155,137

 

144,771

 

Total benefits and expenses

 

801,602

 

746,366

 

Income before income tax

 

150,579

 

90,714

 

Income tax expense

 

51,558

 

31,887

 

Net income

 

99,021

 

58,827

 

Less: Net income (loss) attributable to noncontrolling interests

 

 

(51

)

Net income available to PLC’s common shareowners(1)

 

$

99,021

 

$

58,878

 

 

 

 

 

 

 

Net income available to PLC’s common shareowners - basic

 

$

1.20

 

$

0.68

 

Net income available to PLC’s common shareowners - diluted

 

$

1.18

 

$

0.67

 

Cash dividends paid per share

 

$

0.16

 

$

0.14

 

 

 

 

 

 

 

Average shares outstanding - basic

 

82,330,330

 

86,603,228

 

Average shares outstanding - diluted

 

83,921,135

 

87,820,085

 

 


(1) Protective Life Corporation (“PLC”)

(2) Recast from previously reported information

 

See Notes to Consolidated Condensed Financial Statements

 

3



Table of Contents

 

PROTECTIVE LIFE CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

For The Three Months Ended March 31,

 

 

 

2012

 

2011(1)

 

 

 

(Dollars In Thousands)

 

Net income

 

$

99,021

 

$

58,827

 

Other comprehensive income (loss):

 

 

 

 

 

Change in net unrealized gains (losses) on investments, net of income tax:
(2012 - $5,308; 2011 - $18,443)

 

9,856

 

34,258

 

Reclassification adjustment for investment amounts included in net income, net of income tax: (2012 - $(449); 2011 - $(3,054))

 

(833

)

(5,678

)

Change in net unrealized gains (losses) relating to other-than-temporary impaired investments for which a portion has been recognized in earnings, net of income tax: (2012 - $1,571; 2011 - $(3,608))

 

2,917

 

(6,700

)

Change in accumulated gain - derivatives, net of income tax:
(2012 - $3,408; 2011 - $3,621)

 

6,330

 

6,724

 

Reclassification adjustment for derivative amounts included in net income, net of income tax: (2012 - $(301); 2011 - $(361))

 

(559

)

(671

)

Change in postretirement benefits liability adjustment, net of income tax:
(2012 - $(728); 2011 - $(451))

 

(1,352

)

(838

)

Total other comprehensive income

 

16,359

 

27,095

 

Comprehensive income

 

115,380

 

85,922

 

Comprehensive income attributable to noncontrolling interests

 

 

51

 

Total comprehensive income attributable to Protective Life Corporation

 

$

115,380

 

$

85,973

 

 


(1) Recast from previously reported information

 

See Notes to Consolidated Condensed Financial Statements

 

4



Table of Contents

 

PROTECTIVE LIFE CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

 

 

 

As of

 

 

 

March 31, 2012

 

December 31, 2011(1)

 

 

 

(Dollars In Thousands)

 

Assets

 

 

 

 

 

Fixed maturities, at fair value (amortized cost: 2012 - $26,314,339; 2011 - $26,137,960)

 

$

28,189,744

 

$

27,983,446

 

Equity securities, at fair value (cost: 2012 - $363,315; 2011 - $345,874)

 

360,527

 

335,232

 

Mortgage loans (includes amounts related to securitizations of: 2012 - $842,994; 2011 - $858,139)

 

5,314,496

 

5,353,481

 

Investment real estate, net of accumulated depreciation (2012 - $1,644; 2011 - $1,547)

 

31,527

 

29,899

 

Policy loans

 

877,850

 

879,819

 

Other long-term investments

 

324,001

 

257,714

 

Short-term investments

 

110,194

 

101,489

 

Total investments

 

35,208,339

 

34,941,080

 

Cash

 

175,353

 

267,298

 

Accrued investment income

 

362,837

 

350,580

 

Accounts and premiums receivable, net of allowance for uncollectible amounts (2012 - $3,866; 2011 - $3,899)

 

90,372

 

84,754

 

Reinsurance receivables

 

5,674,662

 

5,645,471

 

Deferred policy acquisition costs and value of business acquired

 

3,234,596

 

3,248,041

 

Goodwill

 

110,884

 

111,659

 

Property and equipment, net of accumulated depreciation (2012 - $136,620; 2011 - $134,924)

 

48,596

 

48,578

 

Other assets

 

163,360

 

150,549

 

Income tax receivable

 

 

50,783

 

Assets related to separate accounts

 

 

 

 

 

Variable annuity

 

7,698,456

 

6,741,959

 

Variable universal life

 

554,817

 

502,617

 

Total assets

 

$

53,322,272

 

$

52,143,369

 

Liabilities

 

 

 

 

 

Policy liabilities and accruals

 

$

22,265,424

 

$

22,126,774

 

Stable value product account balances

 

2,772,378

 

2,769,510

 

Annuity account balances

 

10,856,119

 

10,946,848

 

Other policyholders’ funds

 

537,909

 

546,516

 

Other liabilities

 

1,055,568

 

1,065,451

 

Mortgage loan backed certificates

 

8,834

 

19,755

 

Deferred income taxes

 

1,241,670

 

1,260,629

 

Income tax payable

 

22,725

 

 

Non-recourse funding obligations

 

297,000

 

407,800

 

Repurchase program borrowings

 

221,569

 

 

Debt

 

1,480,000

 

1,520,000

 

Subordinated debt securities

 

524,743

 

524,743

 

Liabilities related to separate accounts

 

 

 

 

 

Variable annuity

 

7,698,456

 

6,741,959

 

Variable universal life

 

554,817

 

502,617

 

Total liabilities

 

49,537,212

 

48,432,602

 

Commitments and contingencies - Note 9

 

 

 

 

 

Shareowners’ equity

 

 

 

 

 

Preferred Stock, $1 par value, shares authorized: 4,000,000; Issued: None

 

 

 

Common Stock, $.50 par value, shares authorized: 2012 and 2011 - 160,000,000; shares issued: 2012 and 2011 - 88,776,960

 

44,388

 

44,388

 

Additional paid-in-capital

 

593,930

 

598,106

 

Treasury stock, at cost (2012 - 7,778,530 shares; 2011 - 7,107,765 shares)

 

(131,578

)

(107,740

)

Retained earnings

 

2,277,267

 

2,191,319

 

Accumulated other comprehensive income (loss):

 

 

 

 

 

Net unrealized gains (losses) on investments, net of income tax: (2012 -$593,991; 2011 - $589,132)

 

1,103,126

 

1,094,103

 

Net unrealized (losses) gains relating to other-than-temporary impaired investments for which a portion has been recognized in earnings, net of income tax: (2012 - $(16,857); 2011 - $(18,428))

 

(31,307

)

(34,224

)

Accumulated loss - derivatives, net of income tax: (2012 - $(1,004); 2011 - $(4,111))

 

(1,863

)

(7,634

)

Postretirement benefits liability adjustment, net of income tax: (2012 -$(36,698); 2011 - $(35,970))

 

(68,153

)

(66,801

)

Total Protective Life Corporation’s shareowners’ equity

 

3,785,810

 

3,711,517

 

Noncontrolling interest

 

(750

)

(750

)

Total equity

 

3,785,060

 

3,710,767

 

Total liabilities and shareowners’ equity

 

$

53,322,272

 

$

52,143,369

 

 


(1)Recast from previously reported information

 

See Notes to Consolidated Condensed Financial Statements

 

5



Table of Contents

 

PROTECTIVE LIFE CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF SHAREOWNERS’ EQUITY

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Protective

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

Life

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Other

 

Corporation’s

 

Non

 

 

 

 

 

Common

 

Paid-In-

 

Treasury

 

Retained

 

Comprehensive

 

shareowners’

 

controlling

 

Total

 

 

 

Stock

 

Capital

 

Stock

 

Earnings(1)

 

Income (Loss)(1)

 

equity(1)

 

Interest

 

Equity(1)

 

 

 

(Dollars In Thousands)

 

Balance, December 31, 2011

 

$

44,388

 

$

598,106

 

$

(107,740

)

$

2,191,319

 

$

985,444

 

$

3,711,517

 

$

(750

)

$

3,710,767

 

Net income for the three months ended March 31, 2012

 

 

 

 

 

 

 

99,021

 

 

 

99,021

 

 

99,021

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

16,359

 

16,359

 

 

16,359

 

Comprehensive income for the three months ended March 31, 2012

 

 

 

 

 

 

 

 

 

 

 

115,380

 

 

115,380

 

Cash dividends ($0.16 per share)

 

 

 

 

 

 

 

(13,073

)

 

 

(13,073

)

 

(13,073

)

Repurchase of common stock

 

 

 

 

 

(25,977

)

 

 

 

 

(25,977

)

 

(25,977

)

Stock-based compensation

 

 

 

(4,176

)

2,139

 

 

 

 

 

(2,037

)

 

(2,037

)

Balance, March 31, 2012

 

$

44,388

 

$

593,930

 

$

(131,578

)

$

2,277,267

 

$

1,001,803

 

$

3,785,810

 

$

(750

)

$

3,785,060

 

 


(1) Recast from previously reported information

 

See Notes to Consolidated Condensed Financial Statements

 

6



Table of Contents

 

PROTECTIVE LIFE CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

For The

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011(1)

 

 

 

(Dollars In Thousands)

 

Cash flows from operating activities

 

 

 

 

 

Net income

 

$

99,021

 

$

58,827

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Realized investment losses (gains)

 

12,947

 

13,877

 

Amortization of deferred policy acquisition costs and value of business acquired

 

56,836

 

65,226

 

Capitalization of deferred policy acquisition costs

 

(63,971

)

(95,560

)

Depreciation expense

 

2,326

 

1,650

 

Deferred income tax

 

(23,126

)

18,573

 

Accrued income tax

 

73,508

 

16,160

 

Interest credited to universal life and investment products

 

243,608

 

237,391

 

Policy fees assessed on universal life and investment products

 

(188,790

)

(165,564

)

Change in reinsurance receivables

 

(29,191

)

(51,162

)

Change in accrued investment income and other receivables

 

(9,776

)

(15,220

)

Change in policy liabilities and other policyholders’ funds of traditional life and health products

 

(11,714

)

(14,041

)

Trading securities:

 

 

 

 

 

Maturities and principal reductions of investments

 

98,457

 

105,170

 

Sale of investments

 

273,030

 

300,010

 

Cost of investments acquired

 

(371,030

)

(275,880

)

Other net change in trading securities

 

17,623

 

(36,908

)

Change in other liabilities

 

(117,178

)

(26,873

)

Other income - surplus note repurchase

 

(35,456

)

(10,095

)

Other, net

 

4,899

 

(15,289

)

Net cash provided by operating activities

 

32,023

 

110,292

 

Cash flows from investing activities

 

 

 

 

 

Maturities and principal reductions of investments, available-for-sale

 

314,920

 

653,265

 

Sale of investments, available-for-sale

 

719,031

 

284,567

 

Cost of investments acquired, available-for sale

 

(1,198,459

)

(998,309

)

Mortgage loans:

 

 

 

 

 

New lendings

 

(81,226

)

(128,640

)

Repayments

 

117,107

 

136,969

 

Change in investment real estate, net

 

(1,754

)

2,508

 

Change in policy loans, net

 

1,969

 

9,128

 

Change in other long-term investments, net

 

(83,836

)

(35,051

)

Change in short-term investments, net

 

(30,950

)

(19,961

)

Net unsettled security transactions

 

93,942

 

152,168

 

Purchase of property and equipment

 

(1,824

)

(4,847

)

Payments for business acquisitions

 

 

(20,418

)

Net cash (used in) provided by investing activities

 

(151,080

)

31,379

 

Cash flows from financing activities

 

 

 

 

 

Borrowings under line of credit arrangements and debt

 

25,000

 

 

Principal payments on line of credit arrangement and debt

 

(65,000

)

(17,000

)

Issuance (repayment) of non-recourse funding obligations

 

(110,800

)

(35,700

)

Repurchase program borrowings

 

221,569

 

 

Dividends to shareowners

 

(13,073

)

(11,994

)

Repurchase of common stock

 

(25,977

)

 

Investment product deposits and change in universal life deposits

 

894,572

 

996,367

 

Investment product withdrawals

 

(895,493

)

(1,081,920

)

Other financing activities, net

 

(3,686

)

(24,911

)

Net cash provided by (used in) financing activities

 

27,112

 

(175,158

)

Change in cash

 

(91,945

)

(33,487

)

Cash at beginning of period

 

267,298

 

264,425

 

Cash at end of period

 

$

175,353

 

$

230,938

 

 


(1) Recast from previously reported information

 

See Notes to Consolidated Condensed Financial Statements

 

7



Table of Contents

 

PROTECTIVE LIFE CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

1.             BASIS OF PRESENTATION

 

Basis of Presentation

 

The accompanying unaudited consolidated condensed financial statements of Protective Life Corporation and subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements. In the opinion of management, the accompanying financial statements reflect all adjustments (consisting only of normal recurring items) necessary for a fair statement of the results for the interim periods presented. Operating results for the three month period ended March 31, 2012, are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. The year-end consolidated condensed balance sheet data was derived from audited financial statements, after the retrospective application of the matter discussed in Note 5, Deferred Acquisition Costs and Value of Business Acquired, but does not include all disclosures required by GAAP. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

 

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, claims, persistency, and other factors.

 

In January of 2012, the Company adopted ASU No. 2010-26 which changed how the Company accounts for its deferred acquisition costs.  See Note 2, Summary of Significant Policies and Note 5, Deferred Acquisition Costs and Value of Business Acquired.

 

Reclassifications and Accounting Changes

 

Certain reclassifications have been made in the previously reported financial statements and accompanying notes to make the prior year amounts comparable to those of the current year. Such reclassifications had no effect on previously reported net income or shareowners’ equity. Current and prior period operating income results within the Annuities segment have been updated to reflect the revised definition of operating income (loss) as it relates to embedded derivatives on our variable annuity contracts and related hedging activities. This change did not impact its comparable GAAP measure income before income tax. See Note 16, Operating Segments and Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations for additional information.

 

In January of 2012, the Company adopted ASU No. 2010-26 which changed certain previously reported items within the Company’s financial statements and accompanying notes.  The changes affected previously reported amounts in Note 3, Significant Acquisitions, Note 5, Deferred Acquisition Costs and Value of Business Acquired, Note 12, Earnings Per Share, Note 13, Income Taxes, and Note 16, Operating Segments.

 

Entities Included

 

The consolidated condensed financial statements include the accounts of Protective Life Corporation and subsidiaries and its affiliate companies in which the Company holds a majority voting or economic interest. Intercompany balances and transactions have been eliminated.

 

2.             SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Significant Accounting Polices

 

Deferred Policy Acquisition Costs

 

In the first quarter of 2012, the Company adopted ASU No. 2010-26 — Financial Services — Insurance - Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. The objective of this Update is to address diversity in practice regarding the interpretation of which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral. This Update prescribes that certain incremental direct costs of successful initial or renewal contract acquisitions may be deferred. It defines incremental direct costs as those costs that result directly from and are essential to the contract transaction and would not have been incurred by the insurance entity had the contract transaction not occurred. This Update also clarifies the definition of the types of incurred costs that may be capitalized and the accounting and recognition treatment of advertising, research, and other administrative costs related to the acquisition of insurance contracts.

 

8



Table of Contents

 

The incremental direct costs associated with successfully acquired insurance policies, are deferred to the extent such costs are deemed recoverable from future profits. Such costs include commissions and other costs of acquiring traditional life and health insurance, credit insurance, universal life insurance, and investment products. DAC is subject to recoverability testing at the end of each accounting period. Traditional life and health insurance acquisition costs are 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.

 

Based on the Accounting Standards Codification (“ASC” or “Codification”) Financial Services-Insurance Topic, the Company makes certain assumptions regarding the mortality, persistency, expenses, and interest rates the Company expects to experience in future periods. These assumptions are to be best estimates and are periodically updated whenever actual experience and/or expectations for the future change from that assumed. Additionally, using guidance from ASC Investments-Debt and Equity Securities Topic, 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 our universal life and investment products had been realized. Acquisition costs for stable value contracts are amortized over the term of the contracts using the effective yield method.

 

Accounting Pronouncements Recently Adopted

 

Accounting Standard Update (“ASU” or “Update”) No. 2010-26 — Financial Services — Insurance - Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. The objective of this Update is to address diversity in practice regarding the interpretation of which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral. This Update prescribes that certain incremental direct costs of successful initial or renewal contract acquisitions may be deferred. It defines incremental direct costs as those costs that result directly from and are essential to the contract transaction and would not have been incurred by the insurance entity had the contract transaction not occurred. This Update also clarifies the definition of the types of incurred costs that may be capitalized and the accounting and recognition treatment of advertising, research, and other administrative costs related to the acquisition of insurance contracts. This Update was effective for the Company on January 1, 2012. The Company retrospectively adopted this Update, which resulted in a reduction in its deferred acquisition cost asset as well as a decrease in the amortization associated with those previously deferred costs. There was also a reduction in the level of costs the Company defers. For additional information on the effect this Update had on the Company, see Note 5, Deferred Policy Acquisition Costs and Value of Business Acquired.

 

ASU No. 2011-03 — Transfers and Servicing - Reconsideration of Effective Control for Repurchase Agreements. This Update amends the assessment of effective control for repurchase agreements to remove 1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and 2) the collateral maintenance implementation guidance related to the criterion. The Boards determined that these criterion should not be a determining factor of effective control. This Update is effective for the first interim or annual period beginning on or after December 15, 2011. For the Company, the Update will be applied to all repurchase agreements beginning January 1, 2012. The Company has modified its policies and procedures to ensure compliance with the updated guidance.

 

ASU No. 2011-04 — Fair Value Measurement - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in this Update result in common fair value measurement and disclosure requirements in GAAP and International Financial Reporting Standards (“IFRSs”). The amendments change the wording used to describe many of the requirements for measuring fair value and for disclosing information about fair value measurements. The intent of this Update was not to change the application of the requirements in Topic 820. Some of the amendments clarify the intent regarding the application of existing fair value measurement requirements. The Update did modify requirements for disclosing information about fair value measurements. These changes were effective for interim and annual periods beginning after December 15, 2011. The Company has included the required additional disclosures in Note 14, Fair Value of Financial Instruments, and has modified its policies and processes to ensure compliance with the updated guidance.

 

ASU No. 2011-05 — Comprehensive Income — Presentation of Comprehensive Income. In this Update, a company has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in 1) a single continuous statement of comprehensive income, or 2) in two separate but consecutive statements. In both choices, a company is required to present each component of

 

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net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The amendments in this Update do not change the items that must be reported in other comprehensive income, or the timing of its subsequent reclassification to net income. This Update was effective January 1, 2012. The Company has implemented the two-page report format beginning in the first quarter of 2012.

 

ASU No. 2011-12 — Comprehensive Income — Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. This Update defers certain provisions of ASU No. 2011-05, notably those provisions which require entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented (for both interim and annual financial statements). These requirements were indefinitely deferred by ASU No. 2011-12 and will be further deliberated by the FASB at a future date. The FASB also decided that during the deferral period, entities would be required to comply with all existing requirements for reclassification adjustments in ASC 220, which indicates that “[a]n entity may display reclassification adjustments on the face of the financial statement in which comprehensive income is reported, or it may disclose reclassification adjustments in the notes to the financial statements”. This Update was effective January 1, 2012. In accordance with this Update, the Company will defer the portion of the guidance in this Update that requires the presentation of reclassification adjustments on the Company’s Statements of Net Income. In accordance with those portions of ASU 2011-05 that were not deferred by ASU 2011-12, the Company has displayed adjustments for reclassifications out of other comprehensive income on the Company’s Statement of Comprehensive Income.

 

Accounting Pronouncements Not Yet Adopted

 

ASU No. 2011-11 — Balance Sheet — Disclosures about Offsetting Assets and Liabilities. This Update contains new disclosure requirements regarding the nature of an entity’s rights of offset and related arrangements associated with its financial and derivative instruments. The new disclosures are designed to make financial statements that are prepared under GAAP more comparable to those prepared under IFRSs. Generally, it is more difficult to qualify for offsetting under IFRSs than it is under GAAP. As a result, entities with significant financial instrument and derivative portfolios that report under IFRSs typically present positions on their balance sheets that are significantly larger than those of entities with similarly sized portfolios whose financial statements are prepared in accordance with GAAP. To facilitate comparison between financial statements prepared under GAAP and IFRSs, the new disclosures will give financial statement users information about both gross and net exposures. This Update is effective January 1, 2013. This Update will not have an impact on the Company’s results of operations or financial position.

 

Significant Accounting Policies

 

For a full description of significant accounting policies, see Note 2 of Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. There were no significant changes to the Company’s accounting policies during the three months ended March 31, 2012, except as noted above. See Note 5, Deferred Policy Acquisition Costs and Value of Business Acquired for additional information on the accounting policies.

 

3.             SIGNIFICANT ACQUISITIONS

 

On April 29, 2011, PLICO closed a previously announced reinsurance transaction with Liberty Life Insurance Company (“Liberty Life”) under the terms of which PLICO reinsured substantially all of the life and health business of Liberty Life. The transaction closed in conjunction with Athene Holding Ltd’s acquisition of Liberty Life from an affiliate of Royal Bank of Canada. The capital invested by PLICO in the transaction at closing was $321 million, including a $225 million ceding commission. In conjunction with the closing, PLICO invested $40 million in a surplus note issued by Athene Life Re. The Company accounted for this transaction in a manner consistent with the purchase method of accounting as required by FASB guidance under the ASC Business Combinations topic. This guidance requires that the total consideration paid be allocated to the assets acquired and liabilities assumed based on their fair values at the transaction date.

 

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The following (unaudited) pro forma condensed consolidated results of operations assumes that the aforementioned transaction with Liberty Life was completed as of January 1, 2010:

 

 

 

For The

 

 

 

Three Months Ended

 

 

 

March 31, 2011

 

 

 

(Dollars In Thousands)

 

Revenue

 

$

899,267

 

 

 

 

 

Net income

 

$

59,273

 

 

 

 

 

EPS - basic

 

$

0.68

 

 

 

 

 

EPS - diluted

 

$

0.67

 

 

4.             INVESTMENT OPERATIONS

 

Net realized investment gains (losses) for all other investments are summarized as follows:

 

 

 

For The Three Months Ended March 31,

 

 

 

2012

 

2011

 

 

 

(Dollars In Thousands)

 

Fixed maturities

 

$

20,046

 

$

5,295

 

Equity securities

 

 

9,100

 

Impairments on fixed maturity securities

 

(18,740

)

(5,663

)

Impairments on equity securities

 

(24

)

 

Modco trading portfolio

 

18,099

 

(5,649

)

Other investments

 

(2,419

)

(4,274

)

Total realized gains (losses) - investments

 

$

16,962

 

$

(1,191

)

 

For the three months ended March 31, 2012, gross realized gains on investments available-for-sale (fixed maturities, equity securities, and short-term investments) were $23.2 million and gross realized losses were $21.8 million, including $18.7 million of impairment losses. The $18.7 million excludes $0.1 million of impairment losses in the trading portfolio.

 

For the three months ended March 31, 2011, gross realized gains on investments available-for-sale (fixed maturities, equity securities, and short-term investments) were $14.6 million and gross realized losses were $5.8 million, including $5.6 million of impairment losses. The $5.6 million excludes $0.1 million of impairment losses in the trading portfolio.

 

For the three months ended March 31, 2012, the Company sold securities in an unrealized gain position with a fair value (proceeds) of $499.4 million. The gain realized on the sale of these securities was $23.2 million. For the three months ended March 31, 2011, the Company sold securities in an unrealized gain position with a fair value (proceeds) of $236.0 million. The gain realized on the sale of these securities was $14.6 million.

 

For the three months ended March 31, 2012, the Company sold securities in an unrealized loss position with a fair value (proceeds) of $17.2 million. The loss realized on the sale of these securities was $3.1 million. For the three months ended March 31, 2011, the Company sold securities in an unrealized loss position with a fair value (proceeds) of $20.0 million. The loss realized on the sale of these securities was $0.2 million.

 

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Certain European countries have experienced varying degrees of financial stress. Risks from the continued debt crisis in Europe could continue to disrupt the financial markets which could have a detrimental impact on global economic conditions and on sovereign and non-sovereign obligations. There remains considerable uncertainty as to future developments in the European debt crisis and the impact on financial markets. The chart shown below includes the Company’s non-sovereign fair value exposures in these countries as of March 31, 2012. As of March 31, 2012, the Company had no unfunded exposure and had no direct sovereign fair value exposure.

 

 

 

 

 

 

 

Total Gross

 

 

 

Non-sovereign Debt

 

Funded

 

Financial Instrument and Country

 

Financial

 

Non-financial

 

Exposure

 

 

 

(Dollars In Millions)

 

Securities:

 

 

 

 

 

 

 

United Kingdom

 

$

437.0

 

$

377.8

 

$

814.8

 

Switzerland

 

121.7

 

214.2

 

335.9

 

France

 

117.1

 

86.9

 

204.0

 

Sweden

 

157.5

 

 

157.5

 

Netherlands

 

93.5

 

84.2

 

177.7

 

Spain

 

41.6

 

96.4

 

138.0

 

Belgium

 

 

99.7

 

99.7

 

Germany

 

25.7

 

56.9

 

82.6

 

Ireland

 

5.5

 

81.2

 

86.7

 

Luxembourg

 

 

58.4

 

58.4

 

Italy

 

 

45.6

 

45.6

 

Norway

 

 

13.3

 

13.3

 

Total securities

 

999.6

 

1,214.6

 

2,214.2

 

Derivatives:

 

 

 

 

 

 

 

Germany

 

13.3

 

 

13.3

 

 

 

$

1,012.9

 

$

1,214.6

 

$

2,227.5

 

 

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The amortized cost and fair value of the Company’s investments classified as available-for-sale as of March 31, 2012 and December 31, 2011, are as follows:

 

 

 

 

 

Gross

 

Gross

 

 

 

Total OTTI

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

Recognized

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

in OCI(1)

 

 

 

(Dollars In Thousands)

 

 

 

2012

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities:

 

 

 

 

 

 

 

 

 

 

 

Bonds

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage-backed securities

 

$

2,251,056

 

$

83,880

 

$

(64,910

)

$

2,270,026

 

$

(27,934

)

Commercial mortgage-backed securities

 

559,859

 

32,023

 

(332

)

591,550

 

 

Other asset-backed securities

 

965,151

 

5,616

 

(97,589

)

873,178

 

(6,557

)

U.S. government-related securities

 

1,303,537

 

50,412

 

(8,862

)

1,345,087

 

 

Other government-related securities

 

119,163

 

4,848

 

(167

)

123,844

 

 

States, municipals, and political subdivisions

 

1,158,496

 

193,675

 

 

1,352,171

 

 

Corporate bonds

 

16,980,176

 

1,808,806

 

(131,995

)

18,656,987

 

(13,673

)

 

 

23,337,438

 

2,179,260

 

(303,855

)

25,212,843

 

(48,164

)

Equity securities

 

345,007

 

9,227

 

(12,014

)

342,220

 

 

Short-term investments

 

46,593

 

 

 

46,593

 

 

 

 

$

23,729,038

 

$

2,188,487

 

$

(315,869

)

$

25,601,656

 

$

(48,164

)

2011

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities:

 

 

 

 

 

 

 

 

 

 

 

Bonds

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage-backed securities

 

$

2,345,578

 

$

82,594

 

$

(86,042

)

$

2,342,130

 

$

(47,806

)

Commercial mortgage-backed securities

 

531,322

 

24,466

 

(4,229

)

551,559

 

 

Other asset-backed securities

 

997,398

 

6,529

 

(90,898

)

913,029

 

(6,559

)

U.S. government-related securities

 

1,150,525

 

65,212

 

(58

)

1,215,679

 

 

Other government-related securities

 

88,058

 

4,959

 

 

93,017

 

 

States, municipals, and political subdivisions

 

1,154,374

 

173,408

 

 

1,327,782

 

 

Corporate bonds

 

16,910,738

 

1,920,142

 

(250,595

)

18,580,285

 

1,787

 

 

 

23,177,993

 

2,277,310

 

(431,822

)

25,023,481

 

(52,578

)

Equity securities

 

328,833

 

5,993

 

(16,635

)

318,191

 

(74

)

Short-term investments

 

15,649

 

 

 

15,649

 

 

 

 

$

23,522,475

 

$

2,283,303

 

$

(448,457

)

$

25,357,321

 

$

(52,652

)

 


(1) These amounts are included in the gross unrealized gains and gross unrealized losses column above.

 

As of March 31, 2012 and December 31, 2011, respectively, the Company had an additional $3.0 billion and $3.0 billion of fixed maturities, $18.3 million and $17.0 million of equity securities, and $63.6 million and $85.8 million of short-term investments classified as trading securities.

 

The amortized cost and fair value of available-for-sale fixed maturities as of March 31, 2012, by expected maturity, are shown below. Expected maturities of securities without a single maturity date are allocated based on estimated rates of prepayment that may differ from actual rates of prepayment.

 

 

 

Amortized

 

Fair

 

 

 

Cost

 

Value

 

 

 

(Dollars In Thousands)

 

Due in one year or less

 

$

518,042

 

$

524,831

 

Due after one year through five years

 

4,487,082

 

4,735,006

 

Due after five years through ten years

 

6,163,622

 

6,657,322

 

Due after ten years

 

12,168,692

 

13,295,684

 

 

 

$

23,337,438

 

$

25,212,843

 

 

Each quarter the Company reviews investments with unrealized losses and tests for other-than-temporary impairments. The Company analyzes various factors to determine if any specific other-than-temporary asset impairments exist. These include, but are not limited to: 1) actions taken by rating agencies, 2) default by the issuer, 3) the significance of the decline, 4) an assessment of the Company’s intent to sell the security (including a more likely than not assessment of whether the Company will be required to sell the security) before recovering the security’s amortized cost, 5) the time period during which the decline has occurred, 6) an economic analysis of the issuer’s industry, and 7) the financial strength, liquidity, and recoverability of the issuer. Management performs a

 

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security by security review each quarter in evaluating the need for any other-than-temporary impairments. Although no set formula is used in this process, the investment performance, collateral position, and continued viability of the issuer are significant measures considered, and in some cases, an analysis regarding the Company’s expectations for recovery of the security’s entire amortized cost basis through the receipt of future cash flows is performed. Once a determination has been made that a specific other-than-temporary impairment exists, the security’s basis is adjusted and an other-than-temporary impairment is recognized. Equity securities that are other-than-temporarily impaired are written down to fair value with a realized loss recognized in earnings. Other-than-temporary impairments to debt securities that the Company does not intend to sell and does not expect to be required to sell before recovering the security’s amortized cost are written down to discounted expected future cash flows (“post impairment cost”) and credit losses are recorded in earnings. The difference between the securities’ discounted expected future cash flows and the fair value of the securities is recognized in other comprehensive income (loss) as a non-credit portion of the recognized other-than-temporary impairment. When calculating the post impairment cost for residential mortgage-backed securities (“RMBS”), commercial mortgage-backed securities (“CMBS”), and other asset-backed securities (collectively referred to as asset-backed securities or “ABS”), the Company considers all known market data related to cash flows to estimate future cash flows. When calculating the post impairment cost for corporate debt securities, the Company considers all contractual cash flows to estimate expected future cash flows. To calculate the post impairment cost, the expected future cash flows are discounted at the original purchase yield. Debt securities that the Company intends to sell or expects to be required to sell before recovery are written down to fair value with the change recognized in earnings.

 

During the three months ended March 31, 2012, the Company recorded pre-tax other-than-temporary impairments of investments of $34.4 million. Of the $34.4 million of impairments for the three months ended March 31, 2012, $18.8 million was recorded in earnings and $15.6 million was recorded in other comprehensive income (loss). For the three months ended March 31, 2012, there was $34.4 million of pre-tax other-than-temporary impairments related to debt securities and an immaterial amount of impairments related to equity securities. For the three months ended March 31, 2012, there were no other-than-temporary impairments related to debt securities or equity securities that the Company intended to sell or expected to be required to sell.

 

During the three months ended March 31, 2011, the Company recorded other-than-temporary impairments on investments of $16.0 million related to debt securities. Of the $16.0 million of impairments for the three months ended March 31, 2011, $5.7 million was recorded in earnings and $10.3 million was recorded in other comprehensive income (loss). For the three months ended March 31, 2011, there were no other-than-temporary impairments related to debt securities or equity securities that the Company intended to sell or expected to be required to sell. For the three months ended March 31, 2011, the $5.7 million of pre-tax other-than-temporary impairments were related to debt securities.

 

The following chart is a rollforward of available-for-sale credit losses on debt securities held by the Company for which a portion of an other-than-temporary impairment was recognized in other comprehensive income (loss):

 

 

 

For The

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

 

 

(Dollars In Thousands)

 

Beginning balance

 

$

69,719

 

$

39,427

 

Additions for newly impaired securities

 

15,854

 

3,609

 

Additions for previously impaired securities

 

2,779

 

668

 

Reductions for previously impaired securities due to a change in expected cash flows

 

 

 

Reductions for previously impaired securities that were sold in the current period

 

 

(3,089

)

Ending balance

 

$

88,352

 

$

40,615

 

 

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The following table includes the gross unrealized losses and fair value of the Company’s investments that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of March 31, 2012:

 

 

 

Less Than 12 Months

 

12 Months or More

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

 

Value

 

Loss

 

Value

 

Loss

 

Value

 

Loss

 

 

 

(Dollars In Thousands)

 

Residential mortgage-backed securities

 

$

191,695

 

$

(2,974

)

$

524,291

 

$

(61,936

)

$

715,986

 

$

(64,910

)

Commercial mortgage-backed securities

 

35,439

 

(332

)

 

 

35,439

 

(332

)

Other asset-backed securities

 

494,648

 

(43,339

)

211,283

 

(54,250

)

705,931

 

(97,589

)

U.S. government-related securities

 

605,267

 

(8,862

)

 

 

605,267

 

(8,862

)

Other government-related securities

 

49,855

 

(167

)

 

 

49,855

 

(167

)

States, municipals, and political subdivisions

 

 

 

 

 

 

 

Corporate bonds

 

1,331,892

 

(63,198

)

538,903

 

(68,797

)

1,870,795

 

(131,995

)

Equities

 

17,808

 

(6,315

)

24,556

 

(5,699

)

42,364

 

(12,014

)

 

 

$

2,726,604

 

$

(125,187

)

$

1,299,033

 

$

(190,682

)

$

4,025,637

 

$

(315,869

)

 

The RMBS have a gross unrealized loss greater than twelve months of $61.9 million as of March 31, 2012. These losses relate to a widening in spreads and defaults as a result of continued weakness in the residential housing market which have reduced the fair value of the RMBS holdings. Factors such as the credit enhancement within the deal structure, the average life of the securities, and the performance of the underlying collateral support the recoverability of these investments.

 

The other asset-backed securities have a gross unrealized loss greater than twelve months of $54.3 million as of March 31, 2012. This category predominately includes student-loan backed auction rate securities, the underlying collateral, of which is at least 97% guaranteed by the Federal Family Education Loan Program (“FFELP”). These unrealized losses have occurred within the Company’s auction rate securities (“ARS”) portfolio since the market collapse during 2008. At this time, the Company has no reason to believe that the U.S. Department of Education would not honor the FFELP guarantee, if it were necessary. In addition, the Company has the ability and intent to hold these securities until their values recover or until maturity.

 

The corporate bonds category has gross unrealized losses greater than twelve months of $68.8 million as of March 31, 2012. These losses relate primarily to fluctuations in credit spreads. The aggregate decline in market value of these securities was deemed temporary due to positive factors supporting the recoverability of the respective investments. Positive factors considered include credit ratings, the financial health of the issuer, the continued access of the issuer to capital markets, and other pertinent information including the Company’s ability and intent to hold these securities to recovery.

 

The equities category has a gross unrealized loss greater than twelve months of $5.7 million as of March 31, 2012. These losses primarily relate to fluctuations in credit spreads on perpetual preferred stock holdings. The aggregate decline in market value of these securities was deemed temporary due to factors supporting the recoverability of the respective investments. Positive factors include credit ratings, the financial health of the issuer, the continued access of the issuer to the capital markets, and other pertinent information including the Company’s ability and intent to hold these securities to recovery.

 

The Company does not consider these unrealized loss positions to be other-than-temporary, based on the factors discussed and because the Company has the ability and intent to hold these investments until the fair values recover, and does not intend to sell or expect to be required to sell the securities before recovering the Company’s amortized cost of these securities.

 

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The following table includes the gross unrealized losses and fair value of the Company’s investments that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2011:

 

 

 

Less Than 12 Months

 

12 Months or More

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

 

Value

 

Loss

 

Value

 

Loss

 

Value

 

Loss

 

 

 

(Dollars In Thousands)

 

Residential mortgage-backed securities

 

$

277,858

 

$

(15,447

)

$

527,120

 

$

(70,595

)

$

804,978

 

$

(86,042

)

Commercial mortgage-backed securities

 

78,892

 

(4,229

)

 

 

78,892

 

(4,229

)

Other asset-backed securities

 

531,653

 

(32,074

)

190,639

 

(58,824

)

722,292

 

(90,898

)

U.S. government-related securities

 

21,311

 

(58

)

 

 

21,311

 

(58

)

Other government-related securities

 

 

 

 

 

 

 

States, municipals, and political subdivisions

 

 

 

 

 

 

 

Corporate bonds

 

1,880,931

 

(132,297

)

526,333

 

(118,298

)

2,407,264

 

(250,595

)

Equities

 

50,638

 

(8,436

)

22,295

 

(8,199

)

72,933

 

(16,635

)

 

 

$

2,841,283

 

$

(192,541

)

$

1,266,387

 

$

(255,916

)

$

4,107,670

 

$

(448,457

)

 

The RMBS have a gross unrealized loss greater than twelve months of $70.6 million as of December 31, 2011. These losses relate to a widening in spreads and defaults as a result of continued weakness in the residential housing market which have reduced the fair value of the RMBS holdings. Factors such as the credit enhancement within the deal structure, the average life of the securities, and the performance of the underlying collateral support the recoverability of these investments.

 

The other asset-backed securities have a gross unrealized loss greater than twelve months of $58.8 million as of December 31, 2011. This category predominately includes student-loan backed auction rate securities, the underlying collateral of which is at least 97% guaranteed by the FFELP. These unrealized losses have occurred within the Company’s ARS portfolio since the market collapse during 2008. At this time, the Company has no reason to believe that the U.S. Department of Education would not honor the FFELP guarantee, if it were necessary. In addition, the Company has the ability and intent to hold these securities until their values recover or until maturity.

 

The corporate bonds category has gross unrealized losses greater than twelve months of $118.3 million as of December 31, 2011. These losses relate primarily to fluctuations in credit spreads. The aggregate decline in market value of these securities was deemed temporary due to positive factors supporting the recoverability of the respective investments. Positive factors considered include credit ratings, the financial health of the issuer, the continued access of the issuer to capital markets, and other pertinent information including the Company’s ability and intent to hold these securities to recovery.

 

The equities category has a gross unrealized loss greater than twelve months of $8.2 million as of December 31, 2011. These losses primarily relate to a widening in credit spreads on perpetual preferred stock holdings. The aggregate decline in market value of these securities was deemed temporary due to factors supporting the recoverability of the respective investments. Positive factors include credit ratings, the financial health of the issuer, the continued access of the issuer to the capital markets, and other pertinent information including the Company’s ability and intent to hold these securities to recovery.

 

The Company does not consider these unrealized loss positions to be other-than-temporary, based on the factors discussed and because the Company has the ability and intent to hold these investments until the fair values recover, and does not intend to sell or expect to be required to sell the securities before recovering the Company’s amortized cost of these securities.

 

As of March 31, 2012, the Company had securities in its available-for-sale portfolio which were rated below investment grade of $1.8 billion and had an amortized cost of $1.9 billion. In addition, included in the Company’s trading portfolio, the Company held $357.9 million of securities which were rated below investment grade. Approximately $433.4 million of the below investment grade securities were not publicly traded.

 

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The change in unrealized gains (losses), net of income tax, on fixed maturity and equity securities, classified as available-for-sale is summarized as follows:

 

 

 

For The Three Months Ended March 31,

 

 

 

2012

 

2011

 

 

 

(Dollars In Thousands)

 

Fixed maturities

 

$

19,446

 

$

27,960

 

Equity securities

 

5,106

 

(416

)

 

Securities Lending

 

In prior periods, the Company participated in securities lending, primarily as an enhancement to its investment yield. Securities that the Company held as investments were loaned to third parties for short periods of time. The Company required initial collateral, in the form of short-term investments, which equaled 102% of the market value of the loaned securities.

 

During the second quarter of 2011, the Company discontinued this program. Certain collateral assets, which the Company previously intended to ultimately dispose of and on which it recorded an other-than-temporary impairment of $1.3 million, were instead retained by the Company and are included in its fixed maturities as of March 31, 2012. The Company currently does not have any intent to sell these securities, and do not anticipate being required to sell them.

 

Mortgage Loans

 

Refer to Note 8, Mortgage Loans for information on the Company’s mortgage loan portfolio.

 

5.                                      DEFERRED POLICY ACQUISITION COSTS AND VALUE OF BUSINESS ACQUIRED

 

In the first quarter of 2012, the Company adopted ASU No. 2010-26 — Financial Services — Insurance - Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. The objective of this Update is to address diversity in practice regarding the interpretation of which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral. This Update prescribes that certain incremental direct costs of successful initial or renewal contract acquisitions may be deferred. It defines incremental direct costs as those costs that result directly from and are essential to the contract transaction and would not have been incurred by the insurance entity had the contract transaction not occurred. This Update also clarifies the definition of the types of incurred costs that may be capitalized and the accounting and recognition treatment of advertising, research, and other administrative costs related to the acquisition of insurance contracts. This Update was effective for the Company on January 1, 2012. The Company retrospectively adopted this Update, which resulted in a reduction in its deferred acquisition cost asset as well as a decrease in the amortization associated with those previously deferred costs. There was also a reduction in the level of costs the Company defers.

 

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The chart shown below summarizes the effect of these adjustments on the Company’s balance sheet (only balances impacted by the Update are presented).

 

 

 

As of December 31, 2011

 

 

 

As originally
reported

 

As adjusted

 

Effect of
Change

 

 

 

(Dollars In Thousands)

 

Assets:

 

 

 

 

 

 

 

Deferred policy acquisition costs and value of business acquired

 

$

4,036,757

 

$

3,248,041

 

$

(788,716

)

 

 

 

 

 

 

 

 

Total Assets

 

$

52,932,085

 

$

52,143,369

 

$

(788,716

)

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Deferred income taxes

 

$

1,540,397

 

$

1,260,629

 

$

(279,768

)

 

 

 

 

 

 

 

 

Total liabilities

 

$

48,712,370

 

$

48,432,602

 

$

(279,768

)

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

Retained earnings

 

$

2,719,492

 

$

2,191,319

 

$

(528,173

)

Accumulated other comprehensive income (loss):

 

 

 

 

 

 

 

Net unrealized gain (losses) on investments, net of income tax

 

1,074,878

 

1,094,103

 

19,225

 

 

 

 

 

 

 

 

 

Total Equity

 

$

4,219,715

 

$

3,710,767

 

$

(508,948

)

 

 

 

 

 

 

 

 

Total liabilities and shareowners’ equity

 

$

52,932,085

 

$

52,143,369

 

$

(788,716

)

 

The chart shown below summarizes the effect of the adjustments on the Company’s income statement (only balances impacted by the Update are presented).

 

 

 

For The Three Months Ended March 31, 2011

 

 

 

As originally
reported

 

As adjusted

 

Effect of
Change

 

 

 

(Dollars In Thousands)

 

Expenses:

 

 

 

 

 

 

 

Amortization of deferred policy acquisition costs and value of business acquired

 

$

74,363

 

$

65,226

 

$

(9,137

)

Other operating expenses

 

122,253

 

144,771

 

22,518

 

Total benefits and expenses

 

732,985

 

746,366

 

13,381

 

 

 

 

 

 

 

 

 

Income before income tax

 

104,095

 

90,714

 

(13,381

)

 

 

 

 

 

 

 

 

Income tax (benefit) expense

 

36,629

 

31,887

 

(4,742

)

 

 

 

 

 

 

 

 

Net income

 

$

67,466

 

$

58,827

 

$

(8,639

)

Less: Net loss attributable to noncontrolling interests

 

(51

)

(51

)

 

Net Income available to PLC’s common shareowners

 

$

67,517

 

$

58,878

 

$

(8,639

)

 

 

 

 

 

 

 

 

 

 

 

Net income available to PLC’s common shareowners - basic

 

$

0.78

 

$

0.68

 

$

(0.10

)

Net income available to PLC’s common shareowners - diluted

 

$

0.77

 

$

0.67

 

$

(0.10

)

 

The chart shown below summarizes the effect of the adjustments on the Company’s cash flow statement (only balances impacted by the Update are presented).

 

 

 

For The Three Months Ended March 31, 2011

 

 

 

As originally
reported

 

As adjusted

 

Effect of Change

 

 

 

(Dollars In Thousands)

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income

 

$

67,466

 

$

58,827

 

$

(8,639

)

Amortization of deferred policy acquisition costs and value of business acquired

 

74,363

 

65,226

 

(9,137

)

Capitalization of deferred policy acquisition costs

 

(118,078

)

(95,560

)

22,518

 

Deferred income tax

 

23,314

 

18,573

 

(4,741

)

Other, net

 

(15,288

)

(15,289

)

(1

)

Change to net cash (used in) provided by operating activities

 

$

31,777

 

$

31,777

 

$

 

 

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Deferred policy acquisition costs

 

The balances and changes in DAC are as follows:

 

 

 

As of

 

 

 

March 31, 2012

 

December 31, 2011

 

 

 

(Dollars In Thousands)

 

Balance, beginning of period

 

$

2,219,901

 

$

2,124,329

 

Capitalization of commissions, sales, and issue expenses

 

65,369

 

370,830

 

Amortization

 

(45,556

)

(215,600

)

Change in unrealized investment gains and losses

 

(10,338

)

(59,658

)

Balance, end of period

 

$

2,229,384

 

$

2,219,901

 

 

Value of business acquired

 

The balances and changes in VOBA are as follows:

 

 

 

As of

 

 

 

March 31, 2012

 

December 31, 2011

 

 

 

(Dollars In Thousands)

 

Balance, beginning of period

 

$

1,028,140

 

$

968,253

 

Acquisitions

 

 

137,418

 

Amortization

 

(12,692

)

(66,163

)

Change in unrealized gains and losses

 

(10,236

)

(21,907

)

Other

 

 

10,539

 

Balance, end of period

 

$

1,005,212

 

$

1,028,140

 

 

6.             GOODWILL

 

During the three months ended March 31, 2012, the Company decreased its goodwill balance by approximately $0.8 million. The decrease was due to adjustments in the Acquisitions segment related to tax benefits realized during 2012 on the portion of tax goodwill in excess of GAAP basis goodwill. As of March 31, 2012, the Company had an aggregate goodwill balance of $110.9 million.

 

Accounting for goodwill requires an estimate of the future profitability of the associated lines of business to assess the recoverability of the capitalized acquisition goodwill. The Company evaluates the carrying value of goodwill at the segment (or reporting unit) level at least annually and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include, but are not limited to: 1) a significant adverse change in legal factors or in business climate, 2) unanticipated competition, or 3) an adverse action or assessment by a regulator. When evaluating whether goodwill is impaired, the Company first determines through qualitative analysis whether relevant events and circumstances indicate that it is more likely than not that segment goodwill balances are impaired as of the testing date. If it is determined that it is more likely than not that impairment exists, the Company compares its estimate of the fair value of the reporting unit to which the goodwill is assigned to the reporting unit’s carrying amount, including goodwill. The Company utilizes a fair value measurement (which includes a discounted cash flows analysis) to assess the carrying value of the reporting units in consideration of the recoverability of the goodwill balance assigned to each reporting unit as of the measurement date. The Company’s material goodwill balances are attributable to certain of its operating segments (which are each considered to be reporting units). The cash flows used to determine the fair value of the Company’s reporting units are dependent on a number of significant assumptions. The Company’s estimates, which consider a market participant view of fair value, are subject to change given the inherent uncertainty in predicting future results and cash flows, which are impacted by such things as policyholder behavior, competitor pricing, capital limitations, new product introductions, and specific industry and market conditions. Additionally, the discount rate used is based on the Company’s judgment of the appropriate rate for each reporting unit based on the relative risk associated with the projected cash flows. As of December 31, 2011, the Company performed its annual evaluation of goodwill and determined that no adjustment to impair goodwill was necessary. During the three months ended March 31, 2012, no triggering or impairment event occurred.

 

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7.             DEBT AND OTHER OBLIGATIONS

 

Under a revolving line of credit arrangement, the Company has the ability to borrow on an unsecured basis up to an aggregate principal amount of $500 million (the “Credit Facility”). The Company has the right in certain circumstances to request that the commitment under the Credit Facility be increased up to a maximum principal amount of $600 million. Balances outstanding under the Credit Facility accrue interest at a rate equal to (i) either the prime rate or the London Interbank Offered Rate (“LIBOR”), plus (ii) a spread based on the ratings of our senior unsecured long-term debt. The Credit Agreement provides that the Company is liable for the full amount of any obligations for borrowings or letters of credit, including those of PLICO, under the Credit Facility. The maturity date on the Credit Facility is April 16, 2013. There was an outstanding balance of $130.0 million at an interest rate of LIBOR plus 0.40% under the Credit Facility as of March 31, 2012.

 

The Company has a repurchase program, in which it may, from time to time, sell an investment security at a specific price and agree to repurchase that security at another specified price at a later date. The market value of securities to be repurchased is monitored and collateral levels are adjusted where appropriate to protect the counterparty against credit exposure. Cash received is invested in fixed maturity securities. As of March 31, 2012, the fair value of securities pledged under the repurchase program was $245.6 million and the repurchase obligation of $221.6 million was included in other liabilities in the consolidated condensed balance sheets. As of December 31, 2011, the Company did not have a balance for its repurchase program.

 

Non-Recourse Funding Obligations

 

Golden Gate II Captive Insurance Company (“Golden Gate II”), a special purpose financial captive insurance company wholly owned by PLICO, had $575 million of outstanding non-recourse funding obligations as of March 31, 2012. These outstanding non-recourse funding obligations were issued to special purpose trusts, which in turn issued securities to third parties. Certain of the Company’s affiliates purchased a portion of these securities during 2012, 2011, and 2010. As a result of these purchases, as of March 31, 2012, securities related to $297.0 million of the outstanding balance of the non-recourse funding obligations were held by external parties and securities related to $278.0 million of the non-recourse funding obligations were held by affiliates.

 

Non-recourse funding obligations outstanding as of March 31, 2012, on a consolidated basis, are shown in the following table:

 

 

 

 

 

 

 

Year-to-Date

 

 

 

 

 

 

 

Weighted-Avg

 

Issuer

 

Balance

 

Maturity Year

 

Interest Rate

 

 

 

(Dollars In Thousands)

 

 

 

 

 

Golden Gate II Captive Insurance Company

 

$

297,000

 

2052

 

1.22

%

 

During the three months ended March 31, 2012, the Company repurchased $110.8 million of its outstanding non-recourse funding obligations, at a discount. These repurchases resulted in a $35.5 million pre-tax gain for the Company. During the three months ended March 31, 2011, the Company repurchased $35.7 million of its outstanding non-recourse funding obligations, at a discount, which resulted in a $10.1 million gain.

 

8.             MORTGAGE LOANS

 

Mortgage Loans

 

The Company invests a portion of its investment portfolio in commercial mortgage loans. As of March 31, 2012, the Company’s mortgage loan holdings were approximately $5.3 billion. The Company has specialized in making loans on either credit-oriented commercial properties or credit-anchored strip shopping centers and apartments. The Company’s underwriting procedures relative to its commercial loan portfolio are based, in the Company’s view, on a conservative and disciplined approach. The Company concentrates on a small number of commercial real estate asset types associated with the necessities of life (retail, multi-family, professional office buildings, and warehouses). The Company believes these asset types tend to weather economic downturns better than other commercial asset classes in which it has chosen not to participate. The Company believes this disciplined approach has helped to maintain a relatively low delinquency and foreclosure rate throughout its history.

 

The Company’s commercial mortgage loans are stated at unpaid principal balance, adjusted for any unamortized premium or discount, and net of valuation allowances. Interest income is accrued on the principal

 

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Table of Contents

 

amount of the loan based on the loan’s contractual interest rate. Amortization of premiums and discounts is recorded using the effective yield method. Interest income, amortization of premiums and discounts and prepayment fees are reported in net investment income.

 

Many of the mortgage loans have call options or interest rate reset options between 3 and 10 years. However, if interest rates were to significantly increase, we may be unable to exercise the call options or increase the interest rates on our existing mortgage loans commensurate with the significantly increased market rates. Assuming the loans are called at their next call dates, approximately $91.3 million would become due for the remainder of 2012, $1.4 billion in 2013 through 2017, $779.2 million in 2018 through 2022, and $271.5 million thereafter.

 

The Company offers a type of commercial mortgage loan under which the Company will permit a loan-to-value ratio of up to 85% in exchange for a participating interest in the cash flows from the underlying real estate. As of March 31, 2012 and December 31, 2011, approximately $901.1 million and $876.8 million, respectively, of the Company’s mortgage loans have this participation feature. Cash flows received as a result of this participation feature are recorded as interest income.

 

As of March 31, 2012, less than $13.6 million, or 0.04%, of invested assets consisted of nonperforming, restructured or mortgage loans that were foreclosed and were converted to real estate properties. The Company does not expect these investments to adversely affect its liquidity or ability to maintain proper matching of assets and liabilities. The Company’s mortgage loan portfolio consists of two categories of loans: (1) those not subject to a pooling and servicing agreement and (2) those subject to a contractual pooling and servicing agreement.

 

As of March 31, 2012, $8.6 million of mortgage loans not subject to a pooling and servicing agreement were nonperforming. None of these nonperforming loans have been restructured during the three month period ending March 31, 2012. In addition, the Company foreclosed on certain nonperforming loans and converted them to $2.2 million of real estate properties during the three months ending March 31, 2012.

 

As of March 31, 2012, $2.3 million of loans subject to a pooling and servicing agreement were nonperforming. None of these nonperforming loans have been restructured during the three months ending March 31, 2012. In addition, the Company foreclosed on certain nonperforming loans and converted them to $0.5 million of real estate properties during the three months ending March 31, 2012.

 

As of March 31, 2012 and December 31, 2011, the Company had an allowance for mortgage loan credit losses of $5.0 million and $6.5 million, respectively. Over the past ten years, the Company’s commercial mortgage loan portfolio has experienced an average credit loss factor of approximately 0.02%. Due to such low historical losses, the Company believes that a collectively evaluated allowance would be inappropriate. The Company believes an allowance calculated through an analysis of specific loans that are believed to have a higher risk of credit impairment provides a more accurate presentation of expected losses in the portfolio and is consistent with the applicable guidance for loan impairments in ASC Subtopic 310. Since the Company uses the specific identification method for calculating the allowance, it is necessary to review the economic situation of each borrower to determine those that have higher risk of credit impairment. The Company has a team of professionals that monitors borrower conditions such as payment practices, borrower credit, operating performance, and property conditions, as well as ensuring the timely payment of property taxes and insurance. Through this monitoring process, the Company assesses the risk of each loan. When issues are identified, the severity of the issues are assessed and reviewed for possible credit impairment. If a loss is probable, an expected loss calculation is performed and an allowance is established for that loan based on the expected loss. The expected loss is calculated as the excess carrying value of a loan over either the present value of expected future cash flows discounted at the loan’s original effective interest rate, or the current estimated fair value of the loan’s underlying collateral. A loan may be subsequently charged off at such point that the Company no longer expects to receive cash payments, the present value of future expected payments of the renegotiated loan is less than the current principal balance, or at such time that the Company is party to foreclosure or bankruptcy proceedings associated with the borrower and does not expect to recover the principal balance of the loan.

 

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A charge off is recorded by eliminating the allowance against the mortgage loan and recording the renegotiated loan or the collateral property related to the loan as investment real estate on the balance sheet, which is carried at the lower of the appraised fair value of the property or the unpaid principal balance of the loan, less estimated selling costs associated with the property:

 

 

 

As of

 

 

 

March 31, 2012

 

December 31, 2011

 

 

 

(Dollars In Thousands)

 

Beginning balance

 

$

6,475

 

$

11,650

 

Charge offs

 

(1,500

)

(16,278

)

Recoveries

 

 

(2,471

)

Provision

 

 

13,574

 

Ending balance

 

$

4,975

 

$

6,475

 

 

It is the Company’s policy to cease to carry accrued interest on loans that are over 90 days delinquent. For loans less than 90 days delinquent, interest is accrued unless it is determined that the accrued interest is not collectible. If a loan becomes over 90 days delinquent, it is the Company’s general policy to initiate foreclosure proceedings unless a workout arrangement to bring the loan current is in place. For loans subject to a pooling and servicing agreement, there are certain additional restrictions and/or requirements related to workout proceedings, and as such, these loans may have different attributes and/or circumstances affecting the status of delinquency or categorization of those in nonperforming status. An analysis of the delinquent loans is shown in the following chart as of March 31, 2012:

 

 

 

 

 

 

 

Greater

 

 

 

 

 

30-59 Days

 

60-89 Days

 

than 90 Days

 

Total

 

 

 

Delinquent

 

Delinquent

 

Delinquent

 

Delinquent

 

 

 

(Dollars In Thousands)

 

Commercial mortgage loans

 

$

47,944

 

$

5,278

 

$

5,624

 

$

58,846

 

Number of delinquent commercial mortgage loans

 

8

 

2

 

3

 

13

 

 

The Company’s commercial mortgage loan portfolio consists of mortgage loans that are collateralized by real estate. Due to the collateralized nature of the loans, any assessment of impairment and ultimate loss given a default on the loans is based upon a consideration of the estimated fair value of the real estate. The Company limits accrued interest income on impaired loans to ninety days of interest. Once accrued interest on the impaired loan is received, interest income is recognized on a cash basis. For information regarding impaired loans, please refer to the following chart as of March 31, 2012 and December 31, 2011:

 

 

 

 

 

Unpaid

 

 

 

Average

 

Interest

 

Cash Basis

 

 

 

Recorded

 

Principal

 

Related

 

Recorded

 

Income

 

Interest

 

 

 

Investment

 

Balance

 

Allowance

 

Investment

 

Recognized

 

Income

 

 

 

(Dollars In Thousands)

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial mortgage loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

With no related allowance recorded

 

$

5,652

 

$

7,713

 

$

 

$

1,413

 

$

34

 

$

34

 

With an allowance recorded

 

14,020

 

13,997

 

4,975

 

4,673

 

85

 

149

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial mortgage loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

With no related allowance recorded

 

$

7,917

 

$

10,926

 

$

 

$

1,979

 

$

34

 

$

34

 

With an allowance recorded

 

15,521

 

15,521

 

6,475

 

5,174

 

117

 

181

 

 

9.             COMMITMENTS AND CONTINGENCIES

 

The Company has entered into indemnity agreements with each of its current directors that provide, among other things and subject to certain limitations, a contractual right to indemnification to the fullest extent permissible under the law. The Company has agreements with certain of its officers providing up to $10 million in indemnification. These obligations are in addition to the customary obligation to indemnify officers and directors contained in the Company’s governance documents.

 

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. In addition, from time to

 

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Table of Contents

 

time, companies may be asked to contribute amounts beyond prescribed limits. Most insurance guaranty fund laws provide that an assessment may be excused or deferred if it would threaten an insurer’s own financial strength. The Company does not believe its insurance guaranty fund assessments will be materially different from amounts already provided for in the financial statements.

 

A number of civil jury verdicts have been returned against insurers, broker dealers and other providers of financial services involving sales, refund or claims practices, alleged agent misconduct, failure to properly supervise representatives, relationships with agents or persons with whom the insurer does business, and other matters. Often these lawsuits have resulted in the award of substantial judgments that are disproportionate to the actual damages, including material amounts of punitive and non-economic compensatory damages. In some states, juries, judges, and arbitrators have substantial discretion in awarding punitive non-economic compensatory damages which creates the potential for unpredictable material adverse judgments or awards in any given lawsuit or arbitration. Arbitration awards are subject to very limited appellate review. In addition, in some class action and other lawsuits, companies have made material settlement payments. Publicly held companies in general and the financial services and insurance industries in particular are also sometimes the target of law enforcement and regulatory investigations relating to the numerous laws and regulations that govern such companies. Some companies have been the subject of law enforcement or regulatory actions or other actions resulting from such investigations. The Company, in the ordinary course of business, is involved in such matters.

 

The Company establishes liabilities for litigation and regulatory actions when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. For matters where a loss is believed to be reasonably possible, but not probable, no liability is established. For such matters, the Company may provide an estimate of the possible loss or range of loss or a statement that such an estimate cannot be made. The Company reviews relevant information with respect to litigation and regulatory matters on a quarterly and annual basis and updates its established liabilities, disclosures and estimates of reasonably possible losses or range of loss based on such reviews.

 

Although the Company cannot predict the outcome of any litigation or regulatory action, the Company does not believe that any such outcome will have an impact, either individually or in the aggregate, on its financial condition or results of operations that differs materially from the Company’s established liabilities. Given the inherent difficulty in predicting the outcome of such matters, however, it is possible that an adverse outcome in certain such matters could be material to the Company’s financial condition or results of operations for any particular reporting period.

 

As a result of an audit, the IRS has proposed adjustments to the Company’s 2006 and 2007 taxable income. The Company intends to protest these adjustments and then seek resolution at the IRS’ Appeals Division. The Company is uncertain but believes that the Appeals conference will not occur within the next 12 months. An unfavorable outcome would cause the Company to make additional income tax cash payments of approximately $12.2 million. However, if these payments were to occur, they would not have a material impact to the Company or to its effective income tax rate.

 

10.          STOCK-BASED COMPENSATION

 

During the three months ended March 31, 2012, 306,100 performance shares with an estimated fair value of $8.6 million were awarded. The criteria for payment of the 2012 performance awards is based primarily on the Company’s average operating return on average equity (“ROE”) over a three-year period. If the Company’s ROE is below 10.0%, no award is earned. If the Company’s ROE is at or above 11.2%, the award maximum is earned. Awards are paid in shares of the Company’s common stock.

 

Restricted stock units are awarded to participants and include certain restrictions relating to vesting periods. The Company issued 143,900 restricted stock units for the three months ended March 31, 2012. These awards had a total fair value at grant date of $4.0 million. Approximately half of these restricted stock units vest in 2015, and the remainder vest in 2016. These awards have been recorded as liability-classified awards for the period ended March 31, 2012.

 

During the first quarter of 2012, the Company changed its intention to pay certain of its previously issued restricted stock units and performance share awards in cash. As a result, these portions of the awards have been recorded as liability-classified awards as of March 31, 2012. The impact of this change was to reclassify $3.6 million from additional paid in capital to other liabilities. The change had an immaterial impact to current year net income.

 

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Stock appreciation right (“SARs”) have been granted to certain officers of the Company to provide long-term incentive compensation based solely on the performance of the Company’s common stock. The SARs are exercisable either five years after the date of grant or in three or four equal annual installments beginning one year after the date of grant (earlier upon the death, disability, or retirement of the officer, or in certain circumstances, of a change in control of the Company) and expire after ten years or upon termination of employment. The SARs activity as well as weighted-average base price is as follows:

 

 

 

Weighted-Average

 

 

 

 

 

Base Price per share

 

No. of SARs

 

Balance as of December 31, 2011

 

$

22.27

 

2,274,229

 

SARs granted

 

 

 

SARs exercised / forfeited / expired

 

26.57

 

452,116

 

Balance as of March 31, 2012

 

$

21.21

 

1,822,113

 

 

There were no SARs issued for the three months ended March 31, 2012. The Company will pay an amount in stock equal to the difference between the specified base price of the Company’s common stock and the market value at the exercise date for each SAR.

 

11.          EMPLOYEE BENEFIT PLANS

 

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

 

 

 

For The

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

 

 

(Dollars In Thousands)

 

Service cost — benefits earned during the period

 

$

2,561

 

$

2,194

 

Interest cost on projected benefit obligation

 

2,604

 

2,508

 

Expected return on plan assets

 

(2,673

)

(2,512

)

Amortization of prior service cost

 

(95

)

(98

)

Amortization of actuarial losses

 

2,175

 

1,388

 

Total benefit cost

 

$

4,572

 

$

3,480

 

 

During the three months ended March 31, 2012, the Company contributed $7.3 million to its defined benefit pension plan for the 2011 plan year. In addition, during April of 2012, the Company contributed $3.3 million to the defined benefit pension plan for the 2012 plan year. The Company will continue to make contributions in future periods as necessary to at least satisfy minimum funding requirements. The Company may also make additional contributions in future periods to maintain an adjusted funding target attainment percentage (“AFTAP”) of at least 80%.

 

In addition to pension benefits, the Company provides life insurance benefits to eligible retirees and limited healthcare benefits to eligible retirees who are not yet eligible for Medicare. For a closed group of retirees over age 65, the Company provides a prescription drug benefit. The cost of these plans for the three months ended March 31, 2012, was immaterial to the Company’s financial statements.

 

12.          EARNINGS PER SHARE

 

Basic earnings per share is computed by dividing net income available to PLC’s common shareowners by the weighted-average number of common shares outstanding during the period, including shares issuable under various deferred compensation plans. Diluted earnings per share is computed by dividing net income available to PLC’s common shareowners by the weighted-average number of common shares and dilutive potential common shares outstanding during the period, assuming the shares were not anti-dilutive, including shares issuable under various stock-based compensation plans and stock purchase contracts.

 

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A reconciliation of the numerators and denominators of the basic and diluted earnings per share is presented below:

 

 

 

For The Three Months Ended March 31,

 

 

 

2012

 

2011

 

 

 

(Dollars In Thousands, Except Per Share Amounts)

 

Calculation of basic earnings per share:

 

 

 

 

 

Net income available to PLC’s common shareowners

 

$

99,021

 

$

58,878

 

 

 

 

 

 

 

Average shares issued and outstanding

 

81,449,315

 

85,679,753

 

Issuable under various deferred compensation plans

 

881,015

 

923,475

 

Weighted shares outstanding - basic

 

82,330,330

 

86,603,228

 

 

 

 

 

 

 

Per share:

 

 

 

 

 

Net income available to PLC’s common shareowners - basic

 

$

1.20

 

$

0.68

 

 

 

 

 

 

 

Calculation of diluted earnings per share:

 

 

 

 

 

Net income available to PLC’s common shareowners

 

$

99,021

 

$

58,878