10-Q 1 a12-19965_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 September 30, 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 October 23, 2012:   79,139,531

 

 

 



Table of Contents

 

PROTECTIVE LIFE CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 2012

 

TABLE OF CONTENTS

 

 

 

 

 

Page

 

 

 

 

 

 

 

PART I

 

 

 

 

 

 

 

Item 1.

 

Financial Statements (unaudited):

 

 

 

 

Consolidated Condensed Statements of Income For The Three and Nine Months Ended September 30, 2012 and 2011

 

3

 

 

Consolidated Condensed Statement of Comprehensive Income For The Three and Nine Months Ended September 30, 2012 and 2011

 

4

 

 

Consolidated Condensed Balance Sheets as of September 30, 2012 and December 31, 2011

 

5

 

 

Consolidated Condensed Statement of Shareowners’ Equity For The Three Months Ended March 31, 2012, June 30, 2012, and September 30, 2012

 

7

 

 

Consolidated Condensed Statements of Cash Flows For The Nine Months Ended September 30, 2012 and 2011

 

8

 

 

Notes to Consolidated Condensed Financial Statements

 

9

Item 2.

 

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

 

56

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

118

Item 4.

 

Controls and Procedures

 

119

 

 

 

 

 

 

 

PART II

 

 

 

 

 

 

 

Item 1A.

 

Risk Factors and Cautionary Factors that may Affect Future Results

 

120

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

126

Item 6.

 

Exhibits

 

127

 

 

Signature

 

128

 

2



Table of Contents

 

PROTECTIVE LIFE CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)

 

 

 

For The

 

For The

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011(2)

 

2012

 

2011(2)

 

 

 

(Dollars In Thousands, Except Per Share Amounts)

 

Revenues

 

 

 

 

 

 

 

 

 

Premiums and policy fees

 

$

684,939

 

$

696,978

 

$

2,092,673

 

$

2,079,907

 

Reinsurance ceded

 

(321,059

)

(326,967

)

(970,290

)

(1,023,023

)

Net of reinsurance ceded

 

363,880

 

370,011

 

1,122,383

 

1,056,884

 

Net investment income

 

467,944

 

462,926

 

1,386,287

 

1,355,924

 

Realized investment gains (losses):

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

(134,222

)

(97,816

)

(212,399

)

(145,495

)

All other investments

 

122,555

 

138,230

 

223,874

 

201,619

 

Other-than-temporary impairment losses

 

(1,676

)

(6,259

)

(49,766

)

(37,912

)

Portion recognized in other comprehensive income (before taxes)

 

(6,880

)

(3,570

)

8,838

 

12,933

 

Net impairment losses recognized in earnings

 

(8,556

)

(9,829

)

(40,928

)

(24,979

)

Other income

 

81,190

 

75,859

 

273,930

 

235,292

 

Total revenues

 

892,791

 

939,381

 

2,753,147

 

2,679,245

 

Benefits and expenses

 

 

 

 

 

 

 

 

 

Benefits and settlement expenses, net of reinsurance ceded: (three months: 2012 - $307,866; 2011 - $208,720; nine months: 2012 - $895,845; 2011 - $878,991)

 

629,945

 

592,792

 

1,788,096

 

1,680,714

 

Amortization of deferred policy acquisition costs and value of business acquired

 

14,011

 

71,740

 

138,035

 

202,684

 

Other operating expenses, net of reinsurance ceded: (three months: 2012 - $46,679; 2011 - $48,924; nine months: 2012 - $139,288; 2011 - $142,994)

 

157,849

 

152,563

 

477,764

 

448,008

 

Total benefits and expenses

 

801,805

 

817,095

 

2,403,895

 

2,331,406

 

Income before income tax

 

90,986

 

122,286

 

349,252

 

347,839

 

Income tax expense

 

30,506

 

39,429

 

113,596

 

118,236

 

Net income

 

60,480

 

82,857

 

235,656

 

229,603

 

Less: Net income attributable to noncontrolling interests

 

 

 

 

245

 

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

 

$

60,480

 

$

82,857

 

$

235,656

 

$

229,358

 

 

 

 

 

 

 

 

 

 

 

Net income available to PLC’s common shareowners - basic

 

$

0.75

 

$

0.98

 

$

2.89

 

$

2.67

 

Net income available to PLC’s common shareowners - diluted

 

$

0.73

 

$

0.96

 

$

2.83

 

$

2.63

 

Cash dividends paid per share

 

$

0.18

 

$

0.16

 

$

0.52

 

$

0.46

 

 

 

 

 

 

 

 

 

 

 

Average shares outstanding - basic

 

80,662,745

 

84,722,232

 

81,541,462

 

85,883,669

 

Average shares outstanding - diluted

 

82,406,103

 

86,004,571

 

83,187,854

 

87,152,812

 

 


(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

 

For The

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011(1)

 

2012

 

2011(1)

 

 

 

(Dollars In Thousands)

 

Net income

 

$

60,480

 

$

82,857

 

$

235,656

 

$

229,603

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Change in net unrealized gains (losses) on investments, net of income tax: (three months: 2012 - $205,978; 2011 - $240,855; nine months: 2012 - $384,084; 2011 - $346,225)

 

382,536

 

447,306

 

713,305

 

643,004

 

Reclassification adjustment for investment amounts included in net income, net of income tax: (three months: 2012 - $(4,931); 2011 - $(3,814); nine months: 2012 - $(6,266); 2011 - $(14,139))

 

(9,162

)

(7,087

)

(11,642

)

(26,273

)

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: (three months: 2012 - $12,808; 2011 - $(509); nine months: 2012 - $15,770; 2011 - $(9,561))

 

23,784

 

(944

)

29,284

 

(17,755

)

Change in accumulated (loss) gain - derivatives, net of income tax: (three months: 2012 - $1,828; 2011 - $(420); nine months: 2012 - $2,739; 2011 - $1,424)

 

3,395

 

(780

)

5,088

 

2,645

 

Reclassification adjustment for derivative amounts included in net income, net of income tax: (three months: 2012 - $(415); 2011 - $(355); nine months: 2012 - $(354); 2011 - $(478))

 

(771

)

(659

)

(658

)

(887

)

Change in postretirement benefits liability adjustment, net of income tax: (three months: 2012 - $(728); 2011 - $(451); nine months: 2012 - $(2,183); 2011 - $(1,354))

 

(1,352

)

(839

)

(4,055

)

(2,515

)

Total other comprehensive income

 

398,430

 

436,997

 

731,322

 

598,219

 

Comprehensive income

 

458,910

 

519,854

 

966,978

 

827,822

 

Comprehensive income attributable to noncontrolling interests

 

 

 

 

(245

)

Total comprehensive income attributable to Protective Life Corporation

 

$

458,910

 

$

519,854

 

$

966,978

 

$

827,577

 

 


(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

 

 

 

September 30, 2012

 

December 31, 2011

 

 

 

(Dollars In Thousands)

 

Assets

 

 

 

 

 

Fixed maturities, at fair value (amortized cost: 2012 - $26,535,113; 2011 - $26,137,960)

 

$

29,607,238

 

$

27,983,446

 

Equity securities, at fair value (cost: 2012 - $371,539; 2011 - $345,874)

 

373,552

 

335,232

 

Mortgage loans (includes amounts related to securitizations of: 2012 - $789,624; 2011 - $858,139)

 

5,096,080

 

5,353,481

 

Investment real estate, net of accumulated depreciation (2012 - $1,321; 2011 - $1,547)

 

19,858

 

29,899

 

Policy loans

 

869,607

 

879,819

 

Other long-term investments

 

347,065

 

257,714

 

Short-term investments

 

110,684

 

101,489

 

Total investments

 

36,424,084

 

34,941,080

 

Cash

 

206,012

 

267,298

 

Accrued investment income

 

360,024

 

350,580

 

Accounts and premiums receivable, net of allowance for uncollectible amounts (2012 - $4,096; 2011 - $3,899)

 

104,037

 

84,754

 

Reinsurance receivables

 

5,753,980

 

5,645,471

 

Deferred policy acquisition costs and value of business acquired

 

3,208,227

 

3,248,041

 

Goodwill

 

109,335

 

111,659

 

Property and equipment, net of accumulated depreciation (2012 - $139,943; 2011 - $134,924)

 

48,321

 

48,578

 

Other assets

 

189,086

 

150,549

 

Income tax receivable

 

55,518

 

50,783

 

Assets related to separate accounts

 

 

 

 

 

Variable annuity

 

8,895,947

 

6,741,959

 

Variable universal life

 

557,529

 

502,617

 

Total assets

 

$

55,912,100

 

$

52,143,369

 

 

See Notes to Consolidated Condensed Financial Statements

 

5



Table of Contents

 

PROTECTIVE LIFE CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS (Continued)

(Unaudited)

 

 

 

As of

 

 

 

September 30, 2012

 

December 31, 2011

 

 

 

(Dollars In Thousands)

 

Liabilities

 

 

 

 

 

Policy liabilities and accruals

 

$

22,767,592

 

$

22,126,774

 

Stable value product account balances

 

2,328,237

 

2,769,510

 

Annuity account balances

 

10,751,652

 

10,946,848

 

Other policyholders’ funds

 

553,262

 

546,516

 

Other liabilities

 

1,306,298

 

1,065,451

 

Mortgage loan backed certificates

 

 

19,755

 

Deferred income taxes

 

1,668,885

 

1,260,629

 

Non-recourse funding obligations

 

297,000

 

407,800

 

Repurchase program borrowings

 

280,000

 

 

Debt

 

1,400,000

 

1,520,000

 

Subordinated debt securities

 

540,593

 

524,743

 

Liabilities related to separate accounts

 

 

 

 

 

Variable annuity

 

8,895,947

 

6,741,959

 

Variable universal life

 

557,529

 

502,617

 

Total liabilities

 

51,346,995

 

48,432,602

 

Commitments and contingencies - Note 9

 

 

 

 

 

Shareowners’ equity

 

 

 

 

 

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

 

603,083

 

598,106

 

Treasury stock, at cost (2012 - 9,640,102 shares; 2011 - 7,107,765 shares)

 

(183,330

)

(107,740

)

Retained earnings

 

2,384,948

 

2,191,319

 

Accumulated other comprehensive income (loss):

 

 

 

 

 

Net unrealized gains (losses) on investments, net of income tax: (2012 -$966,950; 2011 - $589,132)

 

1,795,766

 

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 - $(2,658); 2011 - $(18,428))

 

(4,940

)

(34,224

)

Accumulated loss - derivatives, net of income tax: (2012 - $(1,726); 2011 - $(4,111))

 

(3,204

)

(7,634

)

Postretirement benefits liability adjustment, net of income tax: (2012 -$(38,153); 2011 - $(35,970))

 

(70,856

)

(66,801

)

Total Protective Life Corporation’s shareowners’ equity

 

4,565,855

 

3,711,517

 

Noncontrolling interest

 

(750

)

(750

)

Total equity

 

4,565,105

 

3,710,767

 

Total liabilities and shareowners’ equity

 

$

55,912,100

 

$

52,143,369

 

 

See Notes to Consolidated Condensed Financial Statements

 

6



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

 

Income (Loss)

 

equity

 

Interest

 

Equity

 

 

 

(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

 

Net income for the three months ended June 30, 2012

 

 

 

 

 

 

 

76,155

 

 

 

76,155

 

 

76,155

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

316,533

 

316,533

 

 

316,533

 

Comprehensive income for the three months ended June 30, 2012

 

 

 

 

 

 

 

 

 

 

 

392,688

 

 

392,688

 

Cash dividends ($0.18 per share)

 

 

 

 

 

 

 

(14,545

)

 

 

(14,545

)

 

(14,545

)

Repurchase of common stock

 

 

 

 

 

(26,775

)

 

 

 

 

(26,775

)

 

(26,775

)

Stock-based compensation

 

 

 

9,115

 

941

 

 

 

 

 

10,056

 

 

10,056

 

Balance, June 30, 2012

 

$

44,388

 

$

603,045

 

$

(157,412

)

$

2,338,877

 

$

1,318,336

 

$

4,147,234

 

$

(750

)

$

4,146,484

 

Net income for the three months ended September 30, 2012

 

 

 

 

 

 

 

60,480

 

 

 

60,480

 

 

60,480

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

398,430

 

398,430

 

 

398,430

 

Comprehensive income for the three months ended September 30, 2012

 

 

 

 

 

 

 

 

 

 

 

458,910

 

 

458,910

 

Cash dividends ($0.18 per share)

 

 

 

 

 

 

 

(14,409

)

 

 

(14,409

)

 

(14,409

)

Repurchase of common stock

 

 

 

 

 

(25,934

)

 

 

 

 

(25,934

)

 

(25,934

)

Stock-based compensation

 

 

 

38

 

16

 

 

 

 

 

54

 

 

54

 

Balance, September 30, 2012

 

$

44,388

 

$

603,083

 

$

(183,330

)

$

2,384,948

 

$

1,716,766

 

$

4,565,855

 

$

(750

)

$

4,565,105

 

 

See Notes to Consolidated Condensed Financial Statements

 

7



Table of Contents

 

PROTECTIVE LIFE CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

For The

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2012

 

2011(1)

 

 

 

(Dollars In Thousands)

 

Cash flows from operating activities

 

 

 

 

 

Net income

 

$

235,656

 

$

229,603

 

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

 

 

 

 

 

Realized investment losses (gains)

 

29,453

 

(31,145

)

Amortization of deferred policy acquisition costs and value of business acquired

 

138,035

 

202,684

 

Capitalization of deferred policy acquisition costs

 

(217,319

)

(306,564

)

Depreciation expense

 

6,741

 

6,777

 

Deferred income tax

 

(45,366

)

23,040

 

Accrued income tax

 

(4,735

)

34,440

 

Interest credited to universal life and investment products

 

731,934

 

740,328

 

Policy fees assessed on universal life and investment products

 

(579,812

)

(528,739

)

Change in reinsurance receivables

 

(108,509

)

(27,540

)

Change in accrued investment income and other receivables

 

(6,734

)

(31,583

)

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

 

219,900

 

7,227

 

Trading securities:

 

 

 

 

 

Maturities and principal reductions of investments

 

212,048

 

228,405

 

Sale of investments

 

365,809

 

655,607

 

Cost of investments acquired

 

(528,753

)

(736,587

)

Other net change in trading securities

 

13,758

 

31,307

 

Change in other liabilities

 

(49,200

)

47,114

 

Other income - surplus note repurchase

 

(35,456

)

(36,962

)

Other, net

 

5,525

 

2,014

 

Net cash provided by operating activities

 

382,975

 

509,426

 

Cash flows from investing activities

 

 

 

 

 

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

 

905,085

 

1,144,228

 

Sale of investments, available-for-sale

 

1,960,993

 

2,251,034

 

Cost of investments acquired, available-for sale

 

(3,084,807

)

(4,184,350

)

Mortgage loans:

 

 

 

 

 

New lendings

 

(256,227

)

(408,602

)

Repayments

 

499,524

 

344,921

 

Change in investment real estate, net

 

9,687

 

521

 

Change in policy loans, net

 

10,212

 

13,806

 

Change in other long-term investments, net

 

(96,015

)

36,367

 

Change in short-term investments, net

 

(39,118

)

129,129

 

Net unsettled security transactions

 

69,845

 

127,621

 

Purchase of property and equipment

 

(5,474

)

(12,896

)

Payments for business acquisitions

 

 

(209,609

)

Net cash used in investing activities

 

(26,295

)

(767,830

)

Cash flows from financing activities

 

 

 

 

 

Borrowings under line of credit arrangements and debt

 

492,500

 

20,000

 

Principal payments on line of credit arrangement and debt

 

(596,650

)

(26,852

)

Issuance (repayment) of non-recourse funding obligations

 

(110,800

)

(117,600

)

Repurchase program borrowings

 

280,000

 

157,103

 

Dividends to shareowners

 

(42,027

)

(39,264

)

Repurchase of common stock

 

(78,686

)

(58,480

)

Investment product deposits and change in universal life deposits

 

2,641,899

 

3,413,567

 

Investment product withdrawals

 

(3,002,824

)

(2,998,684

)

Other financing activities, net

 

(1,378

)

(23,324

)

Net cash (used in) provided by financing activities

 

(417,966

)

326,466

 

Change in cash

 

(61,286

)

68,062

 

Cash at beginning of period

 

267,298

 

264,425

 

Cash at end of period

 

$

206,012

 

$

332,487

 

 


(1)Recast from previously reported information

 

See Notes to Consolidated Condensed Financial Statements

 

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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 and nine month periods ended September 30, 2012, are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. The year-end consolidated condensed financial 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 and the Form 8-K filed on May 14, 2012.

 

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 Accounting Standard Update (“ASU” or “Update”) No. 2010-26 — Financial Services — Insurance - Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts 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 the 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 the financial statements, 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.

 

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2.             SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Significant Accounting Polices

 

                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 and the Form 8-K filed on May 14, 2012. There were no significant changes to the Company’s accounting policies during the nine months ended September 30, 2012, except as noted below. See Note 5, Deferred Policy Acquisition Costs and Value of Business Acquired for additional information on the accounting policies.

 

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.

 

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. Deferred acquisition costs (“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

 

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. For additional information on the effect this Update had on the Company, see Note 5, Deferred Policy Acquisition Costs and Value of Business Acquired.

 

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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 Board determined that these criterion should not be a determining factor of effective control. This Update was effective for the first interim or annual period beginning on or after December 15, 2011. For the Company, the Update was applied to all repurchase agreements beginning January 1, 2012. The Company has modified its policies and procedures to ensure compliance with the updated guidance. There was no impact to the Company’s results of operations or financial position as a result of this adoption.

 

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 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 expanded 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 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 Company has implemented the two-statement report format outlined in ASU No. 2011-05 beginning in the first quarter of 2012. 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.

 

Commensurate with the effective date of ASU No. 2011-05, the requirement to present reclassifications from other comprehensive income on the face of the income statement, was deferred indefinitely by ASU No. 2011-12 — Comprehensive Income — Deferral of the Effective for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.

 

ASU No. 2012-04 — Technical Corrections and Improvements. This Update contains changes intended to clarify the Codification or to correct unintended application of guidance, and which are not expected to have a significant effect on current accounting practice. In addition, this Update includes more substantive, limited-scope improvements to the Codification. These are items that represent narrow and incremental improvements to U.S. GAAP and are not purely technical corrections.  This Update was effective upon issuance on October 1, 2012, and will not have an impact on the Company’s results of operations or financial position.

 

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.

 

ASU No. 2012-02 — Intangibles-Goodwill and Other — Testing Indefinite-Lived Intangible Assets for Impairment. This Update is intended to reduce the complexity and cost of performing an impairment test for indefinite-lived intangible assets by allowing an entity the option to make a qualitative evaluation about the likelihood of impairment prior to the quantitative calculation required by current guidance. Under the amendments to Topic 350, an entity has the option to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test. If an entity determines it is not more likely than not that impairment exists, quantitative impairment testing is not required. However, if an entity concludes otherwise, the impairment test outlined in current guidance is required to be completed. The Update does not change the current requirement that indefinite-lived intangible assets be reviewed for impairment at least annually.

 

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This Update is effective January 1, 2013. The Update will not have an impact on the Company’s results of operations or financial position.

 

3.             SIGNIFICANT ACQUISITIONS

 

                On April 29, 2011, Protective Life Insurance Company (“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 under the ASC Financial Services-Insurance topic in a manner similar to the acquisition method of accounting as required by the Financial Accounting Standards Board (“FASB”) guidance under ASC Business Combinations topic.

 

                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  

 

For The

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 2011

 

September 30, 2011

 

 

 

(Dollars In Thousands)

 

Revenue

 

$

939,381

 

$

2,762,074

 

 

 

 

 

 

 

Net income

 

$

82,857

 

$

230,395

 

 

 

 

 

 

 

EPS - basic

 

$

0.98

 

$

2.66

 

 

 

 

 

 

 

EPS - diluted

 

$

0.96

 

$

2.63

 

 

4.             INVESTMENT OPERATIONS

 

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

 

 

 

For The

 

For The

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(Dollars In Thousands)

 

Fixed maturities

 

$

22,889

 

$

20,721

 

$

58,929

 

$

56,212

 

Equity securities

 

(241

)

9

 

(93

)

9,179

 

Impairments on fixed maturity securities

 

(8,556

)

(9,829

)

(40,928

)

(24,979

)

Modco trading portfolio

 

104,865

 

123,760

 

179,027

 

151,714

 

Other investments

 

(4,958

)

(6,260

)

(13,989

)

(15,486

)

Total realized gains (losses) - investments

 

$

113,999

 

$

128,401

 

$

182,946

 

$

176,640

 

 

For the three and nine months ended September 30, 2012, gross realized gains on investments available-for-sale (fixed maturities, equity securities, and short-term investments) were $23.6 million and $63.0 million and gross realized losses, including impairments were $9.3 million and $44.8 million, respectively.

 

For the three and nine months ended September 30, 2011, gross realized gains on investments available-for-sale (fixed maturities, equity securities, and short-term investments) were $23.2 million and $69.7 million and gross realized losses, including impairments, were $12.4 million and $29.0 million, respectively.

 

                For the three and nine months ended September 30, 2012, the Company sold securities in an unrealized gain position with a fair value (proceeds) of $424.6 million and $1.3 billion, respectively. The gain realized on the sale of these securities was $23.6 million and $63.0 million, respectively. For the three and nine months ended

 

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September 30, 2011, the Company sold securities in an unrealized gain position with a fair value (proceeds) of $350.7 million and $1.8 billion, respectively. The gain realized on the sale of these securities was $23.2 million and $69.7 million, respectively.

 

                For the three and nine months ended September 30, 2012, the Company sold securities in an unrealized loss position with a fair value (proceeds) of $14.3 million and $31.7 million, respectively. The losses realized on the sale of these securities were $0.9 million and $4.1 million, respectively. For the three and nine months ended September 30, 2011, the Company sold securities in an unrealized loss position with a fair value (proceeds) of $48.5 million and $211.5 million, respectively. The losses realized on the sale of these securities were $2.5 million and $4.3 million, respectively.

 

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 September 30, 2012. As of September 30, 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

 

$

343.8

 

$

403.7

 

$

747.5

 

Switzerland

 

150.4

 

202.9

 

353.3

 

France

 

85.2

 

98.2

 

183.4

 

Sweden

 

165.8

 

5.0

 

170.8

 

Netherlands

 

140.6

 

90.2

 

230.8

 

Spain

 

37.7

 

96.4

 

134.1

 

Belgium

 

 

92.1

 

92.1

 

Germany

 

26.6

 

59.5

 

86.1

 

Ireland

 

5.9

 

85.7

 

91.6

 

Luxembourg

 

 

51.7

 

51.7

 

Italy

 

 

46.5

 

46.5

 

Norway

 

 

14.6

 

14.6

 

Total securities

 

956.0

 

1,246.5

 

2,202.5

 

Derivatives:

 

 

 

 

 

 

 

Germany

 

25.8

 

 

25.8

 

Switzerland

 

1.1

 

 

1.1

 

Total derivatives

 

26.9

 

 

26.9

 

 

 

$

982.9

 

$

1,246.5

 

$

2,229.4

 

 

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The amortized cost and fair value of the Company’s investments classified as available-for-sale as of September 30, 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

 

$

1,927,585

 

$

103,462

 

$

(24,030

)

$

2,007,017

 

$

(4,612

)

Commercial mortgage-backed securities

 

772,726

 

66,261

 

(329

)

838,658

 

 

Other asset-backed securities

 

999,155

 

11,855

 

(74,947

)

936,063

 

(1,118

)

U.S. government-related securities

 

1,272,338

 

78,539

 

(173

)

1,350,704

 

 

Other government-related securities

 

93,490

 

7,645

 

(19

)

101,116

 

 

States, municipals, and political subdivisions

 

1,168,546

 

252,731

 

(215

)

1,421,062

 

 

Corporate bonds

 

17,205,436

 

2,714,452

 

(63,107

)

19,856,781

 

(1,868

)

 

 

23,439,276

 

3,234,945

 

(162,820

)

26,511,401

 

(7,598

)

Equity securities

 

352,194

 

12,255

 

(10,242

)

354,207

 

 

Short-term investments

 

54,709

 

 

 

54,709

 

 

 

 

$

23,846,179

 

$

3,247,200

 

$

(173,062

)

$

26,920,317

 

$

(7,598

)

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 September 30, 2012 and December 31, 2011, respectively, the Company had an additional $3.1 billion and $3.0 billion of fixed maturities, $19.3 million and $17.0 million of equity securities, and $56.0 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 September 30, 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

 

$

449,143

 

$

455,409

 

Due after one year through five years

 

4,753,893

 

5,187,237

 

Due after five years through ten years

 

5,981,112

 

6,643,874

 

Due after ten years

 

12,255,128

 

14,224,881

 

 

 

$

23,439,276

 

$

26,511,401

 

 

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

 

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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 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 and nine months ended September 30, 2012, the Company recorded pre-tax other-than-temporary impairments of investments of $1.6 million and $49.7 million, respectively. Credit impairments recorded in earnings during the period were $8.5 million. During the period, $7.0 million of non-credit losses previously recorded in other comprehensive income were recorded in earnings as credit losses.  Additional non-credit losses during the period were $0.1 million. Of the $49.7 million of impairments for the nine months ended September 30, 2012, $40.9 million was recorded in earnings and $8.8 million was recorded in other comprehensive income (loss).

 

For the three and nine months ended September 30, 2012, there was $1.6 million and $49.7 million of pre-tax other-than-temporary impairments related to debt securities, respectively. There were no impairments related to equity securities. For the three and nine months ended September 30, 2012, there were $0.1 million of 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 and nine months ended September 30, 2011, the Company recorded other-than-temporary impairments on investments of $6.2 million and $37.9 million, respectively, related to debt securities. Of the $6.2 million of impairments for the three months ended September 30, 2011, $9.8 million was recorded in earnings and $3.6 million was recorded in other comprehensive income (loss). The $3.6 million of non-credit gains includes $1.3 million of losses related to newly impaired securities and a net gain of $4.9 million related to previously impaired securities that are now in a gain position. Of the $37.9 million of impairments for the nine months ended September 30, 2011, $25.0 million was recorded in earnings and $12.9 million was recorded in other comprehensive income (loss). During this period, there were no other-than-temporary impairments related to debt securities or equity securities that the Company intends to sell or expects to be required to sell.

 

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Table of Contents

 

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

 

For The

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(Dollars In Thousands)

 

Beginning balance

 

$

101,470

 

$

49,847

 

$

69,719

 

$

39,427

 

Additions for newly impaired securities

 

 

744

 

19,473

 

10,150

 

Additions for previously impaired securities

 

6,923

 

6,647

 

19,201

 

10,750

 

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

 

$

108,393

 

$

57,238

 

$

108,393

 

$

57,238

 

 

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 September 30, 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

 

$

66,428

 

$

(5,743

)

$

229,183

 

$

(18,287

)

$

295,611

 

$

(24,030

)

Commercial mortgage-backed securities

 

17,625

 

(329

)

 

 

17,625

 

(329

)

Other asset-backed securities

 

511,822

 

(36,646

)

202,059

 

(38,301

)

713,881

 

(74,947

)

U.S. government-related securities

 

51,377

 

(173

)

 

 

51,377

 

(173

)

Other government-related securities

 

34,994

 

(19

)

 

 

34,994

 

(19

)

States, municipals, and political subdivisions

 

10,302

 

(215

)

 

 

10,302

 

(215

)

Corporate bonds

 

571,959

 

(23,279

)

537,676

 

(39,828

)

1,109,635

 

(63,107

)

Equities

 

15,171

 

(4,940

)

21,585

 

(5,302

)

36,756

 

(10,242

)

 

 

$

1,279,678

 

$

(71,344

)

$

990,503

 

$

(101,718

)

$

2,270,181

 

$

(173,062

)

 

The RMBS have a gross unrealized loss greater than twelve months of $18.3 million as of September 30, 2012. These losses are a result of continued weakness in the residential housing market which has 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 $38.3 million as of September 30, 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 does not intend to sell or expect to be required to sell the securities before recovering the Company’s amortized cost of these securities.

 

The corporate bonds category has gross unrealized losses greater than twelve months of $39.8 million as of September 30, 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. In addition, the Company 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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Table of Contents

 

The equities category has a gross unrealized loss greater than twelve months of $5.3 million as of September 30, 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. In addition, the Company does not intend to sell or expect to be required to sell the securities before recovering the Company’s amortized cost of these securities.

 

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 does not intend to sell or expect to be required to sell the securities before recovering the Company’s amortized cost of these securities.

 

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. In addition, the Company does not intend to sell or expect to be required to sell the securities before recovering the Company’s amortized cost of these securities.

 

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. In addition, the Company 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 September 30, 2012, the Company had securities in its available-for-sale portfolio which were rated below investment grade of $1.7 billion and had an amortized cost of $1.7 billion. In addition, included in the Company’s trading portfolio, the Company held $379.9 million of securities which were rated below investment grade. Approximately $457.1 million of the below investment grade securities were not publicly traded.

 

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Table of Contents

 

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

 

For The

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(Dollars In Thousands)

 

Fixed maturities

 

$

437,087

 

$

479,954

 

$

797,314

 

$

677,262

 

Equity securities

 

4,531

 

(8,385

)

8,226

 

(12,173

)

 

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 September 30, 2012. The Company currently does not have any intent to sell these securities, and does 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.

 

As of January 1, 2011, the beginning of the earliest period presented, the cumulative effect adjustment recorded to reflect this guidance resulted in a decrease of $504.5 million in retained earnings, an increase of $14.6 million in accumulated other comprehensive income and a decrease of $489.9 million in total shareowners’ equity.

 

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Table of Contents

 

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 September 30, 2011

 

 

 

As originally
reported

 

As adjusted

 

Effect of Change

 

 

 

(Dollars In Thousands)

 

Expenses:

 

 

 

 

 

 

 

Amortization of deferred policy acquisition costs and value of business acquired

 

$

83,782

 

$

71,740

 

$

(12,042

)

Other operating expenses

 

131,604

 

152,563

 

20,959

 

Total benefits and expenses

 

808,178

 

817,095

 

8,917

 

 

 

 

 

 

 

 

 

Income before income tax

 

131,203

 

122,286

 

(8,917

)

 

 

 

 

 

 

 

 

Income tax (benefit) expense

 

42,589

 

39,429

 

(3,160

)

 

 

 

 

 

 

 

 

Net income

 

$

88,614

 

$

82,857

 

$

(5,757

)

Less: Net loss attributable to noncontrolling interests

 

 

 

 

Net Income available to PLC’s common shareowners

 

$

88,614

 

$

82,857

 

$

(5,757

)

 

 

 

 

 

 

 

 

Net income available to PLC’s common shareowners - basic

 

$

1.05

 

$

0.98

 

$

(0.07

)

Net income available to PLC’s common shareowners - diluted

 

$

1.03

 

$

0.96

 

$

(0.07

)

 

19



Table of Contents

 

 

 

For The Nine Months Ended September 30, 2011

 

 

 

As originally
reported

 

As adjusted

 

Effect of Change

 

 

 

(Dollars In Thousands)

 

Expenses:

 

 

 

 

 

 

 

Amortization of deferred policy acquisition costs and value of business acquired

 

$

237,833

 

$

202,684

 

$

(35,149

)

Other operating expenses

 

382,127

 

448,008

 

65,881

 

Total benefits and expenses

 

2,300,674

 

2,331,406

 

30,732

 

 

 

 

 

 

 

 

 

Income before income tax

 

378,571

 

347,839

 

(30,732

)

 

 

 

 

 

 

 

 

Income tax (benefit) expense

 

129,127

 

118,236

 

(10,891

)

 

 

 

 

 

 

 

 

Net income

 

$

249,444

 

$

229,603

 

$

(19,841

)

Less: Net loss attributable to noncontrolling interests

 

245

 

245

 

 

Net Income available to PLC’s common shareowners

 

$

249,199

 

$

229,358

 

$

(19,841

)

 

 

 

 

 

 

 

 

Net income available to PLC’s common shareowners - basic

 

$

2.90

 

$

2.67

 

$

(0.23

)

Net income available to PLC’s common shareowners - diluted

 

$

2.86

 

$

2.63

 

$

(0.23

)

 

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 Nine Months Ended September 30, 2011

 

 

 

As originally
reported

 

As adjusted

 

Effect of Change

 

 

 

(Dollars In Thousands)

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income

 

$

249,444

 

$

229,603

 

$

(19,841

)

Amortization of deferred policy acquisition costs and value of business acquired

 

237,833

 

202,684

 

(35,149

)

Capitalization of deferred policy acquisition costs

 

(361,644

)

(306,564

)

55,080

 

Deferred income tax

 

30,148

 

23,040

 

(7,108

)

Other, net

 

(5,004

)

2,014

 

7,018

 

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