"Although the companies have increased annuity and life insurance premium volume, consistent growth and profitability in these lines of business remains unproven. Nevertheless, the combined organization has extremely strong capitalization and liquidity as well as very strong operating performance and a conservative investment philosophy."
The strength of the combined companies' earnings continues to be based largely on PMIC's excellent performance in the daily hospital indemnity and Medicare supplement market. However, PLIC's pretax operating earnings, which exclude realized gains and losses, declined to $6.1 million in 2003 from $9.6 million in 2002 and was below expectations of $10 million-$15 million. This was mainly because of greater-than-expected life insurance mortality and reduced investment margins on annuities, which stemmed from the low interest rate environment. In 2001, PLIC had pretax operating earnings of about $300,000 after operating losses in each of the three prior years. It remains uncertain whether PLIC's recent profitability can be sustained for the long term.
PMIC maintains a leading market position in direct-response sales of individual hospital daily indemnity products and a strong market position in Medicare supplement insurance. However, declining sales of its core health insurance products--daily hospital indemnity and Medicare supplement--is a concern. In response to this trend, the companies have begun to develop new health insurance products and seek growth through life insurance and annuity products. Although annuity sales continued to increase significantly in the first six months of 2004 to $74.9 million from $58.3 million in 2003 and $7.6 million in 2002, it remains unclear whether this positive trend can be sustained for the long term.
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