8-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C.  20549

FORM 8-K

CURRENT REPORT

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

Date of Report (Date of earliest event reported)             December 30, 2004

Protective Life Insurance Company

(Exact name of registrant as specified in its charter)

Delaware	001-31901	63-0169720
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No.)

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

N/A

(Former name or former address, if changed since last report.)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CF 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 8.01                Other Events.

This Current Report on Form 8-K discloses amended information about the operating segments of Protective Life Insurance Company (“PLIC”) following management’s decision during 2004 to move the surety and residual value lines of business from the Asset Protection segment to Corporate and Other. The presentation of this information does not change PLIC’s consolidated financial position or consolidated results of operations for any period presented.

The amended segment information is presented in Business, Management’s Discussion and Analysis of Financial Condition and Results of Operations with respect to each of the three years in the period ended December 31, 2003 (“MD&A”), the related Consolidated Financial Statements and Notes to Consolidated Financial Statements of PLIC (“Consolidated Financial Statements”), and Financial Statement Schedules, which are furnished as Exhibit 99.1, Exhibit 99.2, Exhibit 99.3 and Exhibit 99.4, respectively, to this Report. The amended segment information is set forth in Business beneath the headings “Asset Protection” and “Corporate and Other”, in MD&A beneath the headings “Overview” and “Results of Operations”, in Note K of Notes to the Consolidated Financial Statements, and in Schedule III of the Financial Statement Schedules.  The Current Report also includes an updated Report of Independent Registered Public Accounting Firm. Except as noted above, the Consolidated Financial Statements remain unchanged from the Consolidated Financial Statements that were filed in PLIC’s Annual Report on Form 10-K for the year ended December 31, 2003.

Item 9.01                Financial Statements and Exhibits.

(c)Exhibits:

23 – Report of Independent Registered Public Accounting Firm

99.1 – Business

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

99.3 - Consolidated Financial Statements and Notes to Consolidated Financial Statements

99.4 - Financial Statement Schedules

2

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

PROTECTIVE LIFE INSURANCE COMPANY
By /s/	Steven G. Walker
	Steven G. Walker
	Senior Vice President, Controller
	and Chief Accounting Officer
	(Duly Authorized Officer)

Date:           December 30, 2004

3

EX-23

Exhibit 23

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Directors and Share Owner of

Protective Life Insurance Company:

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Protective Life Insurance Company and its subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America.  In addition, in our opinion, the financial statement schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the consolidated financial statements.  These financial statements and financial statement schedules are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States), which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note A of the Notes to the Consolidated Financial Statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142,  Goodwill and Other Intangible Assets and effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133,  Accounting for Derivative Instruments and Hedging Activities.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Birmingham, Alabama

March 11, 2004, except for Note K as to which the date is as of December 29, 2004

EX-99.1

Exhibit 99.1

Business

Protective Life Insurance Company (Protective), a stock life insurance company, was founded in 1907.  Protective is a wholly-owned subsidiary of Protective Life Corporation (PLC), an insurance holding company whose common stock is traded on the New York Stock Exchange (symbol: PL).  Protective provides financial services through the production, distribution, and administration of insurance and investment products.  Unless the context otherwise requires, “Protective” refers to the consolidated group of Protective Life Insurance Company and its subsidiaries.

Protective operates several business segments each having a strategic focus.  An operating segment is generally distinguished by products and/or channels of distribution.  Protective’s operating segments are Life Marketing, Acquisitions, Annuities, Stable Value Products and Asset Protection. Protective also has an additional segment referred to as Corporate and Other.

Additional information concerning Protective’s segments may be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and in Note K to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.  The information incorporated herein by reference is also electronically accessible through the Internet from the “Edgar Database of Corporate Information” on the Securities and Exchange Commission’s World Wide Web site (www.sec.gov).

In the following paragraphs, Protective reports sales and new capital invested.  These statistics are used by Protective to measure the relative progress of its marketing and acquisition efforts.  These statistics were derived from Protective’s various sales tracking and administrative systems and were not derived from Protective’s financial reporting systems or financial statements.  These statistics attempt to measure only one of many factors that may affect future profitability, and therefore are not intended to be predictive of future profitability.

Life Marketing

The Life Marketing segment markets level premium term and term-like insurance, universal life, variable universal life and “bank owned life insurance” (BOLI) products on a national basis.  The segment uses several methods of distribution for its products.  One distribution system is comprised of brokerage general agencies who recruit a network of independent life agents.  The segment also distributes insurance products through a network of experienced independent personal producing general agents who are recruited by regional sales managers.  Also, Protective markets BOLI through an independent marketing organization that specializes in this market.  The segment also distributes life insurance products through stockbrokers and banks, and through direct response and worksite arrangements.

The following table shows the Life Marketing segment’s sales measured by new premium.

Year Ended December 31	Sales
	(dollars in millions)
1999	$	139.2
2000	161.1
2001	163.5
2002	224.1
2003	289.6

Acquisitions

The Acquisitions segment focuses on acquiring, converting, and servicing policies acquired from other companies.  The segment’s primary focus is on life insurance policies sold to individuals.  These acquisitions may be accomplished through acquisitions of companies or through the reinsurance of blocks of policies from other insurers.  Forty-three transactions have been closed by the segment since 1970, including 16 since 1989.  Policies acquired through the segment are usually administered as “closed” blocks; i.e., no new policies are being marketed.  Therefore, the amount of insurance in force for a particular acquisition is expected to decline with time due to lapses and deaths of the insureds.

Most acquisitions closed by the Acquisitions segment do not include the acquisition of an active sales force.  In transactions where some marketing activity was included, Protective generally either ceased future marketing efforts or redirected those efforts to another segment of Protective.  However, in the case of the acquisition of West Coast Life Insurance Company (West Coast) which was closed by the Acquisitions segment in 1997, Protective elected to continue the marketing of new policies and operate West Coast as a component of Protective’s Life Marketing segment.

Protective believes that its focused and disciplined approach to the acquisition process and its experience in the assimilation, conservation, and servicing of acquired policies gives it a significant competitive advantage over many other companies that attempt to make similar acquisitions.  Protective expects acquisition opportunities to continue to be available as the life insurance industry continues to consolidate; however, management believes that Protective may face increased competition for future acquisitions.

Total revenues and income before income tax from the Acquisitions segment are expected to decline with time unless new acquisitions are made.  Therefore, the segment’s revenues and earnings may fluctuate from year to year depending upon the level of acquisition activity.

The following table shows the number of transactions closed by the Acquisitions segment and the approximate amount of (statutory) capital invested for each year in which an acquisition was made.

Year Ended December 31	Number of Transactions	Capital Invested
		(dollars in millions)
2001	2	$	247.8
2002	1	60.0

In 2001, Protective coinsured a block of individual life policies from Standard Insurance Company, and acquired the stock of Inter-State Assurance Company (Inter-State) and First Variable Life Insurance Company (First Variable) from ILona Financial Group, Inc., the U.S. subsidiary of Irish Life & Permanent plc of Dublin, Ireland.  In 2002, Protective coinsured a block of traditional life and interest-sensitive life insurance policies from Conseco Variable Insurance Company.  Although acquisition opportunities were investigated, no transactions were completed in 1999, 2000, or 2003.

From time to time other of Protective’s business segments have acquired companies and blocks of policies which are included in their respective results.

Annuities

Protective’s Annuities segment manufactures, sells, and supports fixed and variable annuity products.  These products are primarily sold through stockbrokers, but are also sold through financial institutions and the Life Marketing segment’s sales force.

Protective’s fixed annuities are primarily modified guaranteed annuities which guarantee an interest rate for a fixed period.  Because contract values are “market-value adjusted” upon surrender prior to maturity, these products afford Protective a measure of protection from the effects of changes in interest rates.  Protective also offers variable annuities which offer the policyholder the opportunity to invest in various investment accounts.

The following table shows fixed and variable annuity sales.  The demand for annuity products is related to the general level of interest rates and performance of the equity markets.

Year Ended December 31	Fixed Annuities		Variable Annuities		Total Annuities
			(dollars in millions)
1999	$	350	$	361	$	711
2000	635		257		892
2001	689		263		952
2002	628		325		953
2003	164		350		514

Stable Value Products

Protective’s Stable Value Products segment markets guaranteed investment contracts (GICs) to 401(k) and other qualified retirement savings plans.  GICs are generally contracts which specify a return on deposits for a specified period and often provide flexibility for withdrawals at book value in keeping with the benefits provided by the plan.  The demand for GICs is related to the relative attractiveness of the “fixed rate” investment option in a 401(k) plan compared to the equity-based investment options available to plan participants.

The segment also markets fixed and floating rate funding agreements directly to the trustees of municipal bond proceeds, institutional investors, bank trust departments and money market funds, and sells funding agreements to special purpose entities that in turn issue notes or certificates in smaller, transferable denominations.  During the fourth quarter of 2003, Protective registered a funding agreement-backed notes program with the SEC.  Through this program, Protective is able to offer notes to both institutional and retail investors.  The segment’s funding agreement-backed notes complement Protective’s overall asset-liability management in that the terms of the funding agreements may be tailored to the needs of the seller, as opposed to the needs of the buyer, and more so in a retail program.  The segment had sales of $450 million under this program in 2003.

Protective’s emphasis is on a consistent and disciplined approach to product pricing and asset/liability management, careful underwriting of early withdrawal risks and maintaining low distribution and administration costs.  Most GIC contracts and funding agreements written by Protective have maturities of three to seven years.

The following table shows the stable value products sales.

Year Ended December 31	GICs		Funding Agreements		Total
			(dollars in millions)
1999	$	584	$	386	$	970
2000	418		801		1,219
2001	409		637		1,046
2002	267		888		1,155
2003	275		1,333		1,608

The rate of growth in account balances is affected by the amount of maturing contracts relative to the amount of sales.

Asset Protection

The Asset Protection segment markets extended service contracts and credit life and disability insurance to protect consumers’ investments in automobiles and watercraft.  The segment’s products are primarily marketed through a national network of 2,500 automobile and marine dealers.  The Asset Protection segment has also offered credit insurance through banks and consumer finance companies.

Protective entered into an agreement in 2003, under the terms of which an unaffiliated company assumed the administration and marketing responsibilities for a portion of the Asset Protection segment’s financial institutions credit business that was based in Raleigh, North Carolina.  Protective is reviewing strategic alternatives for certain under-performing product lines in the Asset Protection segment.

In 2000, Protective acquired the Lyndon Insurance Group (Lyndon) from Frontier Insurance Group.  Lyndon markets a variety of specialty insurance products, including credit insurance and vehicle and marine extended service contracts.  Lyndon distributes products on a national basis through financial institutions and automobile dealers.

Protective is the fifth largest writer of credit insurance in the United States according to industry surveys.  These policies cover consumer loans made by financial institutions located primarily in the southeastern United States and automobile dealers throughout the United States.

The following table shows the credit insurance and related product sales measured by new premium including the sales of Lyndon since the date of acquisition.

Year Ended December 31	Sales
	(dollars in millions)
1999	$	283.4
2000	506.8
2001	500.1
2002	467.8
2003	472.4

In 2003, approximately 58% of the segment’s sales were through the automobile dealer distribution channel, and approximately 42% of sales were extended service contracts.  A portion of the sales and resulting premium are reinsured with producer-owned reinsurers.

Corporate and Other

Protective has an additional segment referred to as Corporate and Other.  The Corporate and Other segment primarily consists of net investment income and expenses not attributable to the other business segments described above (including net investment income on unallocated capital and interest on substantially all debt).  This segment also includes earnings from several small non-strategic lines of business (mostly cancer insurance, residual value insurance, surety insurance and group annuities), and various investment-related transactions.  The earnings of this segment may fluctuate from year to year.

Discontinued Operations

On December 31, 2001, Protective completed the sale to Fortis, Inc. of substantially all of its Dental Benefits Division (Dental Division), and discontinued other remaining Dental Division operations, primarily other health insurance lines.

Investments

The types of assets in which Protective may invest are influenced by various state laws which prescribe qualified investment assets.  Within the parameters of these laws, Protective invests its assets giving consideration to such factors as liquidity needs, investment quality, investment return, matching of assets and liabilities, and the overall composition of the investment portfolio by asset type and credit exposure.  For further information regarding Protective’s investments, the maturity of and the concentration of risk among Protective’s invested assets, derivative financial instruments, and liquidity, see Notes A and C to the Consolidated Financial Statements, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” located in Items 8 and 7, respectively, in this Annual Report on Form 10-K.

A significant portion of Protective’s bond portfolio is invested in mortgage-backed securities.  Mortgage-backed securities are constructed from pools of residential mortgages, and may have cash flow volatility as a result of changes in the rate at which prepayments of principal occur with respect to the underlying loans.  Prepayments of principal on the underlying residential loans can be expected to accelerate with decreases in interest rates and diminish with increases in interest rates.  Protective has not invested in the higher risk tranches of mortgage-backed securities (except mortgage-backed securities issued in securitization transactions sponsored by Protective).  In addition, Protective has entered into hedging transactions to reduce the volatility in market value of its mortgage-backed securities.

The table below shows a breakdown of Protective’s mortgage-backed securities portfolio by type at December 31, 2003.  Planned amortization class securities (PACs) pay down according to a schedule.  Targeted amortization class securities (TACs) pay down in amounts approximating a targeted schedule.  Non-Accelerated Security (NAS) receive no principal payments in the first five years, after which NAS receive an increasing percentage of pro rata principal payments until the tenth year, after which NAS receive principal as principal of the underlying mortgages is received.  All of these types of structured mortgage-backed securities give Protective some measure of protection against both prepayment and extension risk.

Accretion directed securities have a stated maturity but may repay more quickly.  Sequential receive scheduled payments in order until each class is paid off.  Pass through securities receive principal as principal of the underlying mortgages is received.  The CMBS are commercial mortgage-backed securities issued in securitization transactions sponsored by Protective, in which Protective securitized portions of its mortgage loan portfolio.

Type	Percentage of Mortgage-Backed Securities
Sequential	36.2	%
Pass Through	32.9
PAC	17.4
CMBS	7.0
NAS	4.0
Accretion Directed	2.4
TAC	0.1
	100.0	%

Protective obtains ratings of its fixed maturities from Moody’s Investors Service, Inc. (Moody’s) and Standard & Poor’s Corporation (S&P).  If a bond is not rated by Moody’s or S&P, Protective uses ratings from the Securities Valuation Office of the National Association of Insurance Commissioners (NAIC), or Protective rates the bond based upon a comparison of the unrated issue to rated issues of the same issuer or rated issues of other issuers with similar risk characteristics.  At December 31, 2003, approximately 99% of bonds were rated by Moody’s, S&P, or the NAIC.

The approximate percentage distribution of Protective’s fixed maturity investments by quality rating at December 31, 2003, is as follows:

Rating	Percentage of Fixed Maturity Investments
AAA	36.5	%
AA	6.0
A	23.0
BBB	26.9
BB or less	7.6
	100.0	%

At December 31, 2003, approximately $11.9 billion of Protective’s $12.9 billion bond portfolio was invested in U.S. Government or agency-backed securities or investment grade bonds and approximately $983.1 million of its bond portfolio was rated less than investment grade, of which $407.6 million are bank loan participations and $66.9 million were securities issued in Protective-sponsored commercial mortgage loan securitizations.  Protective has increased its investment in bank loan participations over the last two years to take advantage of market conditions.

Risks associated with investments in less than investment grade debt obligations may be significantly higher than risks associated with investments in debt securities rated investment grade.  Risk of loss upon default by the borrower is significantly greater with respect to such debt obligations than with other debt securities because these obligations may be unsecured or subordinated to other creditors.  Additionally, there is often a thinly traded market for such securities and current market quotations are frequently not available for some of these securities.  Issuers of less than investment grade debt obligations usually have higher levels of indebtedness and are more sensitive to adverse economic conditions, such as recession or increasing interest rates, than investment-grade issuers.

Protective also invests a significant portion of its portfolio in mortgage loans.  Results for these investments have been excellent due to careful management and a focus on a specialized segment of the market.  Protective generally does not lend on speculative properties and has specialized in making loans on either credit-oriented commercial properties or credit-anchored strip shopping centers.  The average size of loans made during 2003 was $3.1 million.  At December 31, 2003, the average size mortgage loan in Protective’s portfolio was approximately $2.2 million and the largest single loan amount was $19.6 million.

The following table shows a breakdown of Protective’s mortgage loan portfolio by property type at December 31, 2003:

Property Type	Percentage of Mortgage Loans on Real Estate
Retail	74.7	%
Apartments	7.9
Office Buildings	8.0
Warehouses	8.0
Other	1.4
	100.0	%

Retail loans are generally on strip shopping centers located in smaller towns and anchored by one or more regional or national retail stores.  The anchor tenants enter into long-term leases with Protective’s borrowers.  These centers provide the basic necessities of life, such as food, pharmaceuticals, and clothing, and have been relatively insensitive to changes in economic conditions.  The following are the largest anchor tenants (measured by Protective’s exposure) at December 31, 2003:

Anchor Tenants	Percentage of Mortgage Loans on Real Estate
Ahold Corporation	2.8	%
Walgreen Corporation	2.7
Food Lion, Inc.	2.6
Wal-Mart Stores, Inc.	2.4
Winn Dixie Stores, Inc.	2.2

Protective’s mortgage lending criteria generally require that the loan-to-value ratio on each mortgage be at or under 75% at the time of origination.  Projected rental payments from credit anchors (i.e., excluding rental payments from smaller local tenants) generally exceed 70% of the property’s projected operating expenses and debt service.  Protective also offers a commercial loan product under which Protective 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.  At December 31, 2003, approximately $382.7 million of Protective’s mortgage loans have this participation feature.

Many of Protective’s mortgage loans have call or interest rate reset provisions between 3 and 10 years.  However, if interest rates were to significantly increase, Protective may be unable to call the loans or increase the interest rates on its existing mortgage loans commensurate with the significantly increased market rates.

At December 31, 2003, $11.8 million or 0.4% of the mortgage loan portfolio was nonperforming.  It is Protective’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 Protective’s general policy to initiate foreclosure proceedings unless a workout arrangement to bring the loan current is in place.

In 1996, Protective sold approximately $554 million of its mortgage loans in a securitization transaction.  In 1997, Protective sold approximately $445 million of its loans in a second securitization transaction.  In 1998 Protective securitized $146 million of its mortgage loans and in 1999 Protective securitized $263 million.  The securitizations’ senior tranches were sold, and Protective retained the junior tranches.  Protective continues to service the securitized mortgage loans.  At December 31, 2003, Protective had investments related to retained beneficial interests of mortgage loan securitizations of $283.6 million.

As a general rule, Protective does not invest directly in real estate.  The investment real estate held by Protective consists largely of properties obtained through foreclosures or the acquisition of other insurance companies.  In Protective’s experience, the appraised value of a foreclosed property often approximates the mortgage loan balance on the property plus costs of foreclosure.  Also, foreclosed properties often generate a positive cash flow enabling Protective to hold and manage the property until the property can be profitably sold.

The following table shows the investment results from continuing operations of Protective:

Year ended December 31	Cash, Accrued Investment Income, and Investments at December 31		Net Investment Income		Percentage Earned on Average of Cash and Investments		Realized Investment Gains (Losses)
							Derivative Financial Instruments			All other investments
	(dollars in thousands)
1999	$	8,808,740	$	617,829	7.0	%	$	3,425		$	1,335
2000	10,349,634		692,081		7.1		2,157			(16,756		)
2001	13,526,530		835,203		7.0		2,182			(6,123		)
2002	15,705,411		971,808		6.8		(4,708		)	12,314
2003	17,258,709		980,743		6.1		8,249			66,764

Life Insurance in Force

The following table shows life insurance sales by face amount and life insurance in force.

	Year Ended December 31
	2003		2002		2001		2000		1999
	(dollars in thousands)
New Business Written
Life Marketing	$	102,154,269	$	67,827,198	$	40,538,738	$	45,918,373	$	26,918,775
Group Products(1)	67,405		44,567		123,062		143,192		123,648
Asset Protection	6,655,790		4,516,350		5,917,047		7,052,106		6,665,219
Total	$	108,877,464	$	72,388,115	$	46,578,847	$	53,113,671	$	33,707,642
Business Acquired			$	3,859,788	$	19,992,424
Acquisitions
Asset Protection							$	2,457,296	$	620,000
Total			$	3,859,788	$	19,992,424	$	2,457,296	$	620,000
Insurance in Force at End of Year(2)
Life Marketing	$	305,939,864	$	225,667,767	$	159,485,393	$	129,502,305	$	91,627,218
Acquisitions	30,755,635		27,372,622		36,856,042		20,133,370		22,054,734
Group Products(1)	710,358		5,015,636		5,821,744		7,348,195		6,065,604
Asset Protection	9,088,963		12,461,564		12,094,947		13,438,226		10,069,030
Total	$	346,494,820	$	270,517,589	$	214,258,126	$	170,422,096	$	129,816,586

(1)On December 31, 2001, Protective completed the sale of substantially all of its Dental Division, with which the group products are associated.

(2)Reinsurance assumed has been included; reinsurance ceded (2003 - $292,740,795; 2002 - $219,025,215; 2001-$171,449,182; 2000-$128,374,583; 1999-$92,566,755) has not been deducted.

The ratio of voluntary terminations of individual life insurance to mean individual life insurance in force, which is determined by dividing the amount of insurance terminated due to lapses during the year by the mean of the insurance in force at the beginning and end of the year, adjusted for the timing of major acquisitions was:

Year Ended December 31	Ratio of Voluntary Termination
1999	6.0	%
2000	5.8
2001	7.4
2002	4.7
2003	4.1

The amount of investment products in force is measured by account balances.  The following table shows stable value product and annuity account balances.  Most of the variable annuity account balances are reported in Protective’s

financial statements as liabilities related to separate accounts.

Year Ended December 31	Stable Value Products		Modified Guaranteed Annuities		Fixed Annuities		Variable Annuities
	(dollars in thousands)
1999	$	2,680,009	$	941,692	$	391,085	$	2,085,072
2000	3,177,863		1,384,027		330,428		2,043,878
2001	3,716,530		1,883,998		1,143,394		2,131,476
2002	4,018,552		2,390,440		955,886		1,864,993
2003	4,676,531		2,286,417		851,165		2,388,033

Fixed annuity account balances increased in 2001 due to the acquisition of Inter-State and First Variable.

Underwriting

The underwriting policies of Protective and its insurance subsidiaries are established by management.  With respect to individual insurance, Protective and its insurance subsidiaries use information from the application and, in some cases, inspection reports, attending physician statements, or medical examinations to determine whether a policy should be issued as applied for, rated, or rejected.  Medical examinations of applicants are required for individual life insurance in excess of certain prescribed amounts (which vary based on the type of insurance) and for most individual insurance applied for by applicants over age 50.  In the case of “simplified issue” policies, which are issued primarily through the Asset Protection segment and the Life Marketing segment in the payroll deduction market, coverage is rejected if the responses to certain health questions contained in the application indicate adverse health of the applicant.  For other than “simplified issue” policies, medical examinations are requested of any applicant, regardless of age and amount of requested coverage, if an examination is deemed necessary to underwrite the risk.  Substandard risks may be referred to reinsurers for full or partial reinsurance of the substandard risk.

Protective and its insurance subsidiaries require blood samples to be drawn with individual insurance applications above certain face amounts ranging from $100,000 to $250,000 based on the applicant’s age, except in the worksite and BOLI markets where no blood testing is required.  Blood samples are tested for a wide range of chemical values and are screened for antibodies to the HIV virus.  Applications also contain questions permitted by law regarding the HIV virus which must be answered by the proposed insureds.

Reinsurance Ceded

Protective and its insurance subsidiaries cede insurance to other insurance companies.  The ceding insurance company remains liable with respect to ceded insurance should any reinsurer fail to meet the obligations assumed by it.  Protective sets a limit on the amount of insurance retained on the life of any one person.  In the individual lines it will not retain more than $500,000, including accidental death benefits, on any one life.  In many cases the retention is less.  At December 31, 2003, Protective had insurance in force of $346.5 billion of which approximately $292.7 billion was ceded to reinsurers.

Over the past several years, Protective’s reinsurers have reduced the net cost of reinsurance to Protective.  Consequently, Protective has increased the amount of reinsurance which it cedes on newly-written individual life insurance policies, and has also ceded a portion of the mortality risk of existing business of the Life Marketing and Acquisitions business segments.

Protective also has used reinsurance in the sale of the Dental Division and to reinsure fixed annuities in conjunction with the acquisition of two small insurers and for reinsuring guaranteed minimum death benefit (GMDB) claims in its variable annuity contracts.

Policy Liabilities and Accruals

The applicable insurance laws under which Protective and its insurance subsidiaries operate require that each insurance company report policy liabilities to meet future obligations on the outstanding policies.  These liabilities are the amounts which, with the additional premiums to be received and interest thereon compounded annually at certain assumed rates, are calculated in accordance with applicable law to be sufficient to meet the various policy and contract obligations as they mature.  These laws specify that the liabilities shall not be less than liabilities calculated using certain named mortality tables and interest rates.

The policy liabilities and accruals carried in Protective’s financial reports presented on the basis of accounting principles generally accepted in the United States of America (GAAP) differ from those specified by the laws of the various states and carried in the insurance subsidiaries’ statutory financial statements (presented on the basis of statutory accounting principles mandated by state insurance regulations).  For policy liabilities other than those for universal life policies, annuity contracts, GICs, and funding agreements, these differences arise from the use of mortality and morbidity tables and interest rate assumptions which are deemed to be more appropriate for financial reporting purposes than those required for statutory accounting purposes; from the introduction of lapse assumptions into the calculation; and from the use of the net level premium method on all business.  Policy liabilities for universal life policies, annuity contracts, GICs, and funding agreements are carried in Protective’s financial reports at the account value of the policy or contract plus accrued interest.

Federal Income Tax Consequences

Existing federal laws and regulations affect the taxation of Protective’s products. Income tax payable by policyholders on investment earnings is deferred during the accumulation period of certain life insurance and annuity products.  Congress has from time to time considered proposals that, if enacted, would have had an adverse impact on the federal income tax treatment of such products, or would increase the tax-deferred status of competing products.  In addition, life insurance products are often used to fund estate tax obligations.  Legislation has recently been enacted that would over time, reduce and eventually eliminate the estate tax.  If the estate tax is significantly reduced or eliminated, the demand for certain life insurance products could be adversely affected.  Protective cannot predict what tax initiatives may be enacted which could adversely affect Protective.

Protective and its insurance subsidiaries are taxed by the federal government in a manner similar to companies in other industries.  However, certain restrictions on consolidating recently acquired life insurance companies and on consolidating life insurance company income with non-insurance income are applicable to Protective; thus, Protective is not able to consolidate all of the operating results of its subsidiaries for federal income tax purposes.

Under pre-1984 tax law, certain income of Protective was not taxed currently, but was accumulated in a memorandum account designated as “Policyholders’ Surplus” to be taxed only when such income was distributed to share owners or when certain limits on accumulated amounts were exceeded.  Consistent with current tax law, amounts accumulated in Policyholders’ Surplus have been carried forward, although no accumulated income may be added to these accounts.  As of December 31, 2003, the aggregate accumulation in the Policyholders’ Surplus account was $70.5 million.  Under current income tax laws, Protective does not anticipate paying income tax on amounts in the Policyholders’ Surplus accounts.

Competition

Life and health insurance is a mature industry.  In recent years, the industry has experienced little growth in life insurance sales, though the aging population has increased the demand for retirement savings products.  Life and health insurance is a highly competitive industry.  Protective encounters significant competition in all lines of business from other insurance companies, many of which have greater financial resources than Protective, as well as competition from other providers of financial services.  Competition could result in, among other things, lower sales or higher lapses of existing products.

The insurance industry is consolidating, with larger, potentially more efficient organizations emerging from consolidation. Participants in certain of Protective’s independent distribution channels are also consolidating into larger organizations.  Some mutual insurance companies are converting to stock ownership which will give them greater access to capital markets.  Additionally, commercial banks, insurance companies, and investment banks may now combine, provided certain requirements are satisfied.  The ability of banks to increase their securities-related business or to affiliate with insurance companies may materially and adversely affect sales of all of Protective’s products by substantially increasing the number and financial strength of potential competitors.

Protective’s ability to compete is dependent upon, among other things, its ability to attract and retain distribution channels to market its insurance and investment products, its ability to develop competitive and profitable products, its ability to maintain low unit costs, and its maintenance of strong ratings from rating agencies.

Regulation

Protective and its insurance subsidiaries are subject to government regulation in each of the states in which they conduct business.  Such regulation is vested in state agencies having broad administrative power dealing with many aspects of Protective’s business, which may include premium rates, marketing practices, advertising, privacy, policy

forms, and capital adequacy, and is concerned primarily with the protection of policyholders and other customers rather than share owners.

A life insurance company’s statutory capital is computed according to rules prescribed by the National Association of Insurance Commissioners (NAIC) as modified by the insurance company’s state of domicile.  Statutory accounting rules are different from GAAP and are intended to reflect a more conservative view; for example, requiring immediate expensing of policy acquisition costs and through the use of more conservative computations of policy liabilities.  The NAIC’s risk-based capital requirements require insurance companies to calculate and report information under a risk-based capital formula.  These requirements are intended to allow insurance regulators to identify inadequately capitalized insurance companies based upon the types and mixtures of risks inherent in the insurer’s operations.  The formula includes components for asset risk, liability risk, interest rate exposure, and other factors.  Based upon the December 31, 2003 statutory financial reports, Protective and its insurance subsidiaries are adequately capitalized under the formula.

Protective and its insurance subsidiaries are required to file detailed annual reports with the supervisory agencies in each of the jurisdictions in which they do business and their business and accounts are subject to examination by such agencies at any time.  Under the rules of the NAIC, insurance companies are examined periodically (generally every three to five years) by one or more of the supervisory agencies on behalf of the states in which they do business.  To date, no such insurance department examinations have produced any significant adverse findings regarding Protective or any insurance company subsidiary of Protective.

Under insurance guaranty fund laws in most states, insurance companies doing business in such a state can be assessed up to prescribed limits for policyholder losses incurred by insolvent or failed insurance companies.  Although Protective cannot predict the amount of any future assessments, most insurance guaranty fund laws currently provide that an assessment may be excused or deferred if it would threaten an insurer’s financial strength.  Protective and its insurance subsidiaries were assessed immaterial amounts in 2003, which will be partially offset by credits against future state premium taxes.

In addition, many states, including the states in which Protective and its insurance subsidiaries are domiciled, have enacted legislation or adopted regulations regarding insurance holding company systems.  These laws require registration of and periodic reporting by insurance companies domiciled within the jurisdiction which control or are controlled by other corporations or persons so as to constitute an insurance holding company system.  These laws also affect the acquisition of control of insurance companies as well as transactions between insurance companies and companies controlling them.  Most states, including Tennessee, where Protective is domiciled, require administrative approval of the acquisition of control of an insurance company domiciled in the state or the acquisition of control of an insurance holding company whose insurance subsidiary is incorporated in the state.  In Tennessee, the acquisition of 10% of the voting securities of an entity is generally deemed to be the acquisition of control for the purpose of the insurance holding company statute and requires not only the filing of detailed information concerning the acquiring parties and the plan of acquisition, but also administrative approval prior to the acquisition.

Protective and its insurance subsidiaries are subject to various state statutory and regulatory restrictions on the insurance subsidiaries’ ability to pay dividends to PLC.  In general, dividends up to specified levels are considered ordinary and may be paid without prior approval.  Dividends in larger amounts are subject to approval by the insurance commissioner of the state of domicile.  The maximum amount that would qualify as ordinary dividends to PLC by Protective in 2004 is estimated to be $293.8 million.  No assurance can be given that more stringent restrictions will not be adopted from time to time by states in which Protective and its insurance subsidiaries are domiciled; such restrictions could have the effect, under certain circumstances, of significantly reducing dividends or other amounts payable to PLC by such subsidiaries without affirmative prior approval by state regulatory authorities.

Protective and its insurance subsidiaries may be subject to regulation by the United States Department of Labor when providing a variety of products and services to employee benefit plans governed by the Employee Retirement Income Security Act (ERISA).  Severe penalties are imposed for breach of duties under ERISA.

Certain policies, contracts and annuities offered by Protective and its subsidiaries are subject to regulation under the federal securities laws administered by the Securities and Exchange Commission.  The federal securities laws contain regulatory restrictions and criminal, administrative and private remedial provisions.

Additional issues related to regulation of Protective and its insurance subsidiaries are discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included herein.

Employees

At December 31, 2003 Protective had approximately 1,437 authorized positions, including approximately 973 in Birmingham, Alabama.  Most employees are covered by contributory major medical, dental, group life, and long-term disability insurance plans.  The cost of these benefits to Protective in 2003 was approximately $4.3 million.  In addition, substantially all of the employees are covered by a pension plan. Protective also matches employee contributions to its 401(k) Plan and makes discretionary profit sharing contributions for employees not otherwise covered by a bonus or sales incentive plan.  See Note L to Consolidated Financial Statements.

EX-99.2

Exhibit 99.2

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

This Management’s Discussion and Analysis should be read in its entirety, since it contains detailed information that is important to understanding Protective’s results and financial condition.  The Overview below is qualified in its entirety by the full Management’s Discussion and Analysis.

FORWARD-LOOKING STATEMENTS – CAUTIONARY LANGUAGE

This report reviews Protective’s financial condition and results of operations including its liquidity and capital resources.  Historical information is presented and discussed.  Where appropriate, factors that may affect future financial performance are also identified and discussed.  Certain statements made in this report include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements include any statement that may predict, forecast, indicate or imply future results, performance or achievements instead of historical facts and may contain words like “believe,” “expect,” “estimate,” “project,” “budget,” “forecast,” “anticipate,” “plan,” “will,” “shall,” “may,” and other words, phrases, or expressions with similar meaning.  Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from the results contained in the forward-looking statements, and Protective cannot give assurances that such statements will prove to be correct.  Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.  Please refer to “Known Trends and Uncertainties” herein for more information about factors which could affect future results.

OVERVIEW

Protective Life Insurance Company (Protective) and its subsidiaries provide financial services through the production, distribution, and administration of insurance and investment products. Protective operates five business segments.  An operating segment is generally distinguished by products and/or channels of distribution.  Protective’s operating segments are Life Marketing, Acquisitions, Annuities, Stable Value Products, and Asset Protection.  In addition, Protective has another segment referred to as the Corporate and Other segment.

In 2003, Protective’s net income increased 47.4% to $232.0 million compared to $157.4 million in 2002.  Included in 2003 net income were net realized investment gains of $75.0 million compared to gains of $7.6 million in 2002.

The Life Marketing segment’s pretax operating income was $160.0 million in 2003, an increase of 27.5% over the $125.4 million reported in 2002.  The increase was primarily attributable to an increase in business-in-force.

The Acquisitions segment’s pretax operating income was $96.7 million in 2003, up slightly from the $96.4 million reported in 2002.  Increased earnings from recently completed transactions were offset by the expected declining earnings from older acquired blocks of business.

The Annuities segment’s pretax operating income was $13.2 million in 2003, a decline of $1.5 million from the $14.7 million reported in 2002.  The decrease is primarily due to interest spread compression and low sales of fixed annuities caused by lower interest rates in 2003.

Stable Value Products pretax operating income was $38.9 million in 2003, compared to $42.3 million in 2002.  Average operating spreads decreased to 96 basis points in 2003, compared to 107 basis points in 2002.

The Asset Protection segment had pretax operating income of $16.0 million in 2003, compared to a loss of $6.7 million in 2002.  This increase in pretax operating income was primarily due to improvements in service contract lines and charges recorded in 2002 due to negative trends in service contract and other product lines.

Corporate and Other had a pretax operating loss of $20.8 million in 2003 compared to a loss of $27.9 million in 2002.  An increase in investment income and improved results from the insurance lines contributed to the change.

CRITICAL ACCOUNTING POLICIES

Protective’s accounting policies inherently require the use of judgments relating to a variety of assumptions and estimates, in particular expectations of current and future mortality, morbidity, persistency, expenses, and interest rates.  Because of the inherent uncertainty when using the assumptions and estimates, the effect of certain accounting policies

under different conditions or assumptions could be materially different from those reported in the consolidated financial statements.  A discussion of the various critical accounting policies is presented below.

Protective incurs significant costs in connection with acquiring new insurance business.  These costs, which vary with and are primarily related to the production of new business and coinsurance of blocks of policies, are deferred.  The recovery of such costs is dependent on the future profitability of the related policies.  The amount of future profit is dependent principally on investment returns, mortality, morbidity, persistency, and expenses to administer the business and certain economic variables, such as inflation.  These factors enter into management’s estimates of future profits which generally are used to amortize certain of such costs.  Accounting for other intangible assets such as goodwill also requires an estimate of the future profitability of the associated lines of business.  Revisions to estimates result in changes to the amounts expensed in the reporting period in which the revisions are made and could result in the impairment of the asset and a charge to income if estimated future profits are less than the unamortized deferred amounts.

Protective has a deferred policy acquisition costs asset of approximately $99.7 million related to its variable annuity product line with an account balance of $2.2 billion at December 31, 2003.  Protective monitors the rate of amortization of the deferred policy acquisition costs associated with its variable annuity product line.  The methodologies employ varying assumptions about how much and how quickly the stock markets will appreciate.  The primary assumptions used to project future profits as part of the analysis include: a long-term equity market growth rate of 9%, reversion to the mean methodology with a reversion to the mean cap rate of 14%, reversion to the mean period of 5 years, and an amortization period of 20 years.  A recovery in equity markets, or methodologies and assumptions that anticipate a recovery, results in lower amounts of amortization, and a worsening of equity markets results in higher amounts of amortization.

Establishing an adequate liability for Protective’s obligations to its policyholders requires the use of assumptions.  Liabilities for future policy benefits on traditional life insurance products require the use of assumptions relative to future investment yields, mortality, persistency and other assumptions based on Protective’s historical experience, modified as necessary to reflect anticipated trends and to include provisions for possible adverse deviation.

Protective also establishes liabilities for guaranteed minimum death benefits (GMDB) on its variable annuity products.  The methods used to estimate the liabilities employ assumptions about mortality and the performance of equity markets.  Protective assumes mortality of 60% of the National Association of Insurance Commissioners 1994 Variable Annuity GMDB Mortality Table to reflect improvements in mortality since the table was derived and other factors.  Future declines in the equity market would increase Protective’s GMDB liability.  Differences between the actual experience and the assumptions used result in variances in profit and could result in losses. Protective’s GMDB at December 31, 2003, are subject to a dollar-for-dollar reduction upon withdrawal of related annuity deposits on contracts issued prior to January 1, 2003.

Determining whether a decline in the current fair value of invested assets is an other-than-temporary decline in value can involve a variety of assumptions and estimates, particularly for investments that are not actively traded in established markets.  For example, assessing the value of certain investments requires Protective to perform an analysis of expected future cash flows or rates of prepayments.  Other investments, such as collateralized mortgage or bond obligations, represent selected tranches of a structured transaction, supported overall by underlying investments in a wide variety of issuers.  Protective’s specific accounting policies related to its invested assets are discussed in the Notes to the Consolidated Financial Statements.

Protective utilizes derivative transactions primarily in order to reduce its exposure to interest rate risk as well as currency exchange risk.  Assessing the effectiveness of these hedging programs and evaluating the carrying values of the related derivatives often involve a variety of assumptions and estimates. Protective employs a variety of methods for determining the fair value of its derivative instruments.  The fair values of interest rate swaps, interest rate swaptions, total return swaps and put or call options are based upon industry standard models which present-value the projected cash flows of the derivatives using current and implied future market conditions.

Determining Protective’s obligations to employees under its defined benefit pension plan and stock-based compensation plans requires the use of estimates.  The calculation of the liability related to Protective’s defined benefit pension plan requires assumptions regarding the appropriate weighted average discount rate, estimated rate of increase in the compensation of its employees and the expected long-term rate of return on the plan’s assets.  Accounting for other stock-based compensation plans may require the use of option pricing models to estimate PLC’s obligations.  Assumptions used in such models relate to equity market volatility, the risk-free interest rate at the date of grant, as well as the expected exercise date.

The assessment of potential obligations for tax, regulatory, and litigation matters inherently involve a variety of estimates of potential future outcomes.  Protective makes such estimates after consultation with its advisors and a review of available facts.

RESULTS OF OPERATIONS

PREMIUMS AND POLICY FEES

The following table sets forth for the periods shown the amount of premiums and policy fees, net of reinsurance (premiums and policy fees), and the percentage change from the prior period:

Year Ended December 31	Amount		Percentage Increase (Decrease)
	(in thousands)
2001	$	618,668	26.3	%
2002	810,043		30.9
2003	735,674		(9.2	)

Premiums and policy fees were $810.0 million in 2002, an increase of $191.4 million or 30.9% from the $618.7 million reported for 2001.  During 2002, Protective discovered that it had overpaid the reinsurance premiums due on certain life insurance policies over a period of 10 years.  Protective recorded cash and receivables totaling $69.7 million, and a corresponding increase in premiums and policy fees, which reflected its then current estimate of amounts to be recovered.  Excluding this increase, premiums and policy fees in the Life Marketing segment increased $29.5 million due to an increase in sales.  Premiums and policy fees in the Acquisitions segment are expected to decline with time (due to the lapsing of policies resulting from deaths of insureds or terminations of coverage) unless new acquisitions are made.  In June 2002, Protective coinsured a block of insurance policies from Conseco Variable Insurance Company (Conseco).  This transaction resulted in an increase in premiums and policy fees of $18.8 million.  The acquisition of Inter-State and First Variable resulted in a $27.0 million increase in premiums and policy fees.  Premiums and policy fees from older acquired blocks decreased $3.7 million.  Premiums and policy fees from the Annuities segment declined $2.3 million due to a decline in variable annuity management fees caused by the general decline in the equity markets.  Premiums and policy fees related to the Asset Protection segment increased $49.6 million due to continued higher sales in its service contracts lines.  Lower sales in other Asset Protection lines during 2002 were more than offset by a decline in the amount of reinsurance ceded.  The decline in reinsurance ceded was primarily due to a change in the form of a credit reinsurance agreement in 2002.  Premiums and policy fees relating to various insurance lines in the Corporate and Other segment increased $2.9 million.

Premiums and policy fees were $735.7 million in 2003, a decrease of $74.4 million or 9.2% from 2002 premiums and policy fees.  In 2003, Protective substantially completed its recovery of all of the previously mentioned reinsurance overpayments.  As a result, $18.4 million of premiums and policy fees were recorded in 2003 related to the collection of the reinsurance overpayment.  Overall, premiums and policy fees in the Life Marketing segment declined $21.5 million from 2002, reflecting an increase in the use of reinsurance.  Premiums and policy fees from the Conseco transaction resulted in an increase of $7.2 million.  Premiums and policy fees from older acquired blocks decreased $17.8 million as a result of normal lapsing of policies resulting from deaths of insureds or terminations of coverage.  Premiums and policy fees in the Annuities segment increased by $0.4 million in 2003.  Premiums and policy fees in the Asset Protection segment decreased by $41.3 million due to reduced credit earned premiums attributable to lower sales and the termination of non-core lines of business.  Premiums and policy fees in the Corporate and Other segment decreased by $1.4 million.

NET INVESTMENT INCOME

The following table sets forth for the periods shown the amount of net investment income, the percentage change from the prior period, and the percentage earned on average cash and investments:

Year Ended December 31	Amount		Percentage Increase		Percentage Earned on Average Cash and Investments
	(in thousands)
2001	$	835,203	20.7	%	7.0	%
2002	971,808		16.4		6.8
2003	980,743		0.9		6.1

Net investment income in 2002 increased $136.6 million or 16.4% over 2001, and in 2003 increased $8.9 million or 0.9% over 2002, primarily due to increases in the average amount of invested assets.  Invested assets have increased primarily due to acquisitions, receiving stable value and annuity deposits, and the asset growth that results from the sale of various insurance products.  The Standard coinsurance transaction and the acquisition of Inter-State and First Variable resulted in an increase in investment income of $57.5 million in 2002.  The Conseco coinsurance transaction resulted in an increase in investment income of $13.3 million in 2003.  This increase was more than offset by $19.3 million decline in investment income from older acquisitions.

The percentage earned on average cash and investments was 6.8% in 2002 and 6.1% in 2003, due to the overall decline in interest rates on new investments.

REALIZED INVESTMENT GAINS (LOSSES)

Protective generally purchases its investments with the intent to hold to maturity by purchasing investments that match future cash flow needs.

The following table sets forth realized investment gains (losses) relating to derivative financial instruments and all other investments for the periods shown:

Year Ended December 31	Derivative Financial Instruments			All Other Investments
	(in thousands)
2001	$	2,182		$	(6,123	)
2002	(4,708		)	12,314
2003	8,249			66,764

Realized investment gains and losses related to derivative financial instruments primarily represent changes in the fair values of certain derivative financial instruments.  Realized investment gains and losses related to derivatives include periodic settlements related to interest rate swaps intended to mitigate the risks associated with certain investments, but do not qualify as hedges under SFAS No. 133.

The sales of investments that have occurred generally result from portfolio management decisions to maintain proper matching of assets and liabilities. Realized investment gains related to all other investments in 2002 of $73.0 million were largely offset by realized investment losses of $60.7 million. Realized investment gains related to all other investments in 2003 of $93.4 million were offset by realized investment losses of $26.6 million. During 2002 and 2003, Protective recorded other-than-temporary impairments in its investments of $17.8 million and $13.6 million, respectively.

Each quarter Protective reviews investments with material unrealized losses and tests for other-than-temporary impairments. Management analyzes various factors to determine if any specific other-than-temporary asset impairments exist. Once a determination has been made that a specific other-than-temporary impairment exists, a realized loss is recognized and the cost basis of the impaired asset is adjusted to its fair value. An other-than-temporary impairment loss is recognized based upon all relevant facts and circumstances for each investment. With respect to unrealized losses due to issuer-specific events, Protective considers the creditworthiness and financial performance of the issuer and other available information. With respect to unrealized losses that are not due to issuer-specific events, such as losses due to

interest rate fluctuations, general market conditions or industry-related events, Protective considers its intent and ability to hold the investment to allow for a market recovery or to maturity together with an assessment of the likelihood of full recovery. See also “Liquidity and Capital Resources – Investments” included herein.

OTHER INCOME

The following table sets forth other income for the periods shown:

Year Ended December 31	Amount		Percentage Increase (Decrease)
	(in thousands)
2001	$	38,578	9.6	%
2002	41,483		7.5
2003	46,825		12.9

Other income consists primarily of revenues of Protective’s direct response businesses, service contract businesses, noninsurance subsidiaries, and rental of space in its administrative building to PLC.  In 2002, revenues from Protective’s service contract business increased $4.7 million.  Income from all other sources decreased $1.8 million.  In 2003, revenues from Protective’s service contract business increased $4.5 million.  Income from all other sources increased $0.8 million.

INCOME BEFORE INCOME TAX

Consistent with Protective’s segment reporting in the Notes to Consolidated Financial Statements, management evaluates the results of Protective’s segments on a before-income-tax basis as adjusted for certain items which management believes are not indicative of Protective’s core operations.  Segment operating income (loss) excludes net realized investment gains and losses and the related amortization of deferred policy acquisition costs and gains (losses) on derivative instruments because fluctuations in these items are due to changes in interest rates and other financial market factors instead of mortality and morbidity.  Periodic settlements of interest rate swaps associated with certain investments are included in realized gains and losses but are considered part of operating income because the interest rate swaps are hedging items affecting operating income.  Also, segment operating income (loss) excludes any net gains or losses on disposals of businesses, discontinued operations, and the cumulative effect of changes in accounting principles.  Although the items excluded from segment operating income (loss) may be significant components in understanding and assessing Protective’s overall financial performance, management believes that operating segment income (loss) enhances an investor’s understanding of Protective’s results of operations by highlighting the income (loss) attributable to the normal, recurring operations of the insurance business (i.e., mortality and morbidity), consistent with industry practice.  However, Protective’s segment operating income (loss) measures may not be comparable to similarly titled measures reported by other companies.  Segment operating income (loss) should not be construed as a substitute for net income (loss) determined in accordance with accounting principles generally accepted in the United States of America (GAAP).  “Total income from continuing operations before income tax” is a GAAP measure to which the non-GAAP measure “total operating income” may be compared.  Unlike total operating income, total income before income tax includes net realized investment gains and losses, the related amortization of deferred policy acquisition costs and gains (losses) on derivative instruments.  In the Annuities and Stable Value Products segments operating income excludes realized investment gains and losses and related amortization.  In the Corporate and Other segment operating income includes derivative gains related to investments.

The table below sets forth operating income or loss and income or loss before income tax by business segment for the periods shown:

OPERATING INCOME (LOSS) AND INCOME (LOSS) BEFORE INCOME TAX

	Year Ended December 31
	2003			2002			2001
	(in thousands)
Operating income (loss)(1)
Life Marketing	$	159,957		$	125,419		$	92,016
Acquisitions	96,700			96,418			69,251
Annuities	13,190			14,656			15,093
Stable Value Products	38,911			42,272			33,150
Asset Protection	16,019			(6,661		)	38,063
Corporate and Other	(20,835		)	(27,855		)	(24,778		)
Realized investment gains (losses)
Annuities	22,733			2,277			1,139
Stable Value Products	9,756			(7,061		)	7,218
Corporate and Other	42,524			12,390			(12,298		)
Less derivative gains related to investments(2)
Corporate and Other	(10,036		)	(8,251		)	(3,900		)
Related amortization of deferred policy acquisition costs
Annuities	(18,947		)	(1,981		)	(996		)
Income (loss) before income tax
Life Marketing	159,957			125,419			92,016
Acquisitions	96,700			96,418			69,251
Annuities	16,976			14,952			15,236
Stable Value Products	48,667			35,211			40,368
Asset Protection	16,019			(6,661		)	38,063
Corporate and Other	11,653			(23,716		)	(40,976		)
Total income before income tax	$	349,972		$	241,623		$	213,958

(1)Income before income tax excluding realized investment gains and losses and related amortization of deferred policy acquisition costs.

(2) Certain investments included in realized investment gains and considered a part of operating income.

LIFE MARKETING

The Life Marketing segment’s 2002 pretax operating income was $125.4 million, $33.4 million above 2001.  In the third quarter of 2002, Protective discovered that it had overpaid the reinsurance premiums due on certain life insurance policies, and indicated that it would be seeking recovery of approximately $94.5 million from several reinsurance companies.  At December, 31, 2002, Protective had recorded cash and receivables totaling $69.7 million, which reflected the amounts received at that date, and Protective’s estimate of amounts to be recovered in the future, based upon the information then available.

The corresponding increase in premiums and policy fees resulted in $62.5 million of additional amortization of deferred policy acquisition costs in 2002. The amortization of deferred policy acquisition costs took into account the amortization relating to the increase in premiums and policy fees as well as the additional amortization required should the remainder of the overpayment not be collected. The Life Marketing segment’s pretax operating income thereby increased $7.2 million which is the difference between the premiums recorded and the amount of such additional amortization.

Because the overpayments were made over a period of 10 years beginning in 1992, and had the effect of reducing the amortization of deferred policy acquisition costs during that period, Protective believes that no prior period results were materially understated and that no operating trends were materially affected as a result.

In addition to the increase from reinsurance recoveries, an increase of $7.2 million in 2002 is attributable to

favorable mortality experience, and an increase of $19.0 million can be attributed to growth through sales.

The Life Marketing segment’s 2003 pretax operating income was $160.0 million, an increase of $34.5 million over 2002.  During 2003, Protective received payment from substantially all of the affected reinsurance companies.  As a result Protective increased premiums and policy fees by $18.4 million and amortization of deferred policy acquisition costs by $6.1 million, resulting in an increase in the Life Marketing segment’s pretax operating income of $12.3 million.  The remaining increase is attributable to growth of business-in-force due to strong sales in 2002 and 2003 and favorable expense variances as compared to pricing allowances.

ACQUISITIONS

In the ordinary course of business, the Acquisitions segment regularly considers acquisitions of blocks of policies or smaller insurance companies.  Policies acquired through the segment are usually administered as “closed” blocks; i.e., no new policies are being marketed.  Therefore, earnings from the Acquisitions segment are normally expected to decline over time (due to the lapsing of policies resulting from deaths of insureds or terminations of coverage) unless new acquisitions are made.

In 2002, the segment’s pretax operating income was $96.4 million, $27.2 million above 2001.  The Conseco and Standard coinsurance transactions and the acquisition of Inter-State and First Variable resulted in a $24.7 million increase in earnings in 2002.  Earnings on older acquired blocks of policies increased $2.4 million.  In 2003, the segment’s pretax operating income was $96.7 million, $0.3 million above 2002.  The Conseco transaction contributed a $9.1 million increase in earnings over 2002, and earnings from older acquired blocks of business decreased by $8.8 million.

ANNUITIES

The Annuities segment’s pretax operating income for 2002 was $14.7 million as compared to $15.1 million in 2001.  Fixed annuity earnings increased $1.2 million due to higher account balances.  This increase was more than offset by a decline in variable annuity earnings of $2.4 million due to the general decline in the equity markets. The segment’s 2003 pretax operating income was $13.2 million, a decrease of $1.5 million from 2002.  The decrease is primarily attributable to spread compression and the inability to capitalize excess expenses due to lower sales of fixed annuities caused by lower interest rates in 2003.  The segment had a $0.3 million realized investment gain (net of related amortization of deferred policy acquisition costs) in 2002 and a $3.8 million gain in 2003. As a result, total pretax income was $15.0 million in 2002 and $17.0 million in 2003.

Protective offers a guaranteed minimum death benefit feature (GMDB) on its variable annuity products.  Protective’s accounting policy has been to calculate its total exposure to GMDB, and then apply a mortality factor to determine the amount of claims that could be expected to occur in the coming twelve months.  Protective then accrues to that amount over four quarters.  At December 31, 2003, the total GMDB reserve was $5.1 million.  The total guaranteed amount payable under the GMDB feature based on variable annuity account balances at December 31, 2003, was $287.0 million, a decrease of $252.0 million from December 31, 2002, caused by an improvement in the equity markets.

In accordance with statutory accounting practices prescribed or permitted by regulatory authorities (which require the assumption that equity markets will significantly worsen), the Annuities segment reported GMDB related policy liabilities and accruals of $12.1 million at December 31, 2003, a decrease of $12.6 million from December 31, 2002.

Although positive performance in the equity markets in 2003 allowed Protective to decrease its GMDB related policy liabilities, the Annuities segment’s future results may be negatively affected by a slow economy.  Volatile equity markets could negatively affect sales of variable annuities and the fees the segment assesses on variable annuity contracts.  Lower interest rates have negatively affected sales of fixed annuities.  In this segment, equity market volatility may create uncertainty regarding the level of future profitability in the variable annuity business and the related rate of amortization of deferred policy acquisition costs.

STABLE VALUE PRODUCTS

The Stable Value Products segment’s 2002 pretax operating income was $42.3 million, $9.1 million above 2001. This increase is due primarily to higher average account balances and operating spreads.  Average account balances were $3.9 billion in 2002 as compared to $3.5 billion in 2001.  Operating spreads averaged 107 basis points in 2002 compared to an average of 90 basis points in 2001.  The segment’s 2003 pretax operating income was $38.9 million, a decrease of $3.4 million from 2002.  Average operating spreads were down to 96 basis points in 2003, causing the

decrease in pretax operating income.  The primary reason for the spread compression was a reduction in yield caused by the high level of prepayments in the mortgage-backed securities portfolio in 2003.  The segments average quarterly account balances increased by $189.6 million in 2003 to $4.1 billion.  The segment had realized investment losses in 2002 of $7.1 million compared to gains of $9.8 million in 2003.  As a result, total income before income tax was $35.2 million in 2002 and $48.7 million in 2003.

Protective has registered a program with the Securities and Exchange Commission in which up to $3 billion of secured medium-term notes may be issued to the institutional market and InterNotes^® may be issued to the retail market on a delayed (or shelf) basis.  Each series of notes will be issued by a separate trust and will be secured by one or more funding agreements issued by Protective.  Notes issued under the program will be accounted for in a manner consistent with Protective’s other stable value products (i.e., included in “stable value product account balances” in Protective’s balance sheet).  Protective issued $450 million of notes under this program in the fourth quarter of 2003 to institutional investors.

ASSET PROTECTION

The Asset Protection segment’s core lines of business are vehicle and marine service contracts and credit insurance.  The results of the Asset Protection segment have been significantly affected by general economic conditions.  The segment’s claims and corresponding loss ratios have increased in the current economic environment.  In addition, the segment has been exiting certain ancillary lines of business, which are not core to either the service contract or credit insurance businesses.

In 2002, as a result of the negative trends the Asset Protection segment was experiencing, Protective performed claims experience studies and other analyses and determined that it should increase its estimates of policy liabilities and accruals and write off certain deferred policy acquisition costs and receivables which resulted in a pretax charge of $25.6 million.

The Asset Protection segment had a pretax operating loss of $6.7 million in 2002, $44.8 million lower than the pretax operating income of $38.1 million in 2001.  The decrease included the $25.6 million charge discussed above.  The segment also experienced lower service contract administration fees of $2.8 million and lower earned credit premiums that reduced income $5.8 million.  Higher loss ratios in the vehicle service contract line lowered earnings $2.8 million.  Also, higher loss ratios in the segment’s ancillary lines led to higher losses of $5.2 million in 2002.  Included in the segment’s pretax loss for 2002 was $2.7 million of income related to the sale of the inactive charter of a small subsidiary compared to $2.0 million for a charter sale in 2001.  In addition, 2001 operating income included a change in estimate of $6.7 million related to reserves in certain credit lines.  All other items increased 2002 operating income by $3.5 million.

The segment had pretax operating income of $16.0 million in 2003.  Pretax operating income for the segment’s core lines of business was $17.0 million in 2003 as compared to $18.4 million in 2002.  Lower credit insurance results in 2003, caused by reduced sales, were partially offset by improved results on service contract lines in 2003.  The vehicle service contract line of business improved to contribute pretax operating income of $3.7 million in 2003, as compared to a pretax operating loss of $2.8 million in 2002, due to improving loss ratios caused by the effect of increasing prices in 2000 through 2003.  The marine service contract line’s pretax operating income improved to $6.0 million in 2003, $1.2 million better than in 2002.  Other core lines of business contributed $7.3 million of pretax operating income.  Included in pretax operating income in 2003, was the sale of an inactive charter which contributed $6.9 million of income.  Non-core lines of business and all other items decreased operating income by $7.9 million in 2003.

CORPORATE AND OTHER

The Corporate and Other segment consists primarily of net investment income on unallocated capital, interest expense on substantially all debt, several small non-strategic lines of business (primarily cancer insurance, residual value insurance, surety insurance, and group annuities), and earnings from various investment-related transactions.  In 2002, the segment had a pretax operating loss of $27.9 million, $3.1 million more than 2001.  The change relates to a $10.4 million increase in investment income allocated to the segment, which was partially offset by $10.3 million less income from the residual value, surety, and cancer lines.  Other items decreased income by $3.2 million in 2002.  Realized investment gains (net of derivative gains related to investments) in 2002 were $4.1 million.  As a result, the total pretax loss in 2002 was $23.7 million.

In 2003, the segment had a pretax operating loss of $20.8 million, $7.1 million less than 2002.  An increase in investment income allocated to the segment of $7.5 million was partially offset by a $3.5 million increase in expenses

related to employee incentive plans and other corporate expenses.  In addition, earnings from the residual value and surety lines improved by $3.1 million.  Realized investment gains (net of derivative gains related to investments) in 2003 were $32.5 million.  As a result, total pretax income in 2003 was $11.7 million.

INCOME TAX EXPENSE

The following table sets forth the effective income tax rates relating to continuing operations for the periods shown:

Year Ended December 31	Effective Income Tax Rates
2001	32.9	%
2002	34.9
2003	33.7

Management’s current estimate of the effective income tax rate for 2004 is approximately 34.0%.  The expected increase is primarily due to the expiration of certain tax credits.

DISCONTINUED OPERATIONS

On December 31, 2001, Protective completed the sale to Fortis, Inc. of substantially all of its Dental Benefits Division (Dental Division) and discontinued certain other remaining Dental Division related operations, primarily other health insurance lines.  In 2001, the loss from discontinued operations was $9.9 million (primarily due to the non-performance of reinsurers) and the loss from sale of discontinued operations was $17.8 million, both net of income tax.

CHANGE IN ACCOUNTING PRINCIPLE

On January 1, 2001, Protective adopted Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities.”  The adoption of SFAS No. 133 resulted in a cumulative $8.3 million charge to net income, net of $4.0 million income tax.

NET INCOME

The following table sets forth net income from continuing operations before cumulative effect of change in accounting principle and related per share information for the periods shown:

Year Ended December 31	Amount		Percent Increase/(Decrease)
	(in thousands)
2001	$	143,501	26.8	%
2002	157,394		9.7
2003	232,040		47.4

Net income from continuing operations before cumulative effect of change in accounting principle in 2002 of $157.4 million reflects improved operating earnings in the Life Marketing, Acquisitions, and Stable Value Products segments and higher realized investment gains, which were partially offset by lower operating earnings in the Annuities, Asset Protection, and Corporate and Other segments.  Net income from continuing operations before cumulative effect of change in accounting principle in 2003 of $232.0 million reflects improved operating earnings in the Life Marketing, Acquisitions, Asset Protection, and Corporate and Other segments and higher realized investment gains, which were partially offset by lower operating earnings in the Stable Value Products and Annuities segments.

KNOWN TRENDS AND UNCERTAINTIES

The operating results of companies in the insurance industry have historically been subject to significant fluctuations.  The factors which could affect Protective’s future results include, but are not limited to, general economic conditions and the known trends and uncertainties which are discussed more fully below.

Protective is exposed to the risks of natural disasters, malicious and terrorist acts that could adversely affect Protective’s operations.

While Protective has obtained insurance, implemented risk management and contingency plans, and taken preventive measures and other precautions, no predictions of specific scenarios can be made nor can assurance be given that there are not scenarios that could have an adverse effect on Protective.  A natural disaster or an outbreak of an easily communicable disease could adversely affect the mortality or morbidity experience of Protective or its reinsurers.

Protective operates in a mature, highly competitive industry, which could limit its ability to gain or maintain its position in the industry.

Life and health insurance is a mature industry.  In recent years, the industry has experienced little growth in life insurance sales, though the aging population has increased the demand for retirement savings products.  Life and health insurance is a highly competitive industry.  Protective encounters significant competition in all lines of business from other insurance companies, many of which have greater financial resources than Protective, as well as competition from other providers of financial services.  Competition could result in, among other things, lower sales or higher lapses of existing products.

The insurance industry is consolidating, with larger, potentially more efficient organizations emerging from consolidation.  Participants in certain of Protective’s independent distribution channels are also consolidating into larger organizations.  Some mutual insurance companies are converting to stock ownership, which will give them greater access to capital markets.  Additionally, commercial banks, insurance companies, and investment banks may now combine, provided certain requirements are satisfied.  The ability of banks to increase their securities-related business or to affiliate with insurance companies may materially and adversely affect sales of all of Protective’s products by substantially increasing the number and financial strength of potential competitors.

Protective’s ability to compete is dependent upon, among other things, its ability to attract and retain distribution channels to market its insurance and investment products, its ability to develop competitive and profitable products, its ability to maintain low unit costs, and its maintenance of strong ratings from rating agencies.

A ratings downgrade could adversely affect Protective’s ability to compete.

Rating organizations periodically review the financial performance and condition of insurers, including Protective’s subsidiaries.  In recent years, downgrades of insurance companies have occurred with increasing frequency.  A downgrade in the rating of Protective’s subsidiaries could adversely affect Protective’s ability to sell its products, retain existing business, and compete for attractive acquisition opportunities.  Specifically, a ratings downgrade would materially harm Protective’s ability to sell certain products, including guaranteed investment products and funding agreements.

Rating organizations assign ratings based upon several factors.  While most of the factors relate to the rated company, some of the factors relate to the views of the rating organization, general economic conditions and circumstances outside the rated company’s control.  In addition, rating organizations use various models and formulas to assess the strength of a rated company, and from time to time rating organizations have, in their discretion, altered the models.  Changes to the models could impact the rating organizations’ judgment of the rating to be assigned to the rated company.  Protective cannot predict what actions the rating organizations may take, or what actions Protective may be required to take in response to the actions of the rating organizations, which could adversely affect Protective.

Protective’s policy claims fluctuate from period to period, and actual results could differ from its expectations.

Protective’s results may fluctuate from period to period due to fluctuations in policy claims received by Protective.  Certain of Protective’s businesses may experience higher claims if the economy is growing slowly or in recession, or equity markets decline.

Mortality, morbidity, and casualty expectations incorporate assumptions about many factors, including for example, how a product is distributed, persistency and lapses, and future progress in the fields of health and medicine.  Actual mortality, morbidity, and casualty claims could differ from expectations if actual results differ from those assumptions.

Protective’s results may be negatively affected should actual experience differ from management’s assumptions and estimates.

In the conduct of business, Protective makes certain assumptions regarding the mortality, persistency, expenses and interest rates, or other factors appropriate to the type of business it expects to experience in future periods.  These assumptions are also used to estimate the amounts of deferred policy acquisition costs, policy liabilities and accruals, future earnings, and various components of Protective’s balance sheet.  Protective’s actual experience, as well as changes in estimates, are used to prepare Protective’s statements of income.

The calculations Protective uses to estimate various components of its balance sheet and statements of income are necessarily complex and involve analyzing and interpreting large quantities of data.  Protective currently employs various techniques for such calculations and it from time to time will develop and implement more sophisticated administrative systems and procedures capable of facilitating the calculation of more precise estimates.

Assumptions and estimates involve judgment, and by their nature are imprecise and subject to changes and revision over time.  Accordingly, Protective’s results may be affected, positively or negatively, from time to time, by actual results differing from assumptions, by changes in estimates, and by changes resulting from implementing more sophisticated administrative systems and procedures that facilitate the calculation of more precise estimates.

The use of reinsurance introduces variability in Protective’s statements of income.

The timing of premium payments to, and receipt of expense allowances from, reinsurers may differ from Protective’s receipt of customer premium payments and incurrence of expenses.  These timing differences introduce variability in certain components of Protective’s statements of income, and may also introduce variability in Protective’s quarterly results.

Protective could be forced to sell investments at a loss to cover policyholder withdrawals.

Many of the products offered by Protective and its insurance subsidiaries allow policyholders and contract holders to withdraw their funds under defined circumstances.  Protective and its insurance subsidiaries manage their liabilities and configure their investment portfolios so as to provide and maintain sufficient liquidity to support anticipated withdrawal demands and contract benefits and maturities.  While Protective and its life insurance subsidiaries own a significant amount of liquid assets, a certain portion of their assets are relatively illiquid.  If Protective or its subsidiaries experience unanticipated withdrawal or surrender activity, Protective or its subsidiaries could exhaust their liquid assets and be forced to liquidate other assets, perhaps on unfavorable terms.  If Protective or its subsidiaries are forced to dispose of assets on unfavorable terms, it could have an adverse effect on Protective’s financial condition.

Interest-rate fluctuations could negatively affect Protective’s spread income or otherwise impact its business.

Significant changes in interest rates expose insurance companies to the risk of not earning anticipated spreads between the interest rate earned on investments and the credited interest rates paid on outstanding policies and contracts.  Both rising and declining interest rates can negatively affect Protective’s spread income.  While Protective develops and maintains asset/liability management programs and procedures designed to preserve spread income in rising or falling interest rate environments, no assurance can be given that changes in interest rates will not affect such spreads.

From time to time, Protective has participated in securities repurchase transactions that have contributed to Protective’s investment income.  Such transactions involve some degree of risk that the counterparty may fail to perform its obligations to pay amounts owed and the collateral has insufficient value to satisfy the obligation.  No assurance can be given that such transactions will continue to be entered into and contribute to Protective’s investment income in the future.

Changes in interest rates may also impact its business in other ways.  Lower interest rates may result in lower sales of certain of Protective’s insurance and investment products.  In addition, certain of Protective’s insurance and investment products guarantee a minimum credited interest rate, and Protective could become unable to earn its spread income should interest rates decrease significantly.

Higher interest rates may create a less favorable environment for the origination of mortgage loans and decrease the investment income Protective receives in the form of prepayment fees, make-whole payments, and mortgage participation income.  Higher interest rates may also increase the cost of debt and other obligations having floating rate or rate reset provisions and may result in lower sales of variable products.

Additionally, Protective’s asset/liability management programs and procedures incorporate assumptions about the relationship between short-term and long-term interest rates (i.e., the slope of the yield curve) and relationships between risk-adjusted and risk-free interest rates, market liquidity, and other factors.  The effectiveness of Protective’s asset/liability management programs and procedures may be negatively affected whenever actual results differ from these assumptions.

In general terms, Protective’s results are improved when the yield curve is positively sloped (i.e., when long-term interest rates are higher than short-term interest rates), and will be adversely affected by a flat or negatively sloped curve.

Equity market volatility could negatively impact Protective’s business.

The amount of policy fees received from variable products is affected by the performance of the equity markets, increasing or decreasing as markets rise or fall.  Equity market volatility can also affect the profitability of variable products in other ways.

The amortization of deferred policy acquisition costs relating to variable products and the estimated cost of providing guaranteed minimum death benefits incorporate various assumptions about the overall performance of equity markets over certain time periods.  The rate of amortization of deferred policy acquisition costs and the estimated cost of providing guaranteed minimum death benefits could increase if equity market performance is worse than assumed.

A deficiency in Protective’s systems could result in over or underpayments of amounts owed to or by Protective and/or errors in Protective’s critical assumptions or reported financial results.

The business of insurance necessarily involves the collection and dissemination of large amounts of data using systems operated by Protective.  Examples of data collected and analyzed include policy information, policy rates, expenses, mortality and morbidity experience.  To the extent that data input errors, systems errors, or systems failures are not identified and corrected by Protective’s internal controls, the information generated by the systems and used by Protective and/or supplied to business partners, policyholders, and others may be incorrect and may result in an overpayment or underpayment of amounts owed to or by Protective and/or Protective using incorrect assumptions in its business decisions or financial reporting.

In the third quarter of 2002, Protective discovered that the rates payable on certain life insurance policies were incorrectly entered into its reinsurance administrative system in 1991.  As a result, Protective overpaid to several reinsurance companies the reinsurance premiums related to such policies of approximately $94.5 million over a period of 10 years beginning in 1992.  Protective has received payment from substantially all of the affected reinsurance companies.

Insurance companies are highly regulated and subject to numerous legal restrictions and regulations.

Protective and its subsidiaries are subject to government regulation in each of the states in which they conduct business.  Such regulation is vested in state agencies having broad administrative power dealing with many aspects of Protective’s business, which may include premium rates, marketing practices, advertising, privacy, policy forms, and capital adequacy, and is concerned primarily with the protection of policyholders and other customers rather than share owners.  At any given time, a number of financial and/or market conduct examinations of Protective’s subsidiaries is ongoing.  Protective is required to obtain state regulatory approval for rate increases for certain health insurance products, and Protective’s profits may be adversely affected if the requested rate increases are not approved in full by regulators in a timely fashion.  From time to time, regulators raise issues during examinations or audits of Protective’s subsidiaries that could, if determined adversely, have a material impact on Protective. Protective cannot predict whether or when regulatory actions may be taken that could adversely affect Protective or its operations.  In addition, the interpretations of regulations by regulators may change and statutes may be enacted with retroactive impact, particularly in areas such as health insurance.

Protective and its insurance subsidiaries may be subject to regulation by the United States Department of Labor when providing a variety of products and services to employee benefit plans governed by the Employee Retirement Income Security Act (ERISA).  Severe penalties are imposed for breach of duties under ERISA.

Certain policies, contracts, and annuities offered by Protective and its subsidiaries are subject to regulation under the federal securities laws administered by the Securities and Exchange Commission.  The federal securities laws contain regulatory restrictions and criminal, administrative, and private remedial provisions.

Other types of regulation that could affect Protective and its subsidiaries include insurance company investment laws and regulations, state statutory accounting practices, state anti-trust laws, minimum solvency requirements, state securities laws, federal privacy laws, federal money laundering and anti-terrorism laws, and because Protective owns and operates real property state, federal, and local environmental laws.  Protective cannot predict what form any future changes in these or other areas of regulation affecting the insurance industry might take or what effect, if any, such proposals might have on Protective if enacted into law.

Changes to tax law or interpretations of existing tax law could adversely affect Protective and its ability to compete with non-insurance products or reduce the demand for certain insurance products.

Under the Internal Revenue Code of 1986, as amended (the “Code”), income tax payable by policyholders on investment earnings is deferred during the accumulation period of certain life insurance and annuity products.  This favorable tax treatment may give certain of Protective’s products a competitive advantage over other non-insurance products.  To the extent that the Code is revised to reduce the tax-deferred status of life insurance and annuity products, or to increase the tax-deferred status of competing products, all life insurance companies, including Protective and its subsidiaries, would be adversely affected with respect to their ability to sell such products, and, depending upon grandfathering provisions, would be affected by the surrenders of existing annuity contracts and life insurance policies.  For example, changes in laws or regulations could restrict or eliminate the advantages of certain corporate or bank-owned life insurance products.  Recent changes in tax law, which have reduced the federal income tax rates on corporate dividends in certain circumstances, could make the tax advantages of investing in certain life insurance or annuity products less attractive.  Additionally, changes in tax law based on proposals to establish new tax advantaged retirement and life savings plans, if enacted, could reduce the tax advantage of investing in certain life insurance or annuity products.  In addition, life insurance products are often used to fund estate tax obligations.  Legislation has been enacted that would, over time, reduce and eventually eliminate the estate tax.  If the estate tax is significantly reduced or eliminated, the demand for certain life insurance products could be adversely affected.  Additionally, Protective is subject to the federal corporation income tax.  Protective cannot predict what changes to tax law or interpretations of existing tax law could adversely affect Protective.

Financial services companies are frequently the targets of litigation, including class action litigation, which could result in substantial judgments.

A number of civil jury verdicts have been returned against insurers, broker-dealers, and other providers of financial services involving sales practices, alleged agent misconduct, failure to properly supervise representatives, relationships with agents or other persons with whom the insurer does business, and other matters.  Increasingly these lawsuits have resulted in the award of substantial judgments that are disproportionate to the actual damages, including material amounts of punitive non-economic compensatory damages.  In some states, juries, judges, and arbitrators have substantial discretion in awarding punitive and 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.

Group health coverage issued through associations has received some negative coverage in the media as well as increased regulatory consideration and review.  Protective has a small closed block of group health insurance coverage that was issued to members of an association; a lawsuit is currently pending against Protective in connection with this business.

Protective, like other financial services companies, in the ordinary course of business is involved in such litigation and arbitration.  Although Protective cannot predict the outcome of any such litigation or arbitration, Protective does not believe that any such outcome will have a material impact on the financial condition or results of operations of Protective.

Protective’s ability to maintain low unit costs is dependent upon the level of new sales and persistency of existing business.

Protective’s ability to maintain low unit costs is dependent upon the level of new sales and persistency (continuation or renewal) of existing business.  A decrease in sales or persistency without a corresponding reduction in expenses may result in higher unit costs.

Additionally, a decrease in persistency may result in higher or more rapid amortization of deferred policy acquisition costs and thus higher unit costs, and lower reported earnings.  Although many of Protective’s products contain surrender charges, the charges decrease over time and may not be sufficient to cover the unamortized deferred

policy acquisition costs with respect to the insurance policy or annuity contract being surrendered.  Some of Protective’s products do not contain surrender charge features and such products can be surrendered or exchanged without penalty.  A decrease in persistency may also result in higher claims.

Protective’s investments are subject to market and credit risks.

Protective’s invested assets and derivative financial instruments are subject to customary risks of credit defaults and changes in market values.  The value of Protective’s commercial mortgage loan portfolio depends in part on the financial condition of the tenants occupying the properties which Protective has financed.  Factors that may affect the overall default rate on, and market value of, Protective’s invested assets, derivative financial instruments, and mortgage loans include interest rate levels, financial market performance, and general economic conditions as well as particular circumstances affecting the businesses of individual borrowers and tenants.

Protective may not realize its anticipated financial results from its acquisitions strategy.

Protective’s acquisitions have increased its earnings in part by allowing Protective to enter new markets and to position itself to realize certain operating efficiencies.  There can be no assurance, however, that suitable acquisitions, presenting opportunities for continued growth and operating efficiencies, or capital to fund acquisitions will continue to be available to Protective, or that Protective will realize the anticipated financial results from its acquisitions.

Additionally, in connection with its acquisitions, Protective assumes or otherwise becomes responsible for the obligations of policies and other liabilities of other insurers.  Any regulatory, legal, financial, or other adverse development affecting the other insurer could also have an adverse effect on Protective.

Protective is dependent on the performance of others.

Protective’s results may be affected by the performance of others because Protective has entered into various arrangements involving other parties.  For example, most of Protective’s products are sold through independent distribution channels, and variable annuity deposits are invested in funds managed by third parties.  Additionally, Protective’s operations are dependent on various technologies, some of which are provided and/or maintained by other parties.

Certain of these other parties may act on behalf of Protective or represent Protective in various capacities.  Consequently, Protective may be held responsible for obligations that arise from the acts or omissions of these other parties.

As with all financial services companies, its ability to conduct business is dependent upon consumer confidence in the industry and its products.  Actions of competitors and financial difficulties of other companies in the industry could undermine consumer confidence and adversely affect retention of existing business and future sales of Protective’s insurance and investment products.

Protective’s reinsurers could fail to meet assumed obligations, increase rates or be subject to adverse developments that could affect Protective.

Protective and its insurance subsidiaries cede material amounts of insurance and transfer related assets to other insurance companies through reinsurance.  Protective may enter into third-party reinsurance arrangements under which Protective will rely on the third party to collect premiums, pay claims, and/or perform customer service functions.  However, notwithstanding the transfer of related assets or other issues, Protective remains liable with respect to ceded insurance should any reinsurer fail to meet the obligations assumed by it.

Protective’s ability to compete is dependent on the availability of reinsurance.  Premium rates charged by Protective are based, in part, on the assumption that reinsurance will be available at a certain cost.  Under certain reinsurance agreements, the reinsurer may increase the rate it charges Protective for the reinsurance, though Protective does not anticipate increases to occur with respect to existing reinsurance contracts.  Therefore, if the cost of reinsurance were to increase or if reinsurance were to become unavailable, or if a reinsurer should fail to meet its obligations, Protective could be adversely affected.

Recently, certain commentators on the insurance industry have speculated that reinsurance might become more costly or less available in the future, which could have a negative effect on Protective’s ability to compete.  In recent years, the number of life reinsurers has decreased as the reinsurance industry has consolidated.  The decreased number of participants in the life reinsurance market results in increased concentration risk for insurers, including Protective.  In

addition, some reinsurers have indicated an unwillingness to continue to reinsure new sales of long-term guarantee products.  If the reinsurance markets for these products further contracts, Protective’s ability to continue to offer such products would be adversely impacted.

Computer viruses or network security breaches could affect the data processing systems of Protective or its business partners.

A computer virus could affect the data processing systems of Protective or its business partners, destroying valuable data or making it difficult to conduct business.  In addition, despite our implementation of network security measures, our servers could be subject to physical and electronic break-ins, and similar disruptions from unauthorized tampering with our computer systems.

Protective’s ability to grow depends in large part upon the continued availability of capital.

Protective has recently deployed significant amounts of capital to support its sales and acquisitions efforts. Capital has also been consumed as Protective increased its reserves on the residual value product.  Although positive performance in the equity markets has recently allowed Protective to decrease its GMDB related policy liabilities and accruals, deterioration in these markets could lead to further capital consumption.  Although Protective believes it has sufficient capital to fund its immediate growth and capital needs, the amount of capital available can vary significantly from period to period due to a variety of circumstances, some of which are neither predictable nor foreseeable, nor within Protective’s control.  A lack of sufficient capital could impair Protective’s ability to grow.

New accounting rules or changes to existing accounting rules could negatively impact Protective’s reported financial results.

Like all publicly traded companies, PLC is required to comply with accounting principles generally accepted in the United States of America (GAAP).  A number of organizations are instrumental in the development of GAAP such as the Securities and Exchange Commission (SEC), the Financial Accounting Standards Board (FASB), and the American Institute of Certified Public Accountants (AICPA).  GAAP is subject to constant review by these organizations and others in an effort to address emerging issues and otherwise improve financial reporting.  In this regard, these organizations adopt new accounting rules and issue interpretive accounting guidance on a continual basis.  PLC and Protective can give no assurance that future changes to GAAP will not have a negative impact on Protective’s reported financial results.

RECENTLY ISSUED ACCOUNTING STANDARDS

On January 1, 2001, Protective adopted Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities”.  SFAS No. 133, as amended by SFAS Nos. 137, 138, and 149, requires Protective to record all derivative financial instruments at fair value on the balance sheet.  Changes in fair value of a derivative instrument are reported in net income or other comprehensive income, depending on the designated use of the derivative instrument.  The adoption of SFAS No. 133 resulted in a cumulative charge to net income, net of income tax, of $8.3 million and a cumulative after-tax increase to other comprehensive income of $4.0 million on January 1, 2001.  The charge to net income and increase to other comprehensive income primarily resulted from the recognition of derivative instruments embedded in Protective’s corporate bond portfolio.  In addition, the charge to net income includes the recognition of the ineffectiveness on existing hedging relationships including the difference in spot and forward exchange rates related to foreign currency swaps used as an economic hedge of foreign-currency-denominated stable value contracts.  The adoption of SFAS No. 133 has introduced volatility into Protective’s reported net income and other comprehensive income depending on market conditions and Protective’s hedging activities.

On January 1, 2002, Protective adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 revises the standards for accounting for acquired goodwill and other intangible assets.  The standard replaces the requirement to amortize goodwill with one that calls for an annual impairment test, among other provisions.  Protective has performed an impairment test and determined that its goodwill was not impaired at October 31, 2003, and 2002.  The following table illustrates adjusted income from continuing operations before cumulative effect of change in accounting principle as if this pronouncement was adopted as of January 1, 2001:

	Year Ended December 31
	2003		2002		2001
	(in thousands)
Adjusted net income:
Income from continuing operations before cumulative effect of change in accounting principle	$	232,040	$	157,394	$	143,501
Add back amortization of goodwill, net of income tax					1,838
Adjusted net income from continuing operations before cumulative effect of change in accounting principle	232,040		157,394		145,339
Loss from discontinued operations, net of income tax					(9,856		)
Loss from sale of discontinued operations, net of income tax					(17,754		)
Adjusted net income before cumulative effect of change in accounting principle	232,040		157,394		117,729
Cumulative effect of change in accounting principle, net of income tax					(8,341		)
Adjusted net income	$	232,040	$	157,394	$	109,388

In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. (FIN) 46, “Consolidation of Variable Interest Entities,” which was revised in December 2003.  FIN 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated support from other parties.  The effective date of FIN 46 is March 31, 2004, for Protective.  Protective is currently evaluating the impact of FIN 46 on entities to be consolidated as of March 31, 2004.  Although Protective does not expect the implementation of the provisions of FIN 46, on March 31, 2004, to have a material impact on its results of operations, had the provisions been effective at December 31, 2003, Protective’s reported assets and liabilities would have increased by approximately $70 million.

On October 1, 2003, Protective adopted Derivatives Implementation Group Issue No. B36, “Embedded Derivatives: Modified Coinsurance Arrangements and Debt Instruments That Incorporate Credit Risk Exposures That Are Unrelated or Only Partially Related to the Creditworthiness of the Obligor under Those Instruments” (DIG B36).  DIG B36 requires the bifurcation of embedded derivatives within certain modified coinsurance and funds withheld coinsurance arrangements that expose the creditor to credit risk of a company other than the debtor, even if the debtor owns as investment assets the third-party securities to which the creditor is exposed.  The adoption did not have a material impact on its financial condition or results of operations.

In July 2003, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts.”  SOP 03-1 is effective for fiscal years beginning after December 15, 2003.  SOP 03-1 provides guidance related to the reporting and disclosure of certain insurance contracts and separate accounts, including the calculation of guaranteed minimum death benefits (GMDB).  SOP 03-1 also addresses the capitalization and amortization of sales inducements to contract holders.  Had the provision been effective at December 31, 2003, Protective would have reported a GMDB accrual $0.3 million higher than currently reported.  Although the original intent of SOP 03-1 was to address the accounting for contract provisions not addressed by SFAS No. 97, such as guaranteed minimum death benefits within a variable annuity contract, it appears that SOP 03-1 contains language that may impact the accounting for universal life products in a material way.  The life insurance industry and some insurance companies have filed letters with the American Institute of Certified Public Accountants seeking clarification, guidance, delay and/or revision to more appropriately reflect the underlying economic issues of universal life insurance products.  Protective is currently evaluating the impact of SOP 03-1 on the accounting for its universal life products.

On December 31, 2003, Protective adopted SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” as revised by the FASB in December 2003.  The FASB revised disclosure requirements for pension plans and other postretirement benefit plans to require more information.  The revision of SFAS No. 132 did not have a material effect on Protective’s financial position or results of operations.

On December 8, 2003, President Bush signed into law the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (Medicare Act).  The Medicare Act introduces a prescription drug benefit for Medicare-eligible retirees in 2006, as well as a federal subsidy to plan sponsors that provide prescription drug benefits.  In accordance with FASB Staff Position No. 106-1, Protective has elected to defer recognizing the effects of the Medicare Act for its postretirement plans under FASB Statement No. 106, Employers’ Accounting for Postretirement Benefits Other than Pension until authoritative guidance on accounting for the federal subsidy is issued.  Protective anticipates that the Medicare Act will not have a material impact on the financial results of Protective; therefore the costs reported in Note L to the consolidated financial statements do not reflect these changes.  The final accounting guidance could require changes to previously reported information.

LIQUIDITY AND CAPITAL RESOURCES

Protective’s operations usually produce a positive cash flow.  This cash flow is used to fund an investment portfolio to finance future benefit payments.  Since future benefit payments largely represent medium- and long-term obligations reserved using certain assumed interest rates, Protective’s investments are predominantly in medium- and long-term, fixed-rate investments such as bonds and mortgage loans.

INVESTMENTS

Portfolio Description

Protective’s investment portfolio consists primarily of fixed maturity securities (bonds and redeemable preferred stocks) and commercial mortgage loans.  Protective generally purchases its investments with the intent to hold to maturity by purchasing investments that match future cash flow needs.  However, Protective may sell any of its investments to maintain proper matching of assets and liabilities.  Accordingly, Protective has classified its fixed maturities and certain other securities as “available for sale.”

Protective’s investments in debt and equity securities are reported at market value, and investments in mortgage loans are reported at amortized cost.  At December 31, 2003, Protective’s fixed maturity investments (bonds and redeemable preferred stocks) had a market value of $12.9 billion, which is 5.0% above amortized cost of $12.3 billion.  Protective had $2.7 billion in mortgage loans at December 31, 2003.  While Protective’s mortgage loans do not have quoted market values, at December 31, 2003, Protective estimates the market value of its mortgage loans to be $3.0 billion (using discounted cash flows from the next call date), which is 8.2% above amortized cost. Most of Protective’s mortgage loans have significant prepayment fees.  These assets are invested for terms approximately corresponding to anticipated future benefit payments.  Thus, market fluctuations are not expected to adversely affect liquidity.

At December 31, 2002, Protective’s fixed maturity investments had a market value of $11.7 billion, which was 3.9% above amortized cost of $11.2 billion.  Protective estimated the market value of its mortgage loans to be $2.8 billion at December 31, 2002, which was 12.2% above amortized cost of $2.5 billion.

The following table shows the carrying values of Protective’s invested assets.

	December 31
	2003				2002
	(in thousands)
Publicly issued bonds	$	10,967,622	64.7	%	$	9,694,132	62.8	%
Privately issued bonds	1,956,734		11.5		1,959,506		12.7
Redeemable preferred stock	3,164		0.0		1,827		0.0
Fixed maturities	12,927,520		76.2		11,655,465		75.5
Equity securities	30,521		0.2		48,799		0.3
Mortgage loans	2,733,722		16.1		2,518,151		16.3
Investment real estate	13,152		0.1		15,499		0.1
Policy loans	502,748		3.0		543,161		3.5
Other long-term investments	244,913		1.4		210,381		1.4
Short-term investments	510,635		3.0		447,155		2.9
Total investments	$	16,963,211	100.0	%	$	15,438,611	100.0	%

The following table sets forth the estimated market values of Protective’s fixed maturity investments and mortgage loans resulting from a hypothetical immediate 1 percentage point increase in interest rates from levels prevailing at December 31, and the percent change in market value the following estimated market values would represent.

At December 31	Amount		Percent Change
	(in millions)
2002
Fixed maturities	$	11,084.3	(4.9	)%
Mortgage loans	2,690.5		(4.8	)
2003
Fixed maturities	$	12,203.6	(5.6	)%
Mortgage loans	2,816.1		(4.8	)

Estimated market values were derived from the durations of Protective’s fixed maturities and mortgage loans. Duration measures the relationship between changes in market value to changes in interest rates.  While these estimated market values generally provide an indication of how sensitive the market values of Protective’s fixed maturities and mortgage loans are to changes in interest rates, they do not represent management’s view of future market changes, and actual market results may differ from these estimates.

Protective participates in securities lending, primarily as an investment yield enhancement, whereby securities that are held as investments are loaned to third parties for short periods of time.  Protective requires collateral of 102% of the market value of the loaned securities to be separately maintained.  The loaned securities’ market value is monitored, on a daily basis, with additional collateral obtained as necessary.  At December 31, 2003, securities with a market value of $324.5 million were loaned under these agreements.  As collateral for the loaned securities, Protective receives short-term investments, which are recorded in “short-term investments” with a corresponding liability recorded in “other liabilities” to account for Protective’s obligation to return the collateral.

Risk Management and Impairment Review

Protective monitors the overall credit quality of Protective’s portfolio within general guidelines.  The following table shows Protective’s available for sale fixed maturities by credit rating at December 31, 2003.

S&P or Equivalent Designation	Market Value		Percent of Market Value
	(in thousands)
AAA	$	4,713,838	36.5	%
AA	774,834		6.0
A	2,977,975		23.0
BBB	3,474,563		26.9
Investment grade	11,941,210		92.4
BB	664,131		5.2
B	300,974		2.3
CCC or lower	13,344		0.1
In or near default	4,697		0.0
Below investment grade	983,146		7.6
Redeemable preferred stock	3,164		0.0
Total	$	12,927,520	100.0	%

Limiting bond exposure to any creditor group is another way Protective manages credit risk.  The following table summarizes Protective’s ten largest fixed maturity exposures to an individual creditor group as of December 31, 2003.

Creditor	Market Value
Berkshire Hathaway	$	71.7
Citigroup	68.0
Kinder Morgan Partners	67.4
Progress Energy	64.5
Verizon	64.1
Cox Communications	63.5
Public Service Enterprise Group	61.7
Constellation Energy Group	60.4
Bank of America	59.0
American Electric Power	59.0

During 2003, Protective recorded pretax other-than-temporary impairments in its investments of $13.6 million.  In 2002, Protective recorded pretax other-than-temporary impairments in its investments of $17.8 million.

Protective’s management considers a number of factors when determining the impairment status of individual securities.  These include the economic condition of various industry segments and geographic locations and other areas of identified risks.  Although it is possible for the impairment of one investment to affect other investments, Protective engages in ongoing risk management to safeguard against and limit any further risk to its investment portfolio. Special attention is given to correlative risks within specific industries, related parties and business markets.

Once management has determined that a particular investment has suffered an other-than-temporary impairment, the asset is written down to its estimated fair value.  Protective generally considers a number of factors in determining whether the impairment is other-than-temporary.  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) the intent and ability of Protective to hold the investment until recovery, 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 and continued viability of the issuer are significant measures.

Protective generally considers a number of factors relating to the issuer in determining the financial strength, liquidity, and recoverability of an issuer.  These include but are not limited to: available collateral, tangible and intangible assets that might be available to repay debt, operating cash flows, financial ratios, access to capital markets,

quality of management, market position, exposure to litigation or product warranties, and the effect of general economic conditions on the issuer.

There are certain risks and uncertainties associated with determining whether declines in market values are other-than-temporary.  These include significant changes in general economic conditions and business markets, trends in certain industry segments, interest rate fluctuations, rating agency actions, changes in significant accounting estimates and assumptions, commission of fraud and legislative actions.  Protective continuously monitors these factors as they relate to the investment portfolio in determining the status of each investment.  Provided below are additional facts concerning the potential effect upon Protective’s earnings should circumstances lead management to conclude that some of the current declines in market value are other-than-temporary.

Market values for private, non-traded securities are determined as follows: 1) Protective obtains estimates from independent pricing services or 2) Protective estimates market value based upon a comparison to quoted issues of the same issuer or issues of other issuers with similar terms and risk characteristics.  The market value of private, non-traded securities was $1,956.7 million at December 31, 2003, representing 11.5% of Protective’s total invested assets.

Unrealized Gains and Losses

The majority of unrealized losses in Protective’s investment portfolio can be attributed to interest rate fluctuations and have been deemed temporary.  As indicated above, when Protective’s investment management deems an investment’s market value decline as other-than-temporary, it is written down to estimated market value.  In all cases, management will continue to carefully review and monitor each security.

The information presented below relates to investments at a certain point in time and is not necessarily indicative of the status of the portfolio at any time after December 31, 2003, the balance sheet date.  Furthermore, since the timing of recognizing realized gains and losses is largely based on management’s decisions as to the timing and selection of investments to be sold, the tables and information provided below should be considered within the context of the overall unrealized gain (loss) position of the portfolio.  At December 31, 2003, Protective had an overall net unrealized gain of $614.1 million.

For traded and private fixed maturity and equity securities held by Protective that are in an unrealized loss position at December 31, 2003, the estimated market value, amortized cost, unrealized loss and total time period that the security has been in an unrealized loss position are presented in the table below.

	Estimated Market Value		% Market Value		Amortized Cost		% Amortized Cost		Unrealized Loss			% Unrealized Loss
	(in thousands)
<= 90 days	$	953,867	44.9	%	$	964,963	43.6	%	$	(11,096	)	13.4	%
>90 days but <= 180 days	721,961		34.0		744,905		33.8		(22,944		)	27.9
>180 days but <= 270 days	219,312		10.3		231,500		10.5		(12,188		)	14.8
>270 days but <= 1 year	23,483		1.1		25,410		1.2		(1,927		)	2.3
>1 year but <= 2 years	92,724		4.4		97,917		4.4		(5,193		)	6.3
>2 years but <= 3 years	37,099		1.7		41,176		1.9		(4,077		)	5.0
>3 years but <= 4 years	2,560		0.1		2,857		0.1		(297		)	0.4
>4 years but <= 5 years	31,559		1.5		36,814		1.7		(5,255		)	6.4
>5 years	41,476		2.0		60,789		2.8		(19,313		)	23.5
Total	$	2,124,041	100.0	%	$	2,206,331	100.0	%	$	(82,290	)	100.0	%

At December 31, 2003, $24.5 million of securities in an unrealized loss position were securities issued in Protective-sponsored commercial mortgage loan securitizations, including $19.2 million in an unrealized loss position greater than five years.  Protective does not consider these unrealized loss positions to be other-than-temporary, because the underlying mortgage loans continue to perform consistently with Protective’s original expectations.

Protective has no material concentrations of issuers or guarantors of fixed maturity securities.  The industry segment composition of all securities in an unrealized loss position held by Protective at December 31, 2003, is presented in the following table.

	Estimated Market Value		% Market Value		Amortized Cost		% Amortized Cost		Unrealized Loss			% Unrealized Loss
	(in thousands)
Agency mortgages	$	125,623	5.9	%	$	130,607	5.9	%	$	(4,984	)	6.1	%
Banks	176,174		8.3		178,656		8.1		(2,482		)	3.0
Basic industrial	33,760		1.6		35,542		1.6		(1,782		)	2.2
Brokerage	52,968		2.5		53,951		2.4		(983		)	1.2
Capital goods	511		0.0		517		0.0		(6		)	0.0
Communications	105,841		5.0		109,866		5.0		(4,025		)	4.9
Consumer-cyclical	45,533		2.1		46,259		2.1		(726		)	0.9
Consumer-noncyclical	67,854		3.2		70,120		3.2		(2,266		)	2.8
Electric	397,666		18.7		412,023		18.7		(14,357		)	17.4
Energy	114,662		5.4		117,935		5.3		(3,273		)	4.0
Insurance	68,143		3.2		71,085		3.2		(2,942		)	3.6
Municipal agencies	488		0.0		489		0.0		(1		)	0.0
Natural gas	151,207		7.1		156,227		7.1		(5,020		)	6.1
Non-agency mortgages	563,655		26.6		586,001		26.7		(22,346		)	27.1
Other finance	74,585		3.5		82,252		3.7		(7,667		)	9.3
Other industrial	7,343		0.3		7,395		0.3		(52		)	0.1
Other utility	21		0.0		44		0.0		(23		)	0.0
Technology	24,849		1.2		25,063		1.1		(214		)	0.3
Transportation	97,393		4.7		106,415		4.9		(9,022		)	10.9
U.S. Government	15,765		0.7		15,884		0.7		(119		)	0.1
Total	$	2,124,041	100.0	%	$	2,206,331	100.0	%	$	(82,290	)	100.0	%

The range of maturity dates for securities in an unrealized loss position at December 31, 2003 varies, with 11.5% maturing in less than 5 years, 23.2% maturing between 5 and 10 years, and 65.3% maturing after 10 years.  The following table shows the credit rating of securities in an unrealized loss position at December 31, 2003.

S&P or Equivalent Designation	Estimated Market Value		% Market Value		Amortized Cost		% Amortized Cost		Unrealized Loss			% Unrealized Loss
	(in thousands)
AAA/AA/A	$	1,417,473	66.7	%	$	1,449,428	65.7	%	$	(31,955	)	38.9	%
BBB	458,807		21.6		476,849		21.6		(18,042		)	21.9
Investment grade	1,876,280		88.3		1,926,277		87.3		(49,997		)	60.8
BB	131,833		6.2		142,421		6.5		(10,588		)	12.9
B	101,665		4.8		108,791		4.9		(7,126		)	8.6
CCC or lower	13,143		0.6		27,491		1.2		(14,348		)	17.4
In or near default	1,120		0.1		1,351		0.1		(231		)	0.3
Below investment grade	247,761		11.7		280,054		12.7		(32,293		)	39.2
Total	$	2,124,041	100.0	%	$	2,206,331	100.0	%	$	(82,290	)	100.0	%

At December 31, 2003, 88.3% of total securities in an unrealized loss position were rated as investment grade.  Bonds rated less than investment grade were 5.8% of invested assets.  Protective generally purchases its investments with the intent to hold to maturity.  Protective does not consider these unrealized losses as other-than-temporary impairments.

At December 31, 2003, securities in an unrealized loss position that were rated as below investment grade represented 11.7% of the total market value and 39.2% of the total unrealized loss.  Unrealized losses related to below investment grade securities that had been in an unrealized loss position for more than twelve months were $28.9 million.  Bonds in an unrealized loss position rated less than investment grade were 1.5% of invested assets.  Protective does not expect these investments to adversely affect its liquidity or ability to maintain proper matching of assets and liabilities.

The following table shows the estimated market value, amortized cost, unrealized loss and total time period that the security has been in an unrealized loss position for all below investment grade securities.

	Estimated Market Value		% Market Value		Amortized Cost		% Amortized Cost		Unrealized Loss			% Unrealized Loss
	(in thousands)
<= 90 days	$	25,138	10.1	%	$	25,959	9.3	%	$	(821	)	2.5	%
>90 days but <= 180 days	34,423		13.9		35,497		12.7		(1,074		)	3.3
>180 days but <= 270 days	40,369		16.3		41,363		14.8		(994		)	3.1
>270 days but <= 1 year	14,111		5.7		14,567		5.2		(456		)	1.4
>1 year but <= 2 years	34,399		13.9		38,085		13.6		(3,686		)	11.4
>2 years but <= 3 years	29,901		12.1		32,746		11.7		(2,845		)	8.8
>3 years but <= 4 years	1,919		0.8		2,044		0.7		(125		)	0.4
>4 years but <= 5 years	26,182		10.6		30,335		10.8		(4,153		)	12.9
>5 years	41,319		16.6		59,458		21.2		(18,139		)	56.2
Total	$	247,761	100.0	%	$	280,054	100.0	%	$	(32,293	)	100.0	%

At December 31, 2003, $21.1 million of below investment grade securities in an unrealized loss position were securities issued in Protective-sponsored commercial mortgage loan securitizations, including $18.1 million in an unrealized loss position greater than five years.  Protective does not consider these unrealized positions to be other-than-temporary, because the underlying mortgage loans continue to perform consistently with Protective’s original expectations.

Realized Losses

Realized losses are comprised of both write-downs on other-than-temporary impairments and actual sales of investments.

During the year ended December 31, 2003, Protective recorded pretax other-than-temporary impairments in its investments of $13.6 million as compared to $17.8 million in the year ended December 31, 2002.

As discussed earlier, Protective’s management considers several factors when determining other-than-temporary impairments.  Although Protective generally intends to hold securities until maturity, Protective may change its position as a result of a change in circumstances.  Any such decision is consistent with Protective’s classification of its investment portfolio as available for sale.  During the year ended December 31, 2003, Protective sold securities in an unrealized loss position with a market value of $524.8 million resulting in a realized loss of $6.3 million.  For such securities, the proceeds, realized loss and total time period that the security had been in an unrealized loss position are presented in the table below.

	Proceeds		% Proceeds		Realized Loss		% Realized Loss
	(in thousands)
<= 90 days	$	454,692	86.6	%	$	1,242	19.7	%
>90 days but <= 180 days	7,747		1.5		15		0.2
>180 days but <= 270 days	3,000		0.6		1,952		31.0
>270 days but <= 1 year	35,503		6.8		457		7.2
>1 year	23,808		4.5		2,648		41.9
Total	$	524,750	100.0	%	$	6,314	100.0	%

Mortgage Loans

Protective records mortgage loans net of an allowance for credit losses.  This allowance is calculated through analysis of specific loans that are believed to be at a higher risk of becoming impaired in the near future.  At December 31, 2003, Protective’s allowance for mortgage loan credit losses was $4.7 million.

For several years Protective has offered a type of commercial mortgage loan under which Protective will permit a slightly higher loan-to-value ratio in exchange for a participating interest in the cash flows from the underlying real estate.  As of December 31, 2003, approximately $382.7 million of Protective’s mortgage loans have this participation feature.

At December 31, 2003, delinquent mortgage loans and foreclosed properties were 0.1% of invested assets.  Protective does not expect these investments to adversely affect its liquidity or ability to maintain proper matching of assets and liabilities.

In the ordinary course of its commercial mortgage lending operations, Protective will commit to provide a mortgage loan before the property to be mortgaged has been built or acquired.  The mortgage loan commitment is a contractual obligation to fund a mortgage loan when called upon by the borrower.  The commitment is not recognized in Protective’s financial statements until the commitment is actually funded.  The mortgage loan commitment contains terms, including the rate of interest, which may be less than prevailing interest rates.

At December 31, 2003, Protective had outstanding mortgage loan commitments of $578.5 million with an estimated fair value of $595.7 million (using discounted cash flows from the first call date).  At December 31, 2002, Protective had outstanding commitments of $455.7 million with an estimated fair value of $494.1 million.  The following table sets forth the estimated fair value of Protective’s mortgage loan commitments resulting from a hypothetical immediate 1 percentage point increase in interest rate levels prevailing at December 31, and the percent change in fair value the following estimated fair values would represent.

At December 31	Amount		Percent Change
	(in millions)
2002	$	468.4	(5.2	)%
2003	566.1		(5.0	)

The estimated fair values were derived from the durations of Protective’s outstanding mortgage loan commitments.  While these estimated fair values generally provide an indication of how sensitive the fair value of Protective’s outstanding commitments are to changes in interest rates, they do not represent management’s view of future market changes, and actual market results may differ from these estimates.

LIABILITIES

Many of Protective’s products contain surrender charges and other features that reward persistency and penalize the early withdrawal of funds.  Certain stable value and annuity contracts have market-value adjustments that protect Protective against investment losses if interest rates are higher at the time of surrender than at the time of issue.

At December 31, 2003, Protective had policy liabilities and accruals of $9.7 billion.  Protective’s life insurance products have a weighted average minimum credited interest rate of approximately 4.6%.

At December 31, 2003, Protective had $4.7 billion of stable value product account balances with an estimated fair value of $4.7 billion (using discounted cash flows), and $3.5 billion of annuity account balances with an estimated fair value of $3.5 billion (using surrender values).

At December 31, 2002, Protective had $4.0 billion of stable value product account balances with an estimated fair value of $4.1 billion, and $3.7 billion of annuity account balances with an estimated fair value of $3.8 billion.

The following table sets forth the estimated fair values of Protective’s stable value product and annuity account balances resulting from a hypothetical immediate 1 percentage point decrease in interest rates from levels prevailing at December 31, and the percent change in fair value the following estimated fair values would represent.

At December 31	Amount		Percent Change
	(in millions)
2002
Stable value product account balances	$	4,198.4	1.8	%
Annuity account balances	3,966.6		4.5
2003
Stable value product account balances	$	4,817.2	1.7	%
Annuity account balances	3,642.0		4.8

Estimated fair values were derived from the durations of Protective’s stable value product and annuity account balances.  While these estimated fair values generally provide an indication of how sensitive the fair values of Protective’s stable value and annuity account balances are to changes in interest rates, they do not represent management’s view of future market changes, and actual market results may differ from these estimates.

Approximately 10% of Protective’s liabilities relate to products (primary whole life insurance), the profitability of which could be affected by changes in interest rates.  The effect of such changes in any one year is not expected to be material.

DERIVATIVE FINANCIAL INSTRUMENTS

Protective uses a risk management strategy that incorporates the use of derivative financial instruments, primarily to reduce its exposure to interest rate risk as well as currency exchange risk.

Combinations of interest rate swap contracts, futures contracts, and option contracts are sometimes used to mitigate or eliminate certain financial and market risks, including those related to changes in interest rates for certain investments, primarily outstanding mortgage loan commitments and mortgage-backed securities.  Interest rate swap contracts generally involve the exchange of fixed and variable rate interest payments between two parties, based on a common notional principal amount and maturity date.  Interest rate futures generally involve exchange traded contracts to buy or sell treasury bonds and notes in the future at specified prices. Interest rate options allow the holder of the option to receive cash or purchase, sell or enter into a financial instrument at a specified price within a specified period of time.  Protective used interest rate swap contracts, swaptions (options to enter into interest rate swap contracts), caps, and floors to modify the interest characteristics of certain investments, and liabilities.  Swap contracts are also used to alter the effective durations of assets and liabilities.  Protective uses foreign currency swaps to reduce its exposure to currency exchange risk on certain stable value contracts denominated in foreign currencies, primarily the European euro and the British pound.

Derivative instruments expose Protective to credit and market risk.  Protective minimizes its credit risk by entering into transactions with highly rated counterparties.  Protective manages the market risk associated with interest rate and foreign exchange contracts by establishing and monitoring limits as to the types and degrees of risk that may be undertaken.

Protective monitors its use of derivatives in connection with its overall asset/liability management programs and procedures. Protective’s asset/liability committee is responsible for implementing various strategies to mitigate or eliminate certain financial and market risks.  These strategies are developed through the committee’s analysis of data from financial simulation models and other internal and industry sources and are then incorporated into Protective’s overall interest rate and currency exchange risk management strategies.

At December 31, 2003, contracts with a notional amount of $2.2 billion were in a $169.0 million net gain position.  At December 31, 2002, contracts with a notional amount of $6.0 billion were in an $83.9 million net gain position.  Protective recognized an $8.2 million realized investment gain, a $4.7 million realized investment loss, and a $2.2 million realized investment gain in 2003, 2002, and 2001, respectively, related to derivative financial instruments.

The following table sets forth the December 31 notional amount and fair value of Protective’s interest rate risk related derivative financial instruments, and the estimated fair value resulting from a hypothetical immediate plus and minus one percentage point change in interest rates from levels prevailing at December 31.

	Notional		Fair Value at			Fair Value Resulting From an Immediate +/-1% Change in Interest Rates
	Amount		December 31			+1%			-1%
	(in millions)
2002
Option
Puts	$	4,000.0	$	1.2		$	2.5		$	0.0
Futures	570.0		(11.9		)	8.3			(30.9		)
Fixed to floating
Swaps	731.5		35.7			22.1			50.2
Floating to fixed
Swaps	135.0		(16.7		)	(11.7		)	(21.6		)
	$	5,436.5	$	8.3		$	21.2		$	(2.3	)
2003
Option
Puts	$	1,300.0	$	0.5		$	1.2		$	0.0
Fixed to floating
Swaps	303.7		31.0			21.0			41.5
Floating to fixed
Swaps	175.1		(16.1		)	(12.3		)	(19.0		)
	$	1,778.8	$	15.4		$	9.9		$	22.5

Protective is also subject to foreign exchange risk arising from stable value contracts denominated in foreign currencies and related foreign currency swaps.  At December 31, 2003, stable value contracts of $416.1 million had a foreign exchange loss of approximately $151.8 million and the related foreign currency swaps had a net unrealized gain of approximately $154.4 million.  At December 31, 2002, stable value contracts of $539.2 million had a foreign exchange loss of approximately $86.5 million and the related foreign currency swaps had a net unrealized gain of approximately $78.4 million.

The following table sets forth the notional amount and fair value of the funding agreements and related foreign currency swaps at December 31, and the estimated fair value resulting from a hypothetical 10% change in quoted foreign currency exchange rates from levels prevailing at December 31.

	Notional			Fair Value at				Fair Value Resulting From an Immediate +/-10% Change in Foreign Currency Exchange Rates
	Amount			December 31				+10%			-10%
	(in millions)
2002
Stable Value Contracts	$	539.2		$		(86.5	)	$	(149.1	)	$	(24.0	)
Foreign Currency Swaps	539.2			78.4				124.5			32.3
	$	1,078.4		$		(8.1	)	$	(24.6	)	$	8.3
2003
Stable Value Contracts	$	416.1		$	(151.8		)	$	(208.6	)	$	(95.0	)
Foreign Currency Swaps	416.1			154.4				180.6			128.2
	$		832.2	$	2.6			$	(28.0	)	$	33.2

Estimated gains and losses were derived using pricing models specific to derivative financial instruments.  While these estimated gains and losses generally provide an indication of how sensitive Protective’s derivative financial instruments are to changes in interest rates and foreign currency exchange rates, they do not represent management’s view of future market changes, and actual market results may differ from these estimates.

Protective is exploring other uses of derivative financial instruments.

ASSET/LIABILITY MANAGEMENT

Protective’s asset/liability management programs and procedures involve the monitoring of asset and liability durations for various product lines; cash flow testing under various interest rate scenarios; and the continuous rebalancing of assets and liabilities with respect to yield, risk, and cash flow characteristics.  It is Protective’s policy to generally maintain asset and liability durations within one-half year of one another, although, from time to time, a broader interval may be allowed.

Protective believes its asset/liability management programs and procedures and certain product features provide protection for Protective against the effects of changes in interest rates under various scenarios.  Additionally, Protective believes its asset/liability management programs and procedures provide sufficient liquidity to enable it to fulfill its obligation to pay benefits under its various insurance and deposit contracts.  However, Protective’s asset/liability management programs and procedures incorporate assumptions about the relationship between short-term and long-term interest rates (i.e., the slope of the yield curve), relationships between risk-adjusted and risk-free interest rates, market liquidity and other factors, and the effectiveness of Protective’s asset/liability management programs and procedures may be negatively affected whenever actual results differ from those assumptions.

Cash outflows related to stable value contracts (primarily maturing contracts, scheduled interest payments, and expected withdrawals) were approximately $1,100.1 million during 2003. Cash outflows related to stable value contracts are estimated to be approximately $1,106.1 million in 2004. Protective’s asset/liability management programs and procedures take into account maturing contracts and expected withdrawals. Accordingly, Protective does not expect stable value contract related cash outflows to have an unusual effect on the future operations and liquidity of Protective.

Protective and its insurance subsidiaries were committed at December 31, 2003, to fund mortgage loans in the amount of $578.5 million.  Protective held $621.7 million in cash and short-term investments at December 31, 2003. Protective Life Corporation had an additional $1.1 million in cash and short-term investments available for general corporate purposes.

While Protective generally anticipates that the cash flow of its subsidiaries will be sufficient to meet their investment commitments and operating cash needs, Protective recognizes that investment commitments scheduled to be funded may, from time to time, exceed the funds then available.  Therefore, Protective has arranged sources of credit for its insurance subsidiaries to use when needed.  Protective expects that the rate received on its investments will equal or exceed its borrowing rate.  Additionally, Protective may, from time to time, sell short-duration stable value products to complement its cash management practices.

Protective has also used securitization transactions involving its commercial mortgage loans to increase its liquidity.

CAPITAL

At December 31, 2003, Protective Life Corporation had $25.0 million outstanding under its $200 million revolving lines of credit due October 1, 2005, at an interest rate of 1.64%.

As disclosed in the Notes to the Consolidated Financial Statements, at December 31, 2003, approximately $1,386.9 million of consolidated share-owner’s equity, excluding net unrealized investment gains and losses, represented net assets of Protective that cannot be transferred to PLC.  In addition, the states in which Protective and its insurance subsidiaries are domiciled impose certain restrictions on their ability to pay dividends to PLC.  In general, dividends up to specified levels are considered ordinary and may be paid thirty days after written notice to the insurance commissioner of the state of domicile unless such commissioner objects to the dividend prior to the expiration of such period.  Dividends in larger amounts are considered extraordinary and are subject to affirmative prior approval by such commissioner.  The maximum amount that would qualify as ordinary dividends to PLC by Protective in 2004 is estimated to be $293.8 million.

A life insurance company’s statutory capital is computed according to rules prescribed by the National Association of Insurance Commissioners (NAIC), as modified by the insurance company’s state of domicile.  Statutory accounting rules are different from accounting principles generally accepted in the United States of America and are intended to reflect a more conservative view by, for example, requiring immediate expensing of policy acquisition costs.  The NAIC’s risk-based capital requirements require insurance companies to calculate and report information under a risk-based capital formula.  The achievement of long-term growth will require growth in the statutory capital of

Protective’s insurance subsidiaries.  The subsidiaries may secure additional statutory capital through various sources, such as retained statutory earnings or equity contributions by PLC.

CONTRACTUAL OBLIGATIONS

The table below sets forth future maturities of stable value products, notes payable, operating lease obligation, and mortgage loan commitments.

	2004		2005-2006		2007-2008		After 2008
	(in thousands)
Stable value products	$	1,156,511	$	2,018,613	$	1,378,341	$	123,066
Note payable	2,234
Operating lease obligation	1,530		3,061		66,255
Other property lease obligations	5,730		9,459		5,646		9,313
Mortgage loan commitments	578,546

The table above excludes liabilities related to separate accounts of $2,220.8 million.  Separate account liabilities represent funds maintained for contract holders who bear the related investment risk.  These liabilities are supported by assets that are legally segregated and are not subject to claims that arise from other business activities of Protective.  These assets and liabilities are separately identified on the consolidated balance sheets of Protective.  The table also excludes future cash flows related to certain insurance liabilities due to the uncertainty with respect to the timing of the cash flows.

IMPACT OF INFLATION

Inflation increases the need for life insurance. Many policyholders who once had adequate insurance programs may increase their life insurance coverage to provide the same relative financial benefit and protection.  Higher interest rates may result in higher sales of certain of Protective’s investment products.

The higher interest rates that have traditionally accompanied inflation could also affect Protective’s operations.  Policy loans increase as policy loan interest rates become relatively more attractive.  As interest rates increase, disintermediation of stable value and annuity account balances and individual life policy cash values may increase.  The market value of Protective’s fixed-rate, long-term investments may decrease, Protective may be unable to implement fully the interest rate reset and call provisions of its mortgage loans, and Protective’s ability to make attractive mortgage loans, including participating mortgage loans, may decrease.  In addition, participating mortgage loan income may decrease.  The difference between the interest rate earned on investments and the interest rate credited to life insurance and investment products may also be adversely affected by rising interest rates.

EX-99.3

Exhibit 99.3

PROTECTIVE LIFE INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF INCOME

	Year Ended December 31
	2003			2002			2001
	(dollars in thousands)
Revenues
Premiums and policy fees	$	1,653,609		$	1,548,201		$	1,389,819
Reinsurance ceded	(917,935		)	(738,158		)	(771,151		)
Net of reinsurance ceded	735,674			810,043			618,668
Net investment income	980,743			971,808			835,203
Realized investment gains (losses)
Derivative financial instruments	8,249			(4,708		)	2,182
All other investments	66,764			12,314			(6,123		)
Other income	46,825			41,483			38,578
Total revenues	1,838,255			1,830,940			1,488,508
Benefits and expenses
Benefits and settlement expenses (net of reinsurance ceded: 2003 – $918,275; 2002 – $699,808; 2001 – $609,996)	1,124,077			1,167,085			972,624
Amortization of deferred policy acquisition costs	225,107			267,662			147,058
Amortization of goodwill	0			0			2,827
Other operating expenses (net of reinsurance ceded: 2003 – $142,181; 2002 – $177,509; 2001 – $167,243)	139,099			154,570			152,041
Total benefits and expenses	1,488,283			1,589,317			1,274,550
Income from continuing operations before income tax	349,972			241,623			213,958
Income tax expense
Current	42,491			75,335			118,421
Deferred	75,441			8,894			(47,964		)
Total income tax expense	117,932			84,229			70,457
Net income from continuing operations before cumulative effect of change in accounting principle	232,040			157,394			143,501
Loss from discontinued operations, net of income tax	0			0			(9,856		)
Loss from sale of discontinued operations, net of income tax	0			0			(17,754		)
Net income before cumulative effect of change in accounting principle	232,040			157,394			115,891
Cumulative effect of change in accounting principle, net of income tax	0			0			(8,341		)
Net income	$	232,040		$	157,394		$	107,550

See Notes to Consolidated Financial Statements.

PROTECTIVE LIFE INSURANCE COMPANY

CONSOLIDATED BALANCE SHEETS

	December 31
	2003		2002
	(dollars in thousands)
Assets
Investments:
Fixed maturities, at market (amortized cost: 2003 – $12,314,822; 2002 – $11,212,765)	$	12,927,520	$	11,655,465
Equity securities, at market (cost: 2003 – $29,169; 2002 – $51,095)	30,521		48,799
Mortgage loans	2,733,722		2,518,151
Investment real estate, net of accumulated depreciation (2003 – $1,314; 2002 – $1,099)	13,152		15,499
Policy loans	502,748		543,161
Other long-term investments	244,913		210,381
Short-term investments	510,635		447,155
Total investments	16,963,211		15,438,611
Cash	111,059		85,850
Accrued investment income	184,439		180,950
Accounts and premiums receivable, net of allowance for uncollectible amounts (2003 – $2,617; 2002 – $2,825)	43,095		50,544
Reinsurance receivables	2,308,153		2,333,800
Deferred policy acquisition costs	1,863,568		1,709,254
Goodwill	35,143		35,143
Property and equipment	43,156		38,878
Other assets	198,581		262,127
Assets related to separate accounts
Variable annuity	2,045,038		1,513,824
Variable universal life	171,408		114,364
Other	4,361		4,330
	$	23,971,212	$	21,767,675

See Notes to Consolidated Financial Statements.

PROTECTIVE LIFE INSURANCE COMPANY

CONSOLIDATED BALANCE SHEETS

(continued)

	December 31
	2003			2002
	(dollars in thousands)
Liabilities
Policy liabilities and accruals
Future policy benefits and claims	$	8,950,091		$	8,247,296
Unearned premiums	743,727			843,166
Total policy liabilities and accruals	9,693,818			9,090,462
Stable value product account balances	4,676,531			4,018,552
Annuity account balances	3,480,577			3,697,495
Other policyholders’ funds	158,359			174,665
Other liabilities	764,097			620,731
Accrued income taxes	5,718			36,859
Deferred income taxes	339,273			206,845
Notes payable	2,234			2,264
Indebtedness to related parties	0			2,000
Liabilities related to separate accounts
Variable annuity	2,045,038			1,513,824
Variable universal life	171,408			114,364
Other	4,361			4,330
Total liabilities	21,341,414			19,482,391
Commitments and contingent liabilities – Note G
Share-owner’s equity
Preferred Stock, $1 par value shares authorized and issued: 2,000, liquidation preference $2,000	2			2
Common Stock, $1 par value shares authorized and issued: 5,000,000	5,000			5,000
Additional paid-in capital	863,819			846,619
Note receivable from PLC Employee Stock Ownership Plan	(3,426		)	(3,838		)
Retained earnings	1,431,818			1,201,587
Accumulated other comprehensive income
Net unrealized gains on investments (net of income tax: 2003 – $177,642; 2002 – $128,145)	329,907			237,983
Accumulated gain (loss) – hedging (net of income tax: 2003 – $1,442; 2002 – $(1,114))	2,678			(2,069		)
Total share-owner’s equity	2,629,798			2,285,284
	$	23,971,212		$	21,767,675

See Notes to Consolidated Financial Statements.

PROTECTIVE LIFE INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF SHARE-OWNER’S EQUITY

(dollars in thousands)	Preferred Stock		Common Stock		Additional Paid-In Capital		Note Receivable From PLC ESOP			Retained Earnings			Net Unrealized Gains (Losses) on Investments			Accumulated Gain (Loss) - Hedging			Total Share- Owner’s Equity
Balance, December 31, 2000	$	2	$	5,000	$	651,419	$	(4,841	)	$	939,745		$	(51,370	)	$	0		$	1,539,955
Net income for 2001										107,550									107,550
Change in net unrealized gains/losses on investments (net of income tax - $52,019)													96,607						96,607
Reclassification adjustment for amounts included in net income (net of income tax - $2,143)													3,980						3,980
Transition adjustment on derivative financial instruments (net of income tax - $2,127)													3,951						3,951
Comprehensive income for 2001																			212,088
Capital contribution					134,000														134,000
Common dividend – transfer of subsidiary to PLC (See Note A)										(2,052		)							(2,052		)
Preferred dividend ($500.00 per share)										(1,000		)							(1,000		)
Decrease in note receivable from PLC ESOP							342												342
Balance, December 31, 2001	2		5,000		785,419		(4,499		)	1,044,243			53,168			0			1,883,333
Net income for 2001										157,394									157,394
Change in net unrealized gains/losses on investments (net of income tax - $103,826)													192,819						192,819
Reclassification adjustment for amounts included in net income (net of income tax - $2,143
Transition adjustment on derivative financial instruments (net of income tax - $(4,310))													(8,004		)				(8,004		)
Change in accumulated gain (loss) – hedging (net of income tax - $(1,114))																(2,069		)	(2,069		)
Comprehensive income for 2002																			340,140
Capital contribution					61,200														61,200
Preferred dividend ($25.00 per share)										(50		)							(50		)
Decrease in note receivable from PLC ESOP							661												661
Balance, December 31, 2002	2		5,000		846,619		(3,838		)	1,201,587			237,983			(2,069		)	2,285,284
Net income for 2003										232,040									232,040
Change in net unrealized gains/losses on investments (net of income tax - $72,865)													135,321						135,321
Reclassification adjustment for amounts included in net income (net of income tax - $(23,367))													(43,397		)				(43,397		)
Change in accumulated gain (loss) hedging (net of income tax - $2,556)																4,747			4,747
Comprehensive income for 2003																			328,711
Capital contribution					17,200														17,200
Common dividend										(1,809		)							(1,809		)
Decrease in note receivable from PLC ESOP							412												412
Balance December 31, 2003	$	2	$	5,000	$	863,819	$	(3,426	)	$	1,431,818		$	329,907		$	2,678		$	2,629,798

See notes to consolidated financial statements

PROTECTIVE LIFE INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year Ended December 31
	2003			2002			2001
	(dollars in thousands)
Cash flows from operating activities
Net income	$	232,040		$	157,394		$	107,550
Adjustments to reconcile net income to net cash provided by operating activities:
Realized investment (gains) losses	(66,764		)	(12,314		)	6,123
Amortization of deferred policy acquisition costs	225,107			239,490			154,383
Capitalization of deferred policy acquisition costs	(381,667		)	(437,325		)	(317,626		)
Depreciation expense	11,637			10,409			11,651
Deferred income taxes	75,441			8,894			(40,970		)
Accrued income taxes	(31,141		)	(88,976		)	139,016
Amortization of goodwill	0			0			8,328
Loss from sale of discontinued operations	0			0			17,754
Interest credited to universal life and investment products	647,695			900,930			944,098
Policy fees assessed on universal life and investment products	(324,773		)	(268,191		)	(222,415		)
Change in accrued investment income and other receivables	29,607			(303,497		)	(238,097		)
Change in policy liabilities and other policyholder funds of traditional life and health products	500,871			493,714			444,119
Change in other liabilities	(190,896		)	93,368			132,497
Other (net)	55,437			89,556			11,024
Net cash provided by operating activities	782,594			883,452			1,157,435
Cash flows from investing activities
Investments available for sale, net of short-term investments:
Maturities and principal reductions of investments	4,615,096			3,617,235			1,979,245
Sale of investments	7,539,673			15,267,722			7,696,212
Cost of investments acquired	(13,185,410		)	(20,014,789		)	(10,881,064		)
Increase in mortgage loans, net	(215,571		)	(5,308		)	(244,620		)
Decrease (increase) in investment real estate, net	2,347			8,674			(11,607		)
Decrease (increase) in policy loans, net	40,413			(21,320		)	(291,313		)
Increase in other long-term investments, net	(34,532		)	(109,695		)	(34,040		)
Decrease (increase) in short-term investments, net	270,782			(218,759		)	(55,697		)
Acquisitions and bulk reinsurance assumptions	0			130,515			(118,557		)
Purchase of property and equipment	(15,915		)	(8,934		)	(10,029		)
Sale of discontinued operations, net of cash transferred	0			0			216,031
Net cash used in investing activities	(983,117		)	(1,354,659		)	(1,755,439		)
Cash flows from financing activities
Borrowings under line of credit arrangements and long-term debt	5,829,066			2,050,772			2,574,954
Capital contribution from PLC	17,200			60,785			134,000
Principal payments on line of credit arrangement and long-term debt	(5,829,096		)	(2,167,799		)	(2,457,979		)
Principal payment on surplus note to PLC	(2,000		)	(4,000		)	(4,000		)
Dividends to share owner	0			(50		)	(1,000		)
Investment product deposits and change in universal life deposits	2,721,579			1,687,213			1,735,653
Investment product withdrawals	(2,511,017		)	(1,177,030		)	(1,315,179		)
Net cash provided by financing activities	225,732			449,891			666,449
Increase (decrease) in cash	25,209			(21,316		)	68,445
Cash at beginning of year	85,850			107,166			38,721
Cash at end of year	$	111,059		$	85,850		$	107,166

See notes to consolidated financial statements.

PROTECTIVE LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(All dollar amounts in tables are in thousands)

Note A — SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The accompanying consolidated financial statements of Protective Life Insurance Company and subsidiaries (Protective) are prepared on the basis of accounting principles generally accepted in the United States of America.  Such accounting principles differ from statutory reporting practices used by insurance companies in reporting to state regulatory authorities.  (See also Note B.)

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make various estimates that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities, as well as the reported amounts of revenues and expenses.  Actual results could differ from these estimates.

ENTITIES INCLUDED

The consolidated financial statements include the accounts, after intercompany eliminations, of Protective Life Insurance Company and its wholly-owned subsidiaries.  Protective is a wholly-owned subsidiary of Protective Life Corporation (PLC), an insurance holding company.

On May 1, 2001, PLC transferred its ownership of five companies (that marketed prepaid dental products) to Protective.  Protective has recorded these transactions on a pooling of interests basis whereby Protective’s financial statements reflect the consolidation of the contributed entities as if they had been wholly owned by Protective for all periods in which common control existed.

On December 31, 2001, Protective sold substantially all of the companies transferred from PLC as part of the sale of the Dental Benefits Division.  For more information see the discussion under the heading “Discontinued Operations” included in Note A herein.

NATURE OF OPERATIONS

Protective provides financial services through the production, distribution, and administration of insurance and investment products.  Protective markets individual life insurance, credit life and disability insurance, guaranteed investment contracts, guaranteed funding agreements, fixed and variable annuities, and extended service contracts throughout the United States.  Protective also maintains a separate division devoted to the acquisition of insurance policies from other companies.

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.

RECENTLY ISSUED ACCOUNTING STANDARDS

On January 1, 2001, Protective adopted Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities”.  SFAS No. 133, as amended by SFAS Nos. 137, 138, and 149, requires Protective to record all derivative financial instruments at fair value on the balance sheet.  Changes in fair value of a derivative instrument are reported in net income or other comprehensive income, depending on the designated use of the derivative instrument.  The adoption of SFAS No. 133 resulted in a cumulative charge to net income, net of income tax, of $8.3 million and a cumulative after-tax increase to other comprehensive income of $4.0 million on January 1, 2001.  The charge to net income and increase to other comprehensive income primarily resulted from the recognition of derivative instruments embedded in Protective’s corporate bond portfolio.  In addition, the charge to net income includes the recognition of the ineffectiveness on existing hedging relationships including the difference in spot and forward exchange rates related to foreign currency swaps used as an economic hedge of foreign-currency-denominated stable value contracts.  The adoption of SFAS No. 133 has introduced volatility into Protective’s reported net income and other comprehensive income depending on market conditions and Protective’s hedging activities.

On January 1, 2002, Protective adopted SFAS No. 142, “Goodwill and Other Intangible Assets.”  SFAS No. 142 revises the standards for accounting for acquired goodwill and other intangible assets.  The standard replaces the requirement to amortize goodwill with one that calls for an annual impairment test, among other provisions.  Protective has performed an impairment test and determined that its goodwill was not impaired at October 31, 2003, and 2002.  The following table illustrates adjusted income from continuing operations before cumulative effect of change in accounting principle as if this pronouncement was adopted as of January 1, 2001:

	Year Ended December 31
	2003			2002		2001
Adjusted net income:
Income from continuing operations before cumulative effect of change in accounting principle	$		232,040	$	157,394	$	143,501
Add back amortization of goodwill, net of income tax						1,838
Adjusted income from continuing operations before cumulative effect of change in accounting principle	232,040			157,394		145,339
Loss from discontinued operations, net of income tax						(9,856		)
Loss from sale of discontinued operations, net of income tax						(17,754		)
Adjusted net income before cumulative effect of change in accounting principle	232,040			157,394		117,729
Cumulative effect of change in accounting principle, net of income tax						(8,341		)
Adjusted net income	$	232,040		$	157,394	$	109,388

In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. (FIN) 46, “Consolidation of Variable Interest Entities,” which was revised in December 2003.  FIN 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated support from other parties.  The effective date of FIN 46 is March 31, 2004, for Protective.  Protective is currently evaluating the impact of FIN 46 on entities to be consolidated as of March 31, 2004.  Although Protective does not expect the implementation of the provisions of FIN 46, on March 31, 2004, to have a material impact on its results of operations, had the provisions been effective at December 31, 2003, Protective’s reported assets and liabilities would have increased by approximately $70 million.

On October 1, 2003, Protective adopted Derivatives Implementation Group Issue No. B36, “Embedded Derivatives: Modified Coinsurance Arrangements and Debt Instruments That Incorporate Credit Risk Exposures That Are Unrelated or Only Partially Related to the Creditworthiness of the Obligor under Those Instruments” (DIG B36).  DIG B36 requires the bifurcation of embedded derivatives within certain modified coinsurance and funds withheld coinsurance arrangements that expose the creditor to credit risk of a company other than the debtor, even if the debtor owns as investment assets the third-party securities to which the creditor is exposed.  The adoption did not have a material impact on its financial condition or results of operations.

In July 2003, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts.”  SOP 03-1 is effective for fiscal years beginning after December 15, 2003.  SOP 03-1 provides guidance related to the reporting and disclosure of certain insurance contracts and separate accounts, including the calculation of guaranteed minimum death benefits (GMDB).  SOP 03-1 also addresses the capitalization and amortization of sales inducements to contract holders.  Had the provision been effective at December 31, 2003, Protective would have reported a GMDB accrual $0.3 million higher than currently reported.  Although the original intent of SOP 03-1 was to address the accounting for contract provisions not addressed by SFAS No. 97, such as guaranteed minimum death benefits within a variable annuity contract, it appears that SOP 03-1 contains language that may impact the accounting for universal life products in a material way.  The life insurance industry and some insurance companies have filed letters with the American Institute of Certified Public Accountants seeking clarification, guidance, delay and/or revision to more appropriately reflect the underlying economic issues of universal life insurance products.  Protective is currently evaluating the impact of SOP 03-1 on the accounting for its universal life products.

On December 31, 2003, Protective adopted SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” as revised by the FASB in December 2003.  The FASB revised disclosure requirements for pension plans and other postretirement benefit plans to require more information.  The revision of SFAS No. 132 did not have a material effect on Protective’s financial position or results of operations.

On December 8, 2003, President Bush signed into law the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (Medicare Act).  The Medicare Act introduces a prescription drug benefit for Medicare-eligible retirees in 2006, as well as a federal subsidy to plan sponsors that provide prescription drug benefits.  In accordance with FASB Staff Position No. 106-1,

Protective has elected to defer recognizing the effects of the Medicare Act for its postretirement plans under FASB Statement No. 106, “Employers’ Accounting for Postretirement Benefits Other than Pensions” until authoritative guidance on accounting for the federal subsidy is issued.  Protective anticipates that the Medicare Act will not have a material impact on the financial results of Protective; therefore the costs reported in Note L to the Consolidated Financial Statements do not reflect these changes.  The final accounting guidance could require changes to previously reported information.

INVESTMENTS

Protective has classified all of its investments in fixed maturities, equity securities, and short-term investments as “available for sale.”

Investments are reported on the following bases less allowances for uncollectible amounts on investments, if applicable:

•Fixed maturities (bonds and redeemable preferred stocks) — at current market value.  Where market values are unavailable, Protective obtains estimates from independent pricing services or estimates market value based upon a comparison to quoted issues of the same issuer or issues of other issuers with similar terms and risk characteristics.

•Equity securities (common and nonredeemable preferred stocks) — at current market value.

•Mortgage loans — at unpaid balances, adjusted for loan origination costs, net of fees, and amortization of premium or discount.

•Investment real estate — at cost, less allowances for depreciation computed on the straight-line method.  With respect to real estate acquired through foreclosure, cost is the lesser of the loan balance plus foreclosure costs or appraised value.

•Policy loans — at unpaid balances.

•Other long-term investments — at a variety of methods similar to those listed above, as deemed appropriate for the specific investment.

•Short-term investments — at cost, which approximates current market value, except collateral from securities lending which is recorded at current market value.

Estimated market values were derived from the durations of Protective’s fixed maturities and mortgage loans.  Duration measures the relationship between changes in market value to changes in interest rates.  While these estimated market values generally provide an indication of how sensitive the market values of Protective’s fixed maturities and mortgage loans are to changes in interest rates, they do not represent management’s view of future market changes, and actual market results may differ from these estimates.

Substantially all short-term investments have maturities of three months or less at the time of acquisition and include approximately $0.6 million in bank deposits voluntarily restricted as to withdrawal.

The market values of fixed maturities increase or decrease as interest rates fall or rise.  As prescribed by generally accepted accounting principles, investments deemed as “available for sale” are recorded at their market values with the resulting unrealized gains and losses reduced by a related adjustment to deferred policy acquisition costs, net of income tax, reported as a component of share-owner’s equity.

Realized gains and losses on sales of investments are recognized in net income using the specific identification basis.

DERIVATIVE FINANCIAL INSTRUMENTS

Protective utilizes a risk management strategy that incorporates the use of derivative financial instruments, primarily to reduce its exposure to interest rate risk as well as currency exchange risk.

Combinations of interest rate swap contracts, futures contracts, and option contracts are sometimes used to mitigate or eliminate certain financial and market risks, including those related to changes in interest rates for certain investments, primarily outstanding mortgage loan commitments and mortgage-backed securities.  Interest rate swap contracts generally involve the exchange of fixed and variable rate interest payments between two parties, based on a common notional principal amount and maturity date.  Interest rate futures generally involve exchange traded contracts to buy or sell treasury bonds and notes in the future at specified prices. Interest rate options allow the holder of the option to receive cash or purchase, sell or enter into a financial instrument at a specified price within a specified period of time.  Protective uses interest rate swap contracts, swaptions (options to enter into interest rate swap contracts), caps, and floors to modify the interest characteristics of certain investments and liabilities.  Swap contracts are also used to

alter the effective durations of assets and liabilities.  Protective uses foreign currency swaps to reduce its exposure to currency exchange risk on certain stable value contracts denominated in foreign currencies, primarily the European euro and the British pound.

Derivative instruments expose Protective to credit and market risk.  Protective minimizes its credit risk by entering into transactions with highly rated counterparties.  Protective manages the market risk associated with interest rate and foreign exchange contracts by establishing and monitoring limits as to the types and degrees of risk that may be undertaken.

Protective monitors its use of derivatives in connection with its overall asset/liability management programs and procedures.  Protective’s asset/liability committee is responsible for implementing various strategies to mitigate or eliminate certain financial and market risks.  These strategies are developed through the committee’s analysis of data from financial simulation models and other internal and industry sources and are then incorporated into Protective’s overall interest rate and currency exchange risk management strategies.

All derivatives are recognized on the balance sheet (in “other long-term investments” or “other liabilities”) at their fair value (primarily estimates from independent pricing services).  On the date the derivative contract is entered into, Protective designates the derivative as (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair-value” hedge), (2) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash-flow” hedge), or (3) as a derivative either held for investment purposes or held as an instrument designed to mitigate the economic changes in value or cash flows of another instrument (“other” derivative).  Changes in the fair value of a derivative that is highly effective as – and that is designated and qualifies as – a fair-value hedge, along with the loss or gain on the hedged asset or liability that is attributable to the hedged risk (including losses or gains on firm commitments), are recorded in current-period earnings.  Changes in the fair value of a derivative that is highly effective as – and that is designated and qualified as – a cash-flow hedge are recorded in other comprehensive income, until earnings are affected by the variability of cash flows.  Changes in the fair value of other derivatives are recognized in current earnings and reported in “Realized investment gains (losses) – derivative financial instruments” in Protective’s consolidated condensed statements of income.

Protective formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions.  This process includes linking all derivatives that are designated as fair-value or cash-flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions.  Protective also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.  When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, Protective discontinues hedge accounting prospectively, as discussed below.

Protective discontinues hedge accounting prospectively when (1) it is determined that the derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item (including firm commitments or forecasted transactions); (2) the derivative expires or is sold, terminated, or exercised; (3) the derivative is designated as a hedge instrument, because it is unlikely that a forecasted transaction will occur; (4) because a hedged firm commitment no longer meets the definition of a firm commitment; or (5) management determines that designation of the derivative as a hedge instrument is no longer appropriate.

When hedge accounting is discontinued because it is determined that the derivative no longer qualifies as an effective fair-value hedge, the derivative will continue to be carried on the balance sheet at its fair value, and the hedged asset or liability will no longer be adjusted for changes in fair value.  When hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, the derivative will continue to be carried on the balance sheet at its fair value, and any asset or liability that was recorded pursuant to recognition of the firm commitment will be removed from the balance sheet and recognized as a gain or loss in current-period earnings.  When hedge accounting is discontinued because it is probable that a forecasted transaction will not occur, the derivative will continue to be carried on the balance sheet at its fair value, and gains and losses that were accumulated in other comprehensive income will remain therein until such time as they are reclassified to earnings as originally forecasted to occur. In all situations in which hedge accounting is discontinued, the derivative will be carried at its fair value on the balance sheet, with changes in its fair value recognized in current-period earnings.

Fair-Value Hedges.  During 2003, there were no fair value hedges outstanding.  In 2002 and 2001, Protective designated, as fair value hedges, callable interest rate swaps used to modify the interest characteristics of certain stable value contracts. In assessing hedge effectiveness, Protective excludes the embedded call option’s time value component from each derivative’s total gain or loss.  In 2002 and 2001, total measured ineffectiveness for the fair value hedging relationships was insignificant while the excluded time value component resulted in a pre-tax gain of $0 and $1.3 million, respectively.  Both the measured ineffectiveness and the excluded time value component are reported in “Realized Investment Gains (Losses) – Derivative Financial Instruments” in Protective’s consolidated statements of income.

Cash-Flow Hedges.  Protective has entered into a foreign currency swap to hedge the risk of changes in the value of interest and principal payments to be made on certain of its foreign-currency-based stable value contracts.  Under the terms of the swap, Protective

pays a fixed U.S.-dollar-denominated rate and receives a fixed foreign-currency-denominated rate.  Effective July 1, 2002, Protective designated this swap as a cash flow hedge and therefore recorded the change in the fair value of the swap during the period in accumulated other comprehensive income.  In 2003 and 2002, a pretax loss of $66.0 million and $19.8 million, respectively, representing the change in fair value of the hedged contracts, and a gain of like amount representing the application of hedge accounting to this transaction, were recorded in “Realized Investment Gains (Losses) – Derivative Financial Instruments” in Protective’s consolidated condensed statements of income.  For the years ended December 31, 2003 and 2002, the amount of the hedge’s ineffectiveness reported in income was a $0.3 million gain and an immaterial loss, respectively.  Additionally, as of December 31, 2003 and 2002, Protective reported an increase to accumulated other comprehensive income of $2.7 million (net of income tax of $1.4 million) and a reduction to accumulated other comprehensive income of $2.1 million (net of income tax of $1.1 million), respectively, related to its derivative designated as a cash flow hedge.  During 2004, Protective expects to reclassify out of accumulated other comprehensive income and into earnings, as a reduction of interest expense, approximately $3.4 million.

Other Derivatives.  Protective uses certain interest rate swaps, caps, floors, swaptions, options and futures contracts to mitigate or eliminate exposure to changes in value or cash flows of outstanding mortgage loan commitments and certain owned investments.  In 2003, 2002, and 2001, Protective recognized net pre-tax gains of $4.2 million, $5.3 million, and $2.7 million, respectively, representing the change in fair value of these derivative instruments as well as a realized gain or loss on contracts closed during the period.

On its foreign currency swaps, Protective recognized a $2.6 million pre-tax gain in 2003 while recognizing a $1.9 million foreign exchange pre-tax loss on the related foreign-currency-denominated stable value contracts.  In 2002, Protective recognized a $70.8 million pre-tax gain on its foreign currency swaps; while recognizing a $74.9 million foreign exchange pre-tax loss on the related foreign-currency-denominated stable value contracts.  In 2001, Protective recognized an $8.2 million pre-tax loss on its foreign currency swaps while recognizing an $11.2 million foreign exchange pre-tax gain on the related foreign-currency-denominated stable value contracts.  The net gain, net loss and net gain in 2003, 2002 and 2001, respectively, primarily results from the difference in the forward and spot exchange rates used to revalue the currency swaps and the stable value contracts, respectively.  The net gains and losses are reflected in “Realized Investment Gains (Losses) – Derivative Financial Instruments” in Protective’s consolidated statements of income.

Protective has entered into asset swap arrangements to, in effect, sell the equity options embedded in owned convertible bonds in exchange for an interest rate swap that converts the remaining host bond to a variable rate instrument.  In 2003, 2002, and 2001, Protective recognized pre-tax gains of $3.0 million, $2.0 million, and $12.2 million, respectively, for the change in the asset swaps’ fair value and recognized a $0.1 million pre-tax gain, a $7.8 million pre-tax loss, and a $16.9 million pre-tax loss, respectively, to separately record the embedded equity options at fair value.

At December 31, 2003, contracts with a notional amount of $2.2 billion were in a $169.0 million net gain position.  At December 31, 2002, contracts with a notional amount of $6.0 billion were in an $83.9 million net gain position.

Protective’s derivative financial instruments are with highly rated counterparties.

CASH

Cash includes all demand deposits reduced by the amount of outstanding checks and drafts.  Protective has deposits with certain financial institutions which exceed federally insured limits.  Protective has reviewed the credit worthiness of these financial institutions and believes there is minimal risk of a material loss.

DEFERRED POLICY ACQUISITION COSTS

Commissions and other costs of acquiring traditional life and health insurance, credit insurance, universal life insurance, and investment products that vary with and are primarily related to the production of new business, have been deferred.  Traditional life and health insurance acquisition costs are amortized over the premium-payment period of the related policies in proportion to the ratio of annual premium income to the present value of the total anticipated premium income.  Credit insurance acquisition costs are being amortized in proportion to earned premium.  Acquisition costs for universal life and investment products are amortized over the lives of the policies in relation to the present value of estimated gross profits before amortization.  Under SFAS No. 97, “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments,” Protective makes certain assumptions regarding the mortality, persistency, expenses, and interest rates (equal to the rate used to compute liabilities for future policy benefits; currently 2.6% to 9.4%) it expects to experience in future periods.  These assumptions are to be best estimates and are to be periodically updated whenever actual experience and/or expectations for the future change from that assumed.  Additionally, relating to SFAS No. 115, these costs have been adjusted by an amount equal to the amortization that would have been recorded if unrealized gains or losses on investments associated with Protective’s universal life and investment products had been realized.

The cost to acquire blocks of insurance representing the present value of future profits from such blocks of insurance is also included in deferred policy acquisition costs.  Protective amortizes the present value of future profits over the premium payment period, including accrued interest of up to approximately 8%.  The unamortized present value of future profits for all acquisitions was approximately $502.2 million and $542.5 million at December 31, 2003 and 2002, respectively.  During 2003, no present value of profits was capitalized and $40.3 million was amortized.  During 2002, $62.5 million of present value of future profits was capitalized (relating to acquisitions and adjustments made during the year), a $2.1 million reduction came from the sale of a small subsidiary, and $41.3 was amortized.

The expected amortization of the present value of future profits for the next five years is as follows:

Year	Expected Amortization
2004	$	32,400
2005	30,700
2006	29,200
2007	28,000
2008	26,800

GOODWILL

The goodwill balance at December 31, 2003 and 2002, was $35.1 million.  At October 31, 2003 and 2002, Protective evaluated its goodwill and determined that fair value had not decreased below carrying value and no adjustment to impair goodwill was necessary in accordance with SFAS No. 142.

PROPERTY AND EQUIPMENT

Property and equipment are reported at cost less accumulated depreciation. Protective primarily uses the straight-line method of depreciation based upon the estimated useful lives of the assets.  Protective’s Home Office building is depreciated over a thirty-nine year useful life, furniture is depreciated over a ten year useful life, office equipment and machines are depreciated over a five year useful life, and software and computers are depreciated over a three year useful life.  Major repairs or improvements are capitalized and depreciated over the estimated useful lives of the assets. Other repairs are expensed as incurred.  The cost and related accumulated depreciation of property and equipment sold or retired are removed from the accounts, and resulting gains or losses are included in income.

Property and equipment consisted of the following at December 31:

	2003		2002
Home office building	$	48,678	$	45,297
Other, principally furniture and equipment	76,461		67,059
	125,139		112,356
Accumulated depreciation	81,983		73,478
	$	43,156	$	38,878

SEPARATE ACCOUNTS

The assets and liabilities related to separate accounts in which Protective does not bear the investment risk are valued at market and reported separately as assets and liabilities related to separate accounts in the accompanying consolidated financial statements.

STABLE VALUE PRODUCT ACCOUNT BALANCES

Protective markets guaranteed investment contracts (GICs) to 401(k) and other qualified retirement savings plans, and fixed and floating rate funding agreements to the trustees of municipal bond proceeds, institutional investors, bank trust departments, and money market funds.  Through its registered funding agreement-backed note program, Protective is able to offer secured notes to both institutional and retail investors.  During the fourth quarter of 2003, Protective registered a funding agreement-backed notes program with the SEC.  GICs are generally contracts that specify a return on deposits for a specified period and often provide flexibility for withdrawals at book value in keeping with the benefits provided by the plan.  Stable value product account balances include GICs and funding agreements issued by Protective as well as the obligations of consolidated special purpose trusts or entities formed to purchase funding agreements issued by Protective.  At December 31, 2003 and 2002 Protective had $2.8 billion and $2.2 billion of stable value contract account balances marketed through structured programs.  Most GICs and funding agreements written by Protective have maturities of three to seven years.  At December 31, 2003, future maturities of stable value contracts were $1.2 billion in 2004, $2.0 billion in 2005-2006, $1.4 billion in 2007-2008, and $123.1 million after 2008.

REVENUES AND BENEFITS EXPENSE

Traditional Life, Health, and Credit Insurance Products:

Traditional life insurance products consist principally of those products with fixed and guaranteed premiums and benefits, and they include whole life insurance policies, term and term-like life insurance policies, limited-payment life insurance policies, and certain annuities with life contingencies.  Life insurance and immediate annuity premiums are recognized as revenue when due.  Health and credit insurance premiums are recognized as revenue over the terms of the policies.  Benefits and expenses are associated with earned premiums so that profits are recognized over the life of the contracts.  This is accomplished by means of the provision for liabilities for future policy benefits and the amortization of deferred policy acquisition costs.  Gross premiums in excess of net premiums related to immediate annuities are deferred and recognized over the life of the policy.

Liabilities for future policy benefits on traditional life insurance products have been computed using a net level method including assumptions as to investment yields, mortality, persistency, and other assumptions based on Protective’s experience, modified as necessary to reflect anticipated trends and to include provisions for possible adverse deviation.  Reserve investment yield assumptions on December 31, 2003 were 6.98%.  The liability for future policy benefits and claims on traditional life, health, and credit insurance products includes estimated unpaid claims that have been reported to Protective and claims incurred but not yet reported. Policy claims are charged to expense in the period that the claims are incurred.

Activity in the liability for unpaid claims is summarized as follows:

	2003			2002			2001
Balance beginning of year	$	116,214		$	100,023		$	109,973
Less reinsurance	54,765			33,723			25,830
Net balance beginning of year	61,449			66,300			84,143
Incurred related to:
Current year	266,676			258,612			383,371
Prior year	(1,783		)	(338		)	(1,080		)
Total incurred	264,893			258,274			382,291
Paid related to:
Current year	261,311			243,206			312,748
Prior year	(1,406		)	22,528			81,220
Total paid	259,905			265,734			393,968
Other changes:
Acquisitions and reserve transfers	0			2,609			(6,166		)
Net balance end of year	66,437			61,449			66,300
Plus reinsurance	55,395			54,765			33,723
Balance end of year	$	121,832		$	116,214		$	100,023

Universal Life and Investment Products:

Universal life and investment products include universal life insurance, guaranteed investment contracts, deferred annuities, and annuities without life contingencies.  Premiums and policy fees for universal life and investment products consist of fees that have been assessed against policy account balances for the costs of insurance, policy administration, and surrenders.  Such fees are recognized when assessed and earned.  Benefit reserves for universal life and investment products represent policy account balances before applicable surrender charges plus certain deferred policy initiation fees that are recognized in income over the term of the policies.  Policy benefits and claims that are charged to expense include benefit claims incurred in the period in excess of related

policy account balances and interest credited to policy account balances.  Interest rates credited to universal life products ranged from 4.6% to 6.5% and investment products ranged from 2.6% to 9.4% in 2003.

Protective’s accounting policies with respect to variable universal life and variable annuities are identical except that policy account balances (excluding account balances that earn a fixed rate) are valued at market and reported as components of assets and liabilities related to separate accounts.

INCOME TAXES

Protective uses the asset and liability method of accounting for income taxes. Income tax provisions are generally based on income reported for financial statement purposes.  Deferred federal income taxes arise from the recognition of temporary differences between the basis of assets and liabilities determined for financial reporting purposes and the basis of assets and liabilities determined for financial reporting purposes and the basis for income tax purposes. Such temporary differences are principally related to the deferral of policy acquisition costs and the provision for future policy benefits and expenses.

DISCONTINUED OPERATIONS

On December 31, 2001, Protective completed the sale to Fortis, Inc. of substantially all of its Dental Benefits Division (Dental Division) and discontinued other remaining Dental Division related operations, primarily other health insurance lines.

The operating results and charges related to the sale of the Dental Division and discontinuance of other related operations at December 31 are as follows:

	2003		2002		2001
Total revenues	$	12,293	$	15,809	$	350,988
Loss before income taxes from discontinued operations	$	0	$	0	$	(12,749	)
Income tax benefit	0		0		2,893
Loss from discontinued operations	$	0	$	0	$	(9,856	)
Gain from sale of discontinued operations before income tax					$	27,221
Income tax expense related to sale					(44,975		)
Loss from sale of discontinued operations					$	(17,754	)

Assets and liabilities related to the discontinued lines of business of approximately $57.1 million remain at December 31, 2003.

SUPPLEMENTAL CASH FLOW INFORMATION

The following table sets forth supplemental cash flow information for the years ended December 31:

	2003			2002			2001
Cash paid during the year:
Interest on debt	$	1,582		$	987		$	1,390
Income taxes	66,082			125,039			27,395
Noncash investing and financing activities:
Reduction of principal on note from ESOP	$	412		$	661		$	342
Common dividend	(1,809		)	0			0
Acquisitions, related reinsurance transactions and subsidiary transfer:
Assets acquired	$	0		$	358,897		$	2,549,484
Liabilities assumed	0			(489,412		)	(2,430,927		)
Net	$	0		$	(130,515	)	$	118,557

RECLASSIFICATIONS

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 share-owners’ equity.

Note B —STATUTORY REPORTING PRACTICES AND OTHER REGULATORY MATTERS

Financial statements prepared in conformity with accounting principles generally accepted in the United States of America differ in some respects from the statutory accounting practices prescribed or permitted by insurance regulatory authorities.  The most

significant differences are as follows: (a) acquisition costs of obtaining new business are deferred and amortized over the approximate life of the policies rather than charged to operations as incurred; (b) benefit liabilities are computed using a net level method and are based on realistic estimates of expected mortality, interest, and withdrawals as adjusted to provide for possible unfavorable deviation from such assumptions; (c) deferred income taxes are not subject to statutory limitations as to amounts recognized and are recognized through earnings as opposed to being charged to share-owners’ equity; (d) the Asset Valuation Reserve and Interest Maintenance Reserve are restored to share-owners’ equity; (e) furniture and equipment, agents’ debit balances, and prepaid expenses are reported as assets rather than being charged directly to surplus (referred to as nonadmitted assets); (f) certain items of interest income, such as mortgage and bond discounts, are amortized differently; and (g) bonds are recorded at their market values instead of amortized cost.  The National Association of Insurance Commissioners (NAIC) has adopted the Codification of Statutory Accounting Principles (Codification).  Codification changed statutory accounting rules in several areas and was effective January 1, 2001.  The adoption of Codification did not have a material effect on Protective’s statutory capital.

Net income and share-owner’s equity prepared in conformity with statutory reporting practices to that reported in the accompanying consolidated financial statements are as follows:

	Net Income							Share-Owner’s Equity
	2003		2002			2001		2003		2002		2001
In conformity with statutory reporting practices(1)	$	274,244	$	(2,418	)	$	163,181	$	1,135,942	$	852,645	$	775,138
In conformity with generally accepted accounting principles	$	232,040	$	157,394		$	107,550	$	2,629,798	$	2,285,284	$	1,883,333

(1)Consolidated

As of December 31, 2003, Protective had on deposit with regulatory authorities, fixed maturity and short-term investments with a market value of approximately $74.8 million.

Note C — INVESTMENT OPERATIONS

Major categories of net investment income for the years ended December 31 are summarized as follows:

	2003		2002		2001
Fixed maturities	$	738,503	$	673,393	$	609,578
Equity securities	2,321		3,500		2,247
Mortgage loans	208,983		218,165		208,830
Investment real estate	2,854		881		2,094
Policy loans	42,092		37,463		31,763
Other	46,561		95,575		32,795
	1,041,314		1,028,977		887,307
Investment expenses	60,571		57,169		52,104
	$	980,743	$	971,808	$	835,203

Realized investment gains (losses) for all other investments for the years ended December 31 are summarized as follows:

	2003			2002			2001
Fixed maturities	$	66,101		$	12,606		$	(4,693	)
Equity securities	(1,372		)	65			2,462
Mortgage loans and other investments	2,035			(357		)	(3,892		)
	$	66,764		$	12,314		$	(6,123	)

In 2003, gross gains on the sale of investments available for sale (fixed maturities, equity securities, and short-term investments) were $90.3 million, and gross losses were $25.6 million.  In 2002, gross gains were $73.0 million, and gross losses were $60.3 million.  In 2001, gross gains were $27.5 million, and gross losses were $29.7 million.

Each quarter Protective reviews investments with material unrealized losses and tests for other-than-temporary impairments.  Protective analyzes various factors to determine if any specific other-than-temporary asset impairments exist.  Once a determination has been made that a specific other-than-temporary impairment exists, a realized loss is incurred and the cost basis of the impaired asset is adjusted to its fair value.  During 2003, 2002 and 2001, respectively, Protective recorded other-than-temporary impairments in its investments of $13.6 million, $17.8 million and $12.6 million, respectively.

Realized investment gains (losses) for derivative financial instruments for the years ended December 31 are summarized as follows:

	2003		2002			2001
Derivative financial instruments	$	8,249	$	(4,708	)	$	2,182

The amortized cost and estimated market values of Protective’s investments classified as available for sale at December 31 are as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Market Values
2003
Fixed maturities:
Bonds:
Mortgage-backed securities	$	4,491,392	$	132,984	$	(36,112	)	$	4,588,264
United States Government and authorities	83,834		6,538		(119		)	90,253
States, municipalities, and political subdivision	25,349		1,738		(1		)	27,086
Public utilities	1,389,389		96,926		(10,776		)	1,475,539
Convertibles and bonds with warrants	43,384		743		(277		)	43,850
All other corporate bonds	6,278,517		455,323		(34,476		)	6,699,364
Redeemable preferred stocks	2,957		207		0			3,164
	12,314,822		694,459		(81,761		)	12,927,520
Equity securities	29,169		1,881		(529		)	30,521
Short-term investments	510,635		0		0			510,635
	$	12,854,626	$	696,340	$	(82,290	)	$	13,468,676
2002
Fixed maturities:
Bonds:
Mortgage-backed securities	$	4,168,026	$	199,316	$	(28,311	)	$	4,339,031
United States Government and authorities	90,647		5,752		0			96,399
States, municipalities, and political subdivision	27,005		2,349		0			29,354
Public utilities	1,153,710		61,831		(42,139		)	1,173,402
Convertibles and bonds with warrants	115,728		2,656		(5,872		)	112,512
All other corporate bonds	5,655,949		348,809		(101,818		)	5,902,940
Redeemable preferred stocks	1,700		127		0			1,827
	11,212,765		620,840		(178,140		)	11,655,465
Equity securities	51,095		2,409		(4,705		)	48,799
Short-term investments	447,155		0		0			447,155
	$	11,711,015	$	623,249	$	(182,845	)	$	12,151,419

The amortized cost and estimated market values of fixed maturities at December 31, 2003 by expected maturity, are shown as follows.  Expected maturities are derived from rates of prepayment that may differ from actual rates of prepayment.

	Estimated Amortized Cost		Estimated Market Values
Due in one year or less	$	543,623	$	553,550
Due after one year through five years	2,540,318		2,632,788
Due after five years through ten years	3,566,765		3,771,510
Due after ten years	5,664,116		5,969,672
	$	12,314,822	$	12,927,520

The following table shows our investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous loss position at December 31, 2003.

	Less Than 12 Months						12 Months or More					Total
	Market Value			Unrealized Loss			Market Value		Unrealized Loss			Market Value		Unrealized Loss
Mortgage-backed securities	$		653,360	$	(12,329	)	$	100,397	$	(23,784	)	$	753,757	$	(36,113	)
US Government	15,763			(119		)	0		0			15,763		(119		)
State, municipalities, etc.	488			(1		)	0		0			488		(1		)
Public utilities	286,552			(10,080		)	18,165		(696		)	304,717		(10,776		)
Convertible bonds	21,409			(167		)	229		(111		)	21,638		(278		)
Other corporate bonds	940,949			(25,414		)	83,757		(9,077		)	1,024,706		(34,491		)
Equities	102			(45		)	2,870		(467		)	2,972		(512		)
	$	1,918,623		$	(48,155	)	$	205,418	$	(34,135	)	$	2,124,041	$	(82,290	)

Protective considers the impairment of securities that have been in an unrealized loss position for less than 12 months to be temporary.  Protective believes that it will collect all amounts contractually due and has the intent and the ability to hold these securities until maturity.

For mortgage-backed securities in an unrealized loss position for greater than 12 months, $23.3 million of the unrealized loss relates to securities issued in Protective-sponsored commercial loan securitizations.  Protective does not consider these unrealized loss positions to be other-than-temporary, because the underlying mortgage loans continue to perform consistently with Protective’s original expectations.

The corporate bonds category has gross unrealized losses of $9.1 million at December 31, 2003, composed of $2.8 million of electrical industry securities, $5.0 million of transportation industry securities, and $1.3 million of other industry securities.  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 included credit ratings, the financial health of the investee, the continued access of the investee to capital markets, and other pertinent information.

At December 31, 2003 and 2002, Protective had bonds which were rated less than investment grade of $983.1 million and $860.6 million, respectively, having an amortized cost of $978.9 million and $960.8 million, respectively.  At December 31, 2003, approximately $66.9 million of the bonds rated less than investment grade were securities issued in Protective-sponsored commercial mortgage loan securitizations.  Approximately $1,956.7 million of bonds are not publicly traded.

The change in unrealized gains (losses), net of income tax, on fixed maturity and equity securities for the years ended December 31 is summarized as follows:

	2003		2002			2001
Fixed maturities	$	110,499	$	227,283		$	108,307
Equity securities	2,371		(480		)	715

Protective participates in securities lending, primarily as an investment yield enhancement, whereby securities that are held as investments are loaned to third parties for short periods of time.  Protective requires collateral of 102% of the market value of the loaned securities to be separately maintained.  The loaned securities’ market value is monitored, on a daily basis, with additional collateral obtained as necessary.  At December 31, 2003, securities with a market value of $324.5 million were loaned under these agreements.  As collateral for the loaned securities, Protective receives short-term investments, which are recorded in “short-term investments” with a corresponding liability recorded in “other liabilities” to account for Protective’s obligation to return the collateral.

At December 31, 2003, all of Protective’s mortgage loans were commercial loans of which 75% were retail, 8% were apartments, 8% were office buildings, and 8% were warehouses, and 1% were other.  Protective specializes in making mortgage loans on either credit-oriented or credit-anchored commercial properties, most of which are strip shopping centers in smaller towns and cities.  No single tenant’s leased space represents more than 2.8% of mortgage loans.  Approximately 74% of the mortgage loans are on properties located in the following states listed in decreasing order of significance: Texas, Tennessee, Georgia, North Carolina, South Carolina, Alabama, Florida, Pennsylvania, California, Ohio, Mississippi, and Indiana.

Many of the mortgage loans have call provisions between 3 to 10 years. Assuming the loans are called at their next call dates, approximately $125.0 million would become due in 2004, $537.3 million in 2005 to 2008, $461.5 million in 2009 to 2013, and $40.2 million thereafter.

At December 31, 2003, the average mortgage loan was approximately $2.2 million, and the weighted average interest rate was 7.2%.  The largest single mortgage loan was $19.6 million.

For several years Protective has offered a type of commercial mortgage loan under which Protective will permit a slightly higher loan-to-value ratio in exchange for a participating interest in the cash flows from the underlying real estate.  As of December 31, 2003 and 2002, approximately $382.7 million and $475.5 million, respectively, of Protective’s mortgage loans have this participation feature.

At December 31, 2003 and 2002, Protective’s problem mortgage loans (over ninety days past due) and foreclosed properties totaled $11.8 million and $16.2 million, respectively.  Since Protective’s mortgage loans are collateralized by real estate, any assessment of impairment is based upon the estimated fair value of the real estate.  Based on Protective’s evaluation of its mortgage loan portfolio, Protective does not expect any material losses on its mortgage loans.

At December 31, 2003 and 2002, Protective had investments related to retained beneficial interests of mortgage loan securitizations of $283.6 million and $295.7 million, respectively.

Certain investments with a carrying value of $64.4 million were non-income producing for the twelve months ended December 31, 2003.

Policy loan interest rates generally range from 4.5% to 8.0%.

Note D —INCOME TAXES

Protective’s effective income tax rate related to continuing operations varied from the maximum federal income tax rate as follows:

	2003		2002		2001
Statutory federal income tax rate applied to pretax income	35.0	%	35.0	%	35.0	%
Dividends received deduction and tax-exempt income	(1.2	)	(2.3	)	(1.7	)
Low-income housing credit	(0.2	)	(0.5	)	(0.5	)
Other	(0.2	)	2.1		(0.1	)
State income taxes	0.3		0.6		0.2
Effective income tax rate	33.7	%	34.9	%	32.9	%

The provision for federal income tax differs from amounts currently payable due to certain items reported for financial statement purposes in periods which differ from those in which they are reported for income tax purposes.

Details of the deferred income tax provision for the years ended December 31 are as follows:

	2003				2002
Deferred policy acquisition costs	$		54,747		$	51,998
Benefits and other policy liability changes	41,065				(22,359			)
Temporary differences of investment income	(19,080			)	(28,637			)
Other items	(1,291			)	7,892
	$	75,441			$		8,894

The components of Protective’s net deferred income tax liability as of December 31 were as follows:

	2003		2002
Deferred income tax assets:
Policy and policyholder liability reserves	$	279,016	$	320,081
Other	4,292		3,001
	283,308		323,082
Deferred income tax liabilities:
Deferred policy acquisition costs	485,816		431,069
Unrealized gains (losses) on investments	136,765		98,857
	622,581		529,926
Net deferred income tax liability	$	339,273	$	206,844

Under pre-1984 life insurance company income tax laws, a portion of Protective’s gain from operations which was not subject to current income taxation was accumulated for income tax purposes in a memorandum account designated as Policyholders’ Surplus.  The aggregate accumulation in this account at December 31, 2003 was approximately $70.5 million.  Should the accumulation in the Policyholders’ Surplus account exceed certain stated maximums, or should distributions including cash dividends be made to PLC in excess of approximately $1.6 billion, such excess would be subject to federal income taxes at rates then effective.  Deferred income taxes have not been provided on amounts designated as Policyholders’ Surplus.  Under current income tax laws, Protective does not anticipate paying income tax on amounts in the Policyholders’ Surplus accounts.

Protective’s income tax returns are included in the consolidated income tax returns of PLC.  The allocation of income tax liabilities among affiliates is based upon separate income tax return calculations.

Note E — DEBT

Under revolving line of credit arrangements with several banks, PLC can borrow up to $200 million on an unsecured basis.  No compensating balances are required to maintain the line of credit.  These lines of credit arrangements contain, among other provisions, requirements for maintaining certain financial ratios, and restrictions on indebtedness incurred by PLC’s subsidiaries including Protective.  Additionally, PLC, on a consolidated basis, cannot incur debt in excess of 40% of its total capital.  At December 31, 2003, PLC had $25.0 million of borrowings outstanding under these credit arrangements at an interest rate of 1.64%.

Protective has a mortgage note on investment real estate amounting to approximately $2.2 million that matures in 2004.

Included in indebtedness to related parties at December 31, 2002,was a surplus debenture issued by Protective to PLC.  The balance of the surplus debenture was $2 million.  The surplus debenture was due and paid in 2003.

Protective routinely receives from or pays to affiliates under the control of PLC reimbursements for expenses incurred on one another’s behalf. Receivables and payables among affiliates are generally settled monthly.

Interest expense on debt totaled $1.6 million, $1.4 million, and $1.8 million in 2003, 2002, and 2001, respectively.

Note F — RECENT ACQUISITIONS

In January 2001, Protective coinsured a block of individual life policies from Standard Insurance Company.

In October 2001, Protective completed the acquisition of the stock of Inter-State Assurance Company (Inter-State) and First Variable Life Insurance Company (First Variable) from ILona Financial Group, Inc., a subsidiary of Irish Life & Permanent plc of Dublin, Ireland.  The purchase price was approximately $250 million.  The assets acquired included $166.1 million of present value of future profits.

In June 2002, Protective coinsured a block of traditional life and interest-sensitive life insurance policies from Conseco Variable Insurance Company. These transactions have been accounted for as purchases, and the results of the transactions have been included in the accompanying financial statements since their respective effective dates.

Summarized below are the consolidated results of operations for 2002, on an unaudited pro forma basis, as if the Conseco transaction had occurred as of January 1, 2002.  The pro forma information is based on Protective’s consolidated results of operations for 2002, and on data provided by the acquired block, after giving effect to certain pro forma adjustments.  The pro forma financial information does not purport to be indicative of results of operations that would have occurred had the transaction occurred on the basis assumed above nor are they indicative of results of the future operations of the combined enterprises.

(unaudited)	2002
Total revenues	$	1,844,221
Net income	160,020

Note G — COMMITMENTS AND CONTINGENT LIABILITIES

Protective leases administrative and marketing office space in approximately 24 cities including Birmingham, with most leases being for periods of three to ten years.  The aggregate annualized rent is approximately $8.0 million.

In 2000, Protective entered into an arrangement with an unrelated party related to the construction of a building contiguous to its existing home office complex.  The unrelated party owns the building and leases it to Protective.  The lease is accounted for as an operating lease under SFAS No. 13 “Accounting For Leases”.  Lease payments commenced upon completion, which occurred January 31, 2003, and is based on then current LIBOR interest rates and the cost of the building.  At the end of the lease term, February 1, 2007, Protective may purchase the building for the original building cost of approximately $75 million.  Based upon current interest rates, annual lease payments are estimated to be $1.5 million.  Were Protective not to purchase the building, a payment of approximately $66 million would be due at the end of the lease term.

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.  Protective does not believe such assessments will be materially different from amounts already provided for in the financial statements.  Most of these laws do provide, however, that an assessment may be excused or deferred if it would threaten an insurer’s own financial strength.

A number of civil jury verdicts have been returned against insurers and other providers of financial services involving sales practices, alleged agent misconduct, failure to properly supervise representatives’ relationships with agents or persons with whom the insurer does business, and other matters.  Increasingly these lawsuits have resulted in the award of substantial judgments that are disproportionate to the actual damages, including material amounts of punitive and non-economic compensatory damages.  In some states, juries, judges and arbitrators have substantial discretion in awarding punitive and 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 little appellate review.  In addition, in some class action and other lawsuits, companies have made material settlement payments.  Protective, like other financial service companies, in the ordinary course of business, is involved in such litigation or, alternatively, in arbitration.  Although the outcome of any such litigation or arbitration cannot be predicted Protective believes that at the present time there are no pending or threatened lawsuits that are reasonably likely to have a material adverse effect on the financial position, results of operations, or liquidity of Protective.

Note H — SHARE-OWNER’S EQUITY AND RESTRICTIONS

At December 31, 2003, approximately $1,386.9 million of consolidated share-owner’s equity, excluding net unrealized gains on investments, represented net assets of Protective and its subsidiaries that cannot be transferred to PLC in the form of dividends, loans, or advances.  In addition, Protective and its subsidiaries are subject to various state statutory and regulatory restrictions on their ability to pay dividends to PLC.  In general, dividends up to specified levels are considered ordinary and may be paid thirty days after written notice to the insurance commissioner of the state of domicile unless such commissioner objects to the dividend prior to the expiration of such period.  Dividends in larger amounts are considered extraordinary and are subject to affirmative prior approval by such commissioner.  The maximum amount that would qualify as ordinary dividends to PLC by Protective in 2004 is estimated to be $293.8 million.

Note I — PREFERRED STOCK

PLC owns all of the 2,000 shares of preferred stock issued by Protective’s subsidiary, Protective Life and Annuity Insurance Company (PL&A).  The stock pays, when and if declared, noncumulative participating dividends to the extent PL&A’s statutory earnings for the immediately preceding fiscal year exceeded $1.0 million.  In 2003, PL&A paid no dividend to PLC. In 2002, PL&A paid a $50.0 thousand preferred dividend to PLC, and PL&A paid a $1.0 million preferred dividend to PLC in 2001.

Note J — RELATED PARTY MATTERS

On August 6, 1990, PLC announced that its Board of Directors approved the formation of an Employee Stock Ownership Plan (ESOP).  On December 1, 1990, Protective transferred to the ESOP 520,000 shares of PLC’s common stock held by it in exchange for a note.  The outstanding balance of the note, $3.4 million at December 31, 2003, is accounted for as a reduction to share-owner’s equity.  The stock will be used to match employee contributions to PLC’s existing 401(k) Plan.  The ESOP shares are dividend paying. Dividends on the shares are used to pay the ESOP’s note to Protective.

Protective leases furnished office space and computers to affiliates. Lease revenues were $4.7 million in 2003, $3.5 million in 2002, and $4.0 million in 2001.  Protective purchases data processing, legal, investment and management services from affiliates.  The costs of such services were $93.1 million, $88.0 million, and $82.6 million in 2003, 2002, and 2001, respectively.  Commissions paid to affiliated marketing organizations of $8.6 million, $8.2 million, and $10.0 million, in 2003, 2002, and 2001, respectively, were included in deferred policy acquisition costs.

Certain corporations with which PLC’s directors were affiliated paid Protective premiums and policy fees or other amounts for various types of insurance and investment products.  Such premiums, policy fees, and other amounts totaled $12.2 million, $16.0 million and $19.6 million in 2003, 2002, and 2001, respectively.  Protective and/or PLC paid commissions, interest on debt and investment products, and fees to these same corporations totaling $2.1 million, $1.6 million and $5.9 million in 2003, 2002, and 2001, respectively.

For a discussion of indebtedness to related parties, see Note E.

Note K — OPERATING SEGMENTS

Protective operates several business segments, each having a strategic focus.  An operating segment is generally distinguished by products and/or channels of distribution.  A brief description of each segment follows.

•The Life Marketing segment markets level premium term and term-like insurance, universal life, and variable universal life products on a national basis primarily through networks of independent insurance agents and brokers, and in the “bank owned life insurance” market.

•The Acquisitions segment focuses on acquiring, converting, and servicing policies acquired from other companies.  The segment’s primary focus is on life insurance policies sold to individuals.

•The Annuities segment manufactures, sells, and supports fixed and variable annuity products.  These products are primarily sold through stockbrokers, but are also sold through financial institutions and the Life Marketing segment’s sales force.

•The Stable Value Products segment markets guaranteed investment contracts to 401(k) and other qualified retirement savings plans, and sells funding agreements to special purpose entities that in turn issue notes or certificates in smaller, transferable denominations.  The segment also markets fixed and floating rate funding agreements to the trustees of municipal bond proceeds, institutional investors, bank trust departments, and money market funds.  During the fourth quarter of 2003, Protective registered a funding agreement-backed notes program with the SEC.

•The Asset Protection segment markets extended service contracts and credit life and disability insurance to protect consumers’ investments in automobiles and watercraft.

Protective has an additional segment herein referred to as Corporate and Other.  The Corporate and Other segment primarily consists of net investment income and expenses not attributable to the segments above (including net investment income on unallocated capital and interest on substantially all debt).  This segment also includes earnings from several small non-strategic lines of business (mostly cancer insurance, residual value insurance, surety insurance and group annuities), and various investment-related transactions.  During 2004, a decision was made by management to move the surety and residual value insurance lines from the Asset Protection segment to Corporate and Other.  All segment information presented has been amended to reflect such change.

Protective uses the same accounting policies and procedures to measure operating segment income and assets as it uses to measure its consolidated net income and assets.  Operating segment income is generally income before income tax, adjusted to exclude any pretax minority interest in income of consolidated subsidiaries.  Premiums and policy fees, other income, benefits and settlement expenses, and amortization of deferred policy acquisition costs are attributed directly to each operating segment.  Net investment income is allocated based on directly related assets required for transacting the business of that segment. Realized investment gains (losses) and other operating expenses are allocated to the segments in a manner which most appropriately reflects the operations of that segment.

Assets are allocated based on policy liabilities and deferred policy acquisition costs directly attributable to each segment.

There are no significant intersegment transactions.

The following table sets forth total operating segment income and assets for the periods shown.  Adjustments represent the inclusion of unallocated realized investment gains (losses), the recognition of income tax expense, income from discontinued operations, and cumulative effect of change in accounting principle.  Asset adjustments represent the inclusion of assets related to discontinued operations.

	Operating Segment Income for the Year Ended December 31, 2003
	Life Marketing			Acquisitions			Annuities		Stable Value Products
Premiums and policy fees	$	856,431		$	289,906		$	26,265
Reinsurance ceded	(657,778		)	(75,994		)
Net of reinsurance ceded	198,653			213,912			26,265
Net investment income	229,913			246,143			224,330		$	233,104
Realized investment gains (losses)							22,733		9,756
Other income	875			2,640			3,768
Total revenues	429,441			462,695			277,096		242,860
Benefits and settlement expenses	253,785			291,768			197,955		186,565
Amortization of deferred policy acquisition costs	66,078			32,690			38,196		2,279
Other operating expenses	(50,379		)	41,537			23,969		5,349
Total benefits and expenses	269,484			365,995			260,120		194,193
Income from continuing operations before income tax	159,957			96,700			16,976		48,667
Less: realized investment gains (losses)							22,733		9,756
Add back: related amortization of deferred policy acquisition cost							18,947
Operating income	159,957			96,700			13,190		38,911

	Asset Protection			Corporate and Other			Adjustments		Total Consolidated
Premiums and policy fees	$	424,500		$	56,507				$	1,653,609
Reinsurance ceded	(179,934		)	(4,229		)			(917,935		)
Net of reinsurance ceded	244,566			52,578					735,674
Net investment income	36,423			10,830					980,743
Realized investment gains (losses)				42,524					75,013
Other income	38,063			1,479					46,825
Total revenues	319,052			107,111					1,838,255
Benefits and settlement expenses	142,169			51,835					1,124,077
Amortization of deferred policy acquisition costs	80,320			5,544					225,107
Other operating expenses	80,544			38,079					139,099
Total benefits and expenses	303,033			95,458					1,488,283
Income (loss) from continuing operations before income tax	16,019			11,653					349,972
Less: realized investment gains (losses)				42,524
Add back: derivative gains related to investments				10,036
Operating income (loss)	16,019			(20,835		)
Income tax expense							$	117,932	117,932
Net income									$	232,040

	Operating Segment Income for the Year Ended December 31, 2002
	Life Marketing			Acquisitions			Annuities		Stable Value Products
Premiums and policy fees	$	673,412		$	300,818		$	25,826
Reinsurance ceded	(453,228		)	(76,333		)
Net of reinsurance ceded	220,184			224,485			25,826
Net investment income	208,451			252,147			220,433		$	246,098
Realized investment gains (losses)							2,277		(7,061		)
Other income	1,344			1,826			3,229
Total revenues	429,979			478,458			251,765		239,037
Benefits and settlement expenses	228,225			301,400			186,107		196,576
Amortization of deferred policy acquisition costs	117,836			35,245			24,669		2,304
Other operating expenses	(41,501		)	45,395			26,037		4,946
Total benefits and expenses	304,560			382,040			236,813		203,826
Income from continuing operations before income tax	125,419			96,418			14,952		35,211
Less: realized investment gains (losses)							2,277		(7,061		)
Add back: related amortization of deferred policy acquisition cost							1,981
Operating income	125,419			96,418			14,656		42,272

	Asset Protection			Corporate and Other			Adjustments		Total Consolidated
Premiums and policy fees	$	475,189		$	72,956				$	1,548,201
Reinsurance ceded	(189,338		)	(19,259		)			(738,158		)
Net of reinsurance ceded	285,851			53,697					810,043
Net investment income	41,372			3,307					971,808
Realized investment gains (losses)				12,390					7,606
Other income	33,568			1,516					41,483
Total revenues	360,791			70,910					1,830,940
Benefits and settlement expenses	204,069			50,708					1,167,085
Amortization of deferred policy acquisition costs	75,108			12,500					267,662
Other operating expenses	88,275			31,418					154,570
Total benefits and expenses	367,452			94,626					1,589,317
Income (loss) from continuing operations before income tax	(6,661		)	(23,716		)			241,623
Less: realized investment gains (losses)				12,390
Add back: derivative gains related to investments				8,251
Operating income (loss)	(6,661		)	(27,855		)
Income tax expense							$	84,229	84,229
Net income									$	157,394

	Operating Segment Income for the Year Ended December 31, 2001
	Life Marketing			Acquisitions			Annuities		Stable Value Products
Premiums and policy fees	$	542,407		$	243,914		$	28,145
Reinsurance ceded	(421,411		)	(61,482		)
Net of reinsurance ceded	120,996			182,432			28,145
Net investment income	178,866			187,535			167,809		$	261,079
Realized investment gains (losses)							1,139		7,218
Other income	1,134			345			3,441
Total revenues	300,996			370,312			200,534		268,297
Benefits and settlement expenses	190,538			238,877			137,204		222,306
Amortization of deferred policy acquisition costs and goodwill	41,399			20,500			24,021		1,662
Other operating expenses	(22,957		)	41,684			24,073		3,961
Total benefits and expenses	208,980			301,061			185,298		227,929
Income from continuing operations before income tax	92,016			69,251			15,236		40,368
Less: realized investment gains (losses)							1,139		7,218
Add back: related amortization of deferred policy acquisition cost							996
Operating income	92,016			69,251			15,093		33,150

	Asset Protection			Corporate and Other			Adjustments			Total Consolidated
Premiums and policy fees	$	509,196		$	66,157					$	1,389,819
Reinsurance ceded	(272,930		)	(15,328		)				(771,151		)
Net of reinsurance ceded	236,266			50,829						618,668
Net investment income	46,963			(7,049		)				835,203
Realized investment gains (losses)				(12,298		)				(3,941		)
Other income	31,510			2,148						38,578
Total revenues	314,739			33,630						1,488,508
Benefits and settlement expenses	141,789			41,910						972,624
Amortization of deferred policy acquisition costs and goodwill	56,576			5,727						149,885
Other operating expenses	78,311			26,969						152,041
Total benefits and expenses	276,676			74,606						1,274,550
Income (loss) from continuing operations before income tax	38,063			(40,976		)				213,958
Less: realized investment gains (losses)				(12,298		)
Add back: derivative gains related to investments				3,900
Operating income (loss)	38,063			(24,778		)
Income tax expense							$	70,457		70,457
Discontinued operations, net of income tax							(27,610		)	(27,610		)
Change in accounting principle, net of income tax							(8,341		)	(8,341		)
Net income										$	107,550

	Operating Segment Assets December 31, 2003
	Life Marketing		Acquisitions		Annuities		Stable Value Products
Investments and other assets	$	4,983,336	$	4,356,929	$	5,433,465	$	4,520,955
Deferred policy acquisition costs	1,185,102		385,042		101,096		7,186
Goodwill
Total assets	$	6,168,438	$	4,741,971	$	5,534,561	$	4,528,141

	Asset Protection		Corporate and Other		Adjustments		Total Consolidated
Investments and other assets	$	913,405	$	1,807,317	$	57,094	$	22,072,501
Deferred policy acquisition costs	175,264		9,878				1,863,568
Goodwill	35,143						35,143
Total assets	$	1,123,812	$	1,817,195	$	57,094	$	23,971,212

	Operating Segment Assets December 31, 2002
	Life Marketing		Acquisitions		Annuities		Stable Value Products
Investments and other assets	$	4,193,729	$	4,553,958	$	4,821,398	$	3,930,669
Deferred policy acquisition costs	973,631		435,592		93,140		4,908
Goodwill
Total assets	$	5,167,360	$	4,989,550	$	4,914,538	$	3,935,577

	Asset Protection		Corporate and Other		Adjustments		Total Consolidated
Investments and other assets	$	1,003,562	$	1,440,898	$	79,064	$	20,023,278
Deferred policy acquisition costs	191,840		10,143				1,709,254
Goodwill	35,143						35,143
Total assets	$	1,230,545	$	1,451,041	$	79,064	$	21,767,675

Note L — EMPLOYEE BENEFIT PLANS

PLC has a defined benefit pension plan covering substantially all of its employees, including Protective employees.  The plan is not separable by affiliates participating in the plan.  The benefits are based on years of service and the employee’s highest thirty-six consecutive months of compensation.  PLC’s funding policy is to contribute amounts to the plan sufficient to meet the minimum funding requirements of ERISA plus such additional amounts as PLC may determine to be appropriate from time to time.  Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future.

At December 31, 2003, PLC estimated that its 2004 defined benefit pension plan expense will be $6.4 million, which is PLC’s estimate of its expected contributions for 2004.  The measurement date used to determine the benefit expense and benefit obligations of the plan is December 31, 2003.

The actuarial present value of benefit obligations and the funded status of the plan at December 31 are as follows:

	2003			2002
Projected benefit obligation, beginning of the year	$	62,179		$	50,869
Service cost – benefits earned during the year	4,513			3,723
Interest cost – on projected benefit obligation	4,666			4,111
Actuarial loss	7,531			6,353
Benefits paid	(1,435		)	(2,877		)
Projected benefit obligation, end of the year	77,454			62,179
Fair value of plan assets beginning of the year	49,450			44,024
Actual return on plan assets	12,886			(7,845		)
Employer contribution	13,170			16,149
Benefits paid	(1,435		)	(2,878		)
Fair value of plan assets end of the year	74,071			49,450
Plan assets less than the projected benefit obligation	(3,383		)	(12,729		)
Unrecognized net actuarial loss from past experience different from that assumed	27,453			28,252
Unrecognized prior service cost	1,672			1,886
Other adjustments	684
Net pension asset	$	26,426		$	17,409
Accumulated benefit obligation	$	60,984		$	47,707
Fair value of assets	74,071			49,450
Unfunded accumulated benefit obligation	$	0		$	0

Assumptions used to determine the benefit obligations as of December 31 were as follows:

	2003		2002
Weighted average discount rate	6.25	%	6.75	%
Rates of increase in compensation level	4.00		4.50
Expected long-term rate of return on assets	8.50		8.50

Net pension cost of the defined benefit pension plan includes the following components for the years ended December 31:

	2003			2002			2001
Service cost	$	4,513		$	3,723		$	3,739
Interest cost	4,666			4,111			3,531
Expected return on plan assets	(5,604		)	(4,265		)	(3,669		)
Amortization of prior service cost	214			263			176
Amortization of losses	1,049			302			141
Cost of divestiture							186
Net pension cost	$	4,838		$	4,134		$	4,104

Assumptions used to determine the net pension cost for the years ended December 31 were as follows:

	2003		2002		2001
Weighted average discount rate	6.75	%	7.25	%	7.50	%
Rates of increase in compensation level	4.50		5.00		5.25
Expected long-term rate of return on assets	8.50		8.50		8.50

Plan assets by category as of December 31 were as follows:

	2003		2002
Cash and cash equivalents	$	3,273	$	2,588
Equity securities	53,413		39,157
Fixed income	17,385		7,705
Total	$	74,071	$	49,450

Prior to July 1999, upon an employee’s retirement, a distribution from pension plan assets was used to purchase a single premium annuity from Protective in the retiree’s name.  Therefore, amounts shown above as plan assets exclude assets relating to such retirees.  Since July 1999, retiree obligations have been fulfilled from pension plan assets.  The defined benefit pension plan has a target asset allocation of 60% domestic equities, 38% fixed income, and 2% cash and cash equivalents.  When calculating asset allocation, PLC includes reserves for pre-July 1999 retirees.  Based on historical data of the domestic equity markets and PLC’s group annuity investments, the plan’s target asset allocation would be expected to earn annualized returns in excess of 9% per year.  In arriving at the plan’s 8.5% expected rate of return, PLC has adjusted this historical data to reflect lower expectations for equity returns.  The plan’s equity assets are invested in a domestic equity index collective trust managed by Northern Trust Corporation.  The plan’s cash equivalents are invested in a collective trust managed by Northern Trust Corporation.  The plan’s fixed income assets are invested in a group annuity contract with Protective.

PLC also sponsors an unfunded excess benefits plan, which is a nonqualified plan that provides defined pension benefits in excess of limits imposed on qualified plans by federal tax law.  At December 31, 2003 and 2002, the projected benefit obligation of this plan totaled $18.1 million and $17.2 million, respectively, of which $15.5 million and $14.4 million, respectively, have been recognized in PLC’s financial statements.

Net pension costs of the excess benefits plan includes the following components for the years ended December 31:

	2003		2002		2001
Service cost	$	485	$	455	$	686
Interest cost	1,182		1,178		1,121
Amortization of prior service cost	16		16		19
Amortization of transition asset					37
Recognized net actuarial loss	118		71		233
Cost of divestiture and special termination benefits	81				1,807
Net pension cost	$	1,882	$	1,720	$	3,903

In addition to pension benefits, PLC provides limited healthcare benefits to eligible retired employees until age 65.  This postretirement benefit is provided by an unfunded plan.  This benefit has no material effect on PLC’s consolidated financial statements.  For a closed group of retirees over age 65, PLC provides a prescription drug benefit.  At December 31, 2003, PLC’s liability related to this benefit was $0.3 million.  PLC’s obligation is not materially affected by a 1% change in the healthcare cost trend assumptions used in the calculation of the obligation.

Life insurance benefits for retirees from $10,000 up to a maximum of $75,000 are provided through the payment of premiums under a group life insurance policy.  This plan is partially funded at a maximum of $50,000 face amount of insurance.

PLC sponsors a defined contribution retirement plan which covers substantially all employees.  Employee contributions are made on a before-tax basis as provided by Section 401(k) of the Internal Revenue Code. PLC established an Employee Stock Ownership Plan (ESOP) to match voluntary employee contributions to PLC’s 401(k) Plan.  In 1994, a stock bonus was added to the 401(k) Plan for employees who are not otherwise under a bonus or sales incentive plan.  Expense related to the ESOP consists of the cost of the shares allocated to participating employees plus the interest expense on the ESOP’s note payable to Protective less dividends on shares held by the ESOP.  At December 31, 2003, PLC had committed approximately 124,682 shares to be released to fund the 401(k) Plan match.  The expense recorded by PLC for these employee benefits was $0.6 million, $0.1 million and less than $0.1 million in 2003, 2002, and 2001, respectively.

PLC sponsors a deferred compensation plan for certain directors, officers, agents, and others. Compensation deferred is credited to the participants in cash, PLC Common Stock, or as a combination thereof.

Protective’s share of net costs related to employee benefit plans was approximately $6.9 million, $3.8 million, and $5.4 million, in 2003, 2002, and 2001, respectively.

Note M — STOCK BASED COMPENSATION

Certain Protective employees participate in PLC’s stock-based incentive plans and receive stock appreciation rights (SARs) from PLC.

Since 1973, Protective has had stock-based incentive plans to motivate management to focus on PLC’s long-range performance through the awarding of stock-based compensation.  Under plans approved by share owners in 1997 and 2003, up to 6,500,000 shares may be issued in payment of awards.

The criteria for payment of performance awards is based primarily upon a comparison of PLC’s average return on average equity and total rate of return over a four-year award period (earlier upon the death, disability, or retirement of the executive, or in certain circumstances, of a change in control of PLC) to that of a comparison group of publicly held life and multiline insurance companies.  If PLC’s results are below the median of the comparison group, no portion of the award is earned.  If PLC’s results are at or above the 90th percentile, the award maximum is earned.  Awards are paid in shares of PLC Common Stock.

Performance shares and performance-based stock appreciation rights (P-SARs) awarded in 2003, 2002, 2001, and 2000, and the estimated fair value of the awards at grant date are as follows:

Year Awarded	Performance Shares	P-SARs	Estimated Fair Value
2003	148,730		$	3,900
2002	192,360		5,700
2001	153,490	40,000	4,900
2000	3,330	513,618	3,700

Performance shares are equivalent in value to one share of PLC Common Stock times the award earned percentage payout.  P-SARs convert to the equivalent of one stock appreciation right (SAR) if earned times the award earned percentage payout. Of the 2000 P-SARs awarded, 87,778 have been canceled and 135,104 have been converted to 145,910 SARs.  The remaining 290,076 P-SARs will convert to SARs in 2004 if earned.  The 40,000 P-SARs awarded in 2001 were not earned and have been canceled.  The P-SARs, if earned and converted to SARs, expire 10 years after the grant date.  At December 31, 2003, the total outstanding performance shares and P-SARs related to these performance-based plans measured at maximum payouts were 660,610 and 456,286, respectively.

Between 1996 and 2002 SARs were granted (in addition to the P-SARs discussed above) to certain officers of PLC to provide long-term incentive compensation based solely on the performance of PLC’s Common Stock.  The SARs are exercisable after five years (earlier upon the death, disability, or retirement of the officer, or in certain circumstances, of a change in control of PLC) and expire after ten years or upon termination of employment.  The SARs activity as well as weighted average base price for 2001, 2002, and 2003 is as follows:

	Wtd. Avg.Base Price		No. of SARs
Balance at December 31, 2000	$	18.64	875,000
SAR granted	26.34		138,751
P-SARs converted	22.31		100,072
Balance at December 31, 2001	$	19.92	1,113,823
SARs granted	32.00		480,000
SARs exercised	32.60		(80,000	)
SARs canceled	22.31		(15,000	)
Balance at December 31, 2002	$	23.90	1,498,823
SARs granted	26.49		95,000
SARs converted	22.31		45,838
SARs canceled	30.77		(22,500	)
Balance at December 31, 2003	$	23.91	1,617,161

The outstanding SARs at December 31, 2003, were at the following base prices:

Base Price		SARs Outstanding	Remaining Life in Years	Currently Exercisable
$	17.44	580,000	2	580,000
22.31		419,661	6	239,161
31.26		50,000	7	0
31.29		7,500	7	2,500
32.00		465,000	8	30,000
26.49		95,000	9	15,000

The SARs issued in 2001, 2002, and 2003 had estimated fair values at grant date of $0.6 million, $3.7 million, and $0.6 million, respectively.  The fair value of the 2003 SARs was estimated using a Black-Scholes option pricing model.  Assumptions used in the model were as follows: expected volatility of 25.0% (approximately equal to that of the S&P Life and Health Insurance Index), a risk-free interest rate of 3.1%, a dividend rate of 2.1%, and an expected exercise date of 2009.

PLC will pay an amount equal to the difference between the specified base price of PLC’s Common Stock and the market value at the exercise date for each SAR.

The expense recorded by PLC for its stock-based compensation plans was $5.5 million, $5.2 million, and $5.6 million in 2003, 2002, and 2001, respectively.  PLC’s obligations of its stock-based compensation plans that are expected to be settled in shares of PLC’s Common Stock are reported as a component of PLC’s share-owners’ equity.

Note N — REINSURANCE

Protective reinsures certain of its risks with, and assumes risks from other insurers under yearly renewable term, coinsurance, and modified coinsurance agreements.  Under yearly renewable term agreements, Protective generally pays specific premiums to the reinsurer and receives specific amounts from the reinsurer as reimbursement for certain expenses.  Coinsurance agreements are accounted for by passing a portion of the risk to the reinsurer.  Generally, the reinsurer receives a proportionate part of the premiums less commissions and is liable for a corresponding part of all benefit payments.  Modified coinsurance is accounted for similarly to coinsurance except that the liability for future policy benefits is held by the original company, and settlements are made on a net basis between the companies.  A substantial portion of Protective’s new life insurance and credit insurance sales is being reinsured.  Protective reviews the financial condition of its reinsurers.

Protective continues to monitor the consolidation of reinsurers and the concentration of credit risk Protective has with any reinsurer.  At December 31, 2003, Protective had reinsured approximately 89.6% of the face value of its life insurance in force.  Protective had reinsured approximately 59.1% of the face value of its life insurance in force with three reinsurers.  These reinsurers had a minimum Standard & Poor’s rating of AA- and a minimum A. M. Best rating of A+.  Protective has not experienced any credit losses for the years ended December 31, 2003, 2002, or 2001 related to these reinsurers.

Protective has reinsured approximately $292.7 billion, $219.0 billion and $171.4 billion in face amount of life insurance risks with other insurers representing $781.8 million, $546.0 million and $565.1 million of premium income for 2003, 2002, and 2001, respectively.  Protective has also reinsured accident and health risks representing $61.6 million, $61.5 million and $122.7 million of premium income for 2003, 2002, and 2001, respectively.  In addition, Protective reinsured property and casualty risks representing $91.0 million, $143.9 million, and $83.3 million of premium income for 2003, 2002, and 2001, respectively.  In 2003 and 2002, policy and claim reserves relating to insurance ceded of $2,230.7 million and $2,304.9 million, respectively, are included in reinsurance receivables.  Should any of the reinsurers be unable to meet its obligation at the time of the claim, obligation to pay such claim would remain with Protective.  At December 31, 2003 and 2002, Protective had paid $53.3 million and $45.5 million, respectively, of ceded benefits which are recoverable from reinsurers.  In addition, at December 31, 2003, Protective had receivables of $66.6 million related to insurance assumed.

In 2002, Protective discovered that it had overpaid reinsurance premiums to several reinsurance companies of approximately $94.5 million.  At December 31, 2002, Protective had recorded cash and receivables totaling $69.7 million, which reflected the amounts received and Protective’s then current estimate of amounts to be recovered in the future, based upon the information available.  The corresponding increase in premiums and policy fees resulted in $62.5 million of additional amortization of deferred policy acquisition costs in 2002.  The amortization of deferred policy acquisition costs takes into account the amortization relating to the increase in premiums and policy fees as well as the additional amortization required should the remainder of the overpayment not be collected.  In 2003, Protective substantially completed its recovery of the reinsurance overpayment.  As a result, Protective increased premiums and policy fees by $18.4 million in 2003.  The increase in premiums and policy fees resulted in $6.1 million of additional amortization of deferred policy acquisitions costs.  As a result of the recoveries, income before income tax increased $12.3 million and $7.2 million in 2003 and 2002, respectively.

Note O — ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS

The carrying amount and estimated fair values of Protective’s financial instruments at December 31 are as follows:

	2003				2002
	Carrying Amount		Fair Values		Carrying Amount		Fair Values
Assets (see Notes A and C):
Investments:
Fixed maturities	$	12,927,520	$	12,927,520	$	11,655,465	$	11,655,465
Equity securities	30,521		30,521		48,799		48,799
Mortgage-loans on real estate	2,733,722		2,958,052		2,518,151		2,826,133
Short-term investments	510,635		510,635		447,155		447,155
Liabilities (see Notes A and E):
Stable value product account balances	4,676,531		4,736,681		4,018,552		4,124,192
Annuity account balances	3,480,577		3,475,167		3,697,495		3,751,223
Notes payable	2,234		2,234		2,264		2,264
Other (see Note A):
Derivative financial instruments	169,798		169,798		86,766		86,766

Except as noted below, fair values were estimated using quoted market prices.

Protective estimates the fair value of its mortgage loans using discounted cash flows from the next call date.

Protective believes the fair value of its short-term investments and notes payable to banks approximates book value due to either being short-term or having a variable rate of interest.

Protective estimates the fair value of its guaranteed investment contracts and annuities using discounted cash flows and surrender values, respectively.

Protective believes it is not practicable to determine the fair value of its policy loans since there is no stated maturity, and policy loans are often repaid by reductions to policy benefits.

Protective estimates the fair value of its derivative financial instruments using market quotes or derivative pricing models.  The fair value represents the net amount of cash Protective would have received (or paid) had the contracts been terminated on December 31.

EX-99.4

Exhibit 99.4

SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION

PROTECTIVE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(in thousands)

COL. A	COL. B		COL. C		COL. D		COL. E		COL. F		COL. G			COL. H		COL. I		COL. J
Segment	Deferred Policy Acquisition Costs		Future Policy Benefits and Claims		Unearned Premiums		Stable Value Products, Annuity Contracts and Other Policyholders’ Funds		Net Premiums and Policy Fees		Net Investment Income(1)			Benefits and Settlement Expenses		Amortization of Deferred Policy Acquisition Costs		Other Operating Expenses(1)
Year Ended
December 31, 2003:
Life Marketing	$	1,185,102	$	4,846,032	$	1,854	$	62,641
Acquisitions	385,042		3,185,708		354		917,402		$	198,653	$	229,913		$	253,785	$	66,078	$	(50,379	)
Annuities	101,096		593,119		5,329		2,618,571		213,912		246,143			291,768		32,690		41,537
Stable Value Products	7,186						4,520,956		26,265		224,330			197,955		38,196		23,969
Asset Protection	175,264		189,028		691,254		5,739				233,104			186,565		2,279		5,349
Corporate and Other	9,878		89,043		44,860		189,969		244,566		36,423			142,169		80,320		80,544
Adjustments(2)			47,161		76		189		52,278		10,830			51,835		5,544		38,079
TOTAL	$	1,863,568	$	8,950,091	$	743,727	$	8,315,467	$	735,674	$	980,743		$	1,124,077	$	225,107	$	139,099
Year Ended
December 31, 2002:
Life Marketing	$	973,631	$	4,031,021	$	318	$	48,558	$	220,184	$	208,451		$	228,225	$	117,836	$	(41,501	)
Acquisitions	435,592		3,240,407		395		1,040,855		224,485		252,147			301,400		35,245		45,395
Annuities	93,140		571,109				2,742,642		25,826		220,433			186,107		24,669		26,037
Stable Value Products	4,908						3,930,668				246,098			196,576		2,304		4,946
Asset Protection	191,840		243,809		812,919		8,714		285,851		41,372			204,069		75,108		88,275
Corporate and Other	10,143		97,175		29,248		115,708		53,697		3,307			50,708		12,500		31,418
Adjustments(2)			63,775		286		3,567
TOTAL	$	1,709,254	$	8,247,296	$	843,166	$	7,890,712	$	810,043	$	971,808		$	1,167,085	$	267,662	$	154,570
Year Ended
December 31, 2001:
Life Marketing									$	120,996	$	178,866		$	190,538	$	41,399	$	(22,957	)
Acquisitions									182,432		187,535			238,877		20,500		41,684
Annuities									28,145		167,809			137,204		24,021		24,073
Stable Value Products											261,079			222,306		1,662		3,961
Asset Protection									236,266		46,963			141,789		53,749		78,311
Corporate and Other									50,829		(7,049		)	41,910		5,727		26,969
TOTAL									$	618,668	$	835,203		$	972,624	$	147,058	$	152,041

(1)Allocations of Net Investment Income and Other Operating Expenses are based on a number of assumptions and estimates and results would change if different methods were applied.

(2)Balance Sheet adjustments represent the inclusion of assets related to discontinued operations.

1

SCHEDULE IV — REINSURANCE

PROTECTIVE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(dollars in thousands)

COL. A	COL. B		COL. C		COL. D		COL. E		COL. F
	Gross Amount		Ceded to Other Companies		Assumed from Other Companies		Net Amount		Percentage of Amount to Assumed Net
Year Ended
December 31, 2003:
Life insurance in force	$	324,318,517	$	292,740,795	$	22,176,303	$	53,754,025	41.3	%
Premiums and policy fees:
Life insurance	$	1,011,553	$	765,276	$	247,592	$	493,869	50.1	%
Accident/health insurance	99,023		61,644		59,633		97,012		61.5	%
Property/liability insurance	170,322		91,015		65,688		144,995		45.3
Total	$	1,280,898	$	917,935	$	372,913	$	735,876
Year Ended
December 31, 2002:
Life insurance in force	$	248,994,479	$	219,025,215	$	21,523,110	$	51,492,374	41.8	%
Premiums and policy fees:
Life insurance	$	831,129	$	532,738	$	235,198	$	533,589	44.1	%
Accident/health insurance	103,858		61,512		44,337		86,683		51.1	%
Property/liability insurance	194,601		143,908		110,543		161,236		68.6
Total	$	1,129,588	$	738,158	$	390,078	$	781,508
Year Ended
December 31, 2001:
Life insurance in force	$	191,105,512	$	171,449,182	$	23,152,614	$	42,808,944	54.1	%
Premiums and policy fees:
Life insurance	$	774 294	$	565,130	$	198,832	$	407,996	48.7	%
Accident/health insurance	181,509		122,747				58,762		0.0	%
Property/liability insurance	158,890		83,274		76,295		151,911		50.2	%
Total	$	1,114,693	$	771,151	$	275,127	$	618,669

SCHEDULE V – VALUATION ACCOUNTS

PROTECTIVE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(dollars in thousands)

COL. A	COL. B		COL. C				COL. D		COL. E
			Additions
Description	Balance at beginning of period		(1) Charged to costs and expenses		(2) Charges to other accounts		Deductions		Balance at end of period
2003
Allowance for Uncollected Reinsurance Receivable	$	24,833	$	0	$	0	$	18,371	$	6,462
2002
Allowance for Uncollected Reinsurance Receivable	$	0	$	0	$	24,833	$	0	$	24,833