-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O9VxDuLQkKVDyyK/7FDWie/a0qA6wU7bpenCPQKbzZrNgPg/sdhSOb4KBy5CFBhG nuaIplf4stdIZsuWtDEMPQ== 0000355429-95-000030.txt : 19951119 0000355429-95-000030.hdr.sgml : 19951119 ACCESSION NUMBER: 0000355429-95-000030 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951113 SROS: CSX SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROTECTIVE LIFE CORP CENTRAL INDEX KEY: 0000355429 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 952492236 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12332 FILM NUMBER: 95590632 BUSINESS ADDRESS: STREET 1: 2801 HGWY 280 S CITY: BIRMINGHAM STATE: AL ZIP: 35223 BUSINESS PHONE: 2058799230 MAIL ADDRESS: STREET 1: PO BOX 2606 CITY: BIRMINGHAM STATE: AL ZIP: 35202 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended SEPTEMBER 30, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ Commission File Number 0-9924 PROTECTIVE LIFE CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 95-2492236 (State of incorporation) (IRS Employer Identification Number) 2801 HIGHWAY 280 SOUTH BIRMINGHAM, ALABAMA 35223 (Address of principal executive offices) (205) 879-9230 (Registrant's telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Number of shares of Common Stock, $.50 par value, outstanding as of November 10, 1995: 28,775,118 shares. PROTECTIVE LIFE CORPORATION INDEX PART I. FINANCIAL INFORMATION: Item 1. Financial Statements: Report of Independent Accountants Consolidated Condensed Statements of Income for the Three and Nine Months ended September 30, 1995 and 1994 (unaudited) Consolidated Condensed Balance Sheets as of September 30, 1995 (unaudited) and December 31, 1994 Consolidated Condensed Statements of Cash Flows for the Nine Months ended September 30, 1995 and 1994 (unaudited) Notes to Consolidated Condensed Financial Statements (unaudited) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION: Item 6. Exhibits and Reports on Form 8-K Signature REPORT OF INDEPENDENT ACCOUNTANTS To the Directors and Stockholders Protective Life Corporation Birmingham, Alabama We have reviewed the accompanying consolidated condensed balance sheet of Protective Life Corporation and subsidiaries as of September 30, 1995, and the related consolidated condensed statements of income for the three-month and nine-month periods ended September 30, 1995 and 1994 and consolidated condensed statements of cash flows for the nine-month periods ended September 30, 1995 and 1994. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the consolidated condensed financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet as of December 31, 1994, and the related consolidated statements of income, stockholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated February 13, 1995, we expressed an unqualified opinion which contains an explanatory paragraph regarding the changes in accounting for certain investments in debt and equity securities in 1993 and postretirement benefits other than pensions in 1992 on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated condensed balance sheet as of December 31, 1994, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. COOPERS & LYBRAND L.L.P. Birmingham, Alabama October 25, 1995 PROTECTIVE LIFE CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Dollars in thousands except per share amounts) (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 1995 1994 1995 1994 REVENUES Premiums and policy fees (net of reinsurance ceded: three months: 1995 - $79,908; 1994 - $50,714 $ 93,213 $101,876 $277,460 $289,362 nine months: 1995 - $222,351; 1994 - $121,462) Net investment income 123,894 105,762 354,603 304,647 Realized investment gains (losses) 1,337 3,122 3,401 4,855 Other income 9,637 2,185 26,308 13,394 -------- -------- -------- -------- 228,081 212,945 661,772 612,258 -------- -------- -------- -------- BENEFITS AND EXPENSES Benefits and settlement expenses (net of reinsurance ceded: three months: 1995 - $54,638; 1994 - $31,118 134,111 134,208 383,039 376,536 six months: 1995 - $159,760; 1994 - $80,541) Amortization of deferred policy acquisition costs 17,652 20,493 63,218 60,218 Other operating expenses (net of reinsurance ceded: three months: 1995 - $23,173; 1994 - $3,793 42,614 29,610 124,369 98,038 -------- -------- -------- -------- nine months: 1995 - $58,645; 1994 - $9,842) 194,377 184,311 570,626 534,792 -------- -------- -------- -------- INCOME BEFORE INCOME TAX AND MINORITY INTEREST 33,704 28,634 91,146 77,466 Income tax expense 12,034 9,163 30,990 24,789 -------- -------- -------- -------- INCOME BEFORE MINORITY INTEREST 21,670 19,471 60,156 52,677 Minority interest in net income of consolidated subsidiaries 804 804 2,413 992 -------- -------- -------- -------- NET INCOME $ 20,866 $ 18,667 $ 57,743 $ 51,685 ========= ========= ========= ======== NET INCOME PER SHARE $ 0.72 $ 0.68 $ 2.03 $ 1.89 ========= ========= ========= ======== DIVIDENDS PAID PER SHARE $ 0.16 $ 0.14 $ 0.46 $ 0.41 ========= ========= ========= ======== Average shares outstanding 28,775,118 27,402,166 28,384,873 27,388,228 SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
PROTECTIVE LIFE CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS (Dollars in thousands)
SEPTEMBER 30 DECEMBER 31 1995 1994 (Unaudited) ASSETS Investments: Fixed maturities $3,909,950 $3,493,646 Equity securities 47,456 45,005 Mortgage loans on real estate 1,718,200 1,487,795 Investment real estate, net 21,173 20,303 Policy loans 145,655 147,608 Other long-term investments 44,108 48,013 Short-term investments 97,124 59,541 ---------- ---------- Total investments 5,983,666 5,301,911 Cash 5,748 4,468 Accrued investment income 61,704 55,637 Accounts and premiums receivable, net 41,244 30,472 Reinsurance receivables 223,457 122,175 Deferred policy acquisition costs 412,504 434,444 Property and equipment, net 37,362 36,323 Other assets 52,842 20,709 Assets held in separate accounts 277,493 124,145 ---------- ---------- TOTAL ASSETS $7,096,020 $6,130,284 ========== ========== LIABILITIES Policy liabilities and accruals $2,023,998 $1,797,774 Guaranteed investment contract deposits 2,483,669 2,281,673 Annuity deposits 1,298,167 1,251,318 Other policyholders' funds 144,468 144,461 Other liabilities 141,833 127,873 Accrued income taxes 4,850 (6,238) Deferred income taxes 49,029 (14,095) Debt 140,500 98,000 Liabilities related to separate accounts 277,493 124,145 Minority interest in consolidated subsidiaries 55,000 55,000 ---------- ---------- TOTAL LIABILITIES 6,619,007 5,859,911 ---------- ---------- COMMITMENTS AND CONTINGENT LIABILITIES - NOTE C STOCKHOLDERS' EQUITY Preferred Stock, $1 par value Shares authorized: 3,850,000; Issued: none Junior Participating Cumulative Preferred Stock, $1 par value Shares authorized: 150,000; Issued: none Common Stock, $0.50 par value Shares authorized: 80,000,000 Issued: 1995 and 1994 - 31,336,462 15,668 15,668 Additional paid-in capital 96,371 71,295 Net unrealized gains (losses) on investments (net of income tax: 1995 - $12,189 1994 - ($57,902) 22,637 (107,532) Retained earnings 359,604 314,857 Treasury stock (1995 - 2,561,344 shares; 1994 - 3,909,994 shares) (12,008) (18,323) Unallocated stock in Employee Stock Ownership Plan (1995 - 793,804 shares; 1994 - 844,146 shares) (5,259) (5,592) ---------- ---------- TOTAL STOCKHOLDERS' EQUITY 477,013 270,373 ---------- ---------- $7,096,020 $6,130,284 ========== ========== SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
PROTECTIVE LIFE CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30 1995 1994 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 57,743 $ 51,685 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of deferred policy acquisition costs 63,218 60,219 Capitalization of deferred policy acquisition costs (61,287) (89,296) Depreciation expense 4,277 4,388 Deferred income taxes (6,966) (9,909) Accrued income taxes 11,088 (3,772) Interest credited to universal life and investment products 213,303 183,642 Policy fees assessed on universal life and investment products (74,772) (58,887) Change in accrued investment income and other receivables (116,181) 13,656 Change in policy liabilities and other policyholders' funds of traditional life and health products 131,345 84,215 Change in other liabilities (5,964) 12,777 Other (net) (1,381) (9,588) ----------- ---------- Net cash provided by operating activities 214,423 239,130 ----------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Maturities and principal reductions of investments Investments available for sale 219,760 317,959 Other 49,536 129,296 Sale of investments Investments available for sale 863,479 349,944 Other 4,243 16,183 Cost of investments acquired Investments available for sale (1,322,651) (1,336,274) Other (243,788) (112,964) Acquisitions and bulk reinsurance assumptions (7,550) 39,328 Purchase of property and equipment (5,283) (4,380) Sale of property and equipment 136 1,832 ----------- ---------- Net cash used in investing activities (442,118) (599,076) ----------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from borrowings under line of credit arrangements and debt 1,032,400 460,186 Principal payments on line of credit arrangements and debt (989,900) (505,258) Proceeds from issuance of Monthly Income Preferred Securities 55,000 Dividends to stockholders (12,995) (11,232) Purchase of treasury stock (3) (190) Investment product deposits and change in universal life deposits 734,707 1,064,910 Investment product withdrawals (535,234) (728,070) ----------- ---------- Net cash provided by financing activities 228,975 335,346 ----------- ---------- INCREASE (DECREASE) IN CASH 1,280 (24,600) CASH AT BEGINNING OF PERIOD 4,468 27,119 ----------- ---------- CASH AT END OF PERIOD $ 5,748 $ 2,519 =========== ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period: Interest on debt $ (9,740) $ (4,176) Income taxes $ (25,648) $ (37,937) SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Reissuance of treasury stock to ESOP $ 350 $ 3 Unallocated stock in ESOP $ 333 $ 264 Reissuance of treasury stock $ 362 $ 578 Acquisitions Assets acquired $ 10,394 $ 41,818 Liabilities assumed (25,651) (49,049) Reissuance of treasury stock (30,681) ----------- ---------- Net $ (45,938) $ (7,231) =========== ========== SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
PROTECTIVE LIFE CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) NOTE A - BASIS OF PRESENTATION The accompanying unaudited consolidated condensed financial statements of Protective Life Corporation (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the disclosures required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. Operating results for the nine month period ended September 30, 1995 are not necessarily indicative of the results that may be expected for the year ending December 31, 1995. For further information, refer to the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1994. NOTE B - ACQUISITION On March 20, 1995 the Company acquired National Health Care Systems of Florida, Inc. The purchase price was $38.3 million and was paid with a combination of the Company's Common Stock ($30.7 million) and cash ($7.6 million). In connection with the acquisition, the Company reissued 1,316,458 shares of its Common Stock previously held as Treasury Stock. NOTE C - COMMITMENTS AND CONTINGENT LIABILITIES The Company is contingently liable to obtain a $20 million letter of credit under indemnity agreements with its directors. Such agreements provide insurance protection in excess of the directors' and officers' liability insurance in force at the time up to $20 million. Should certain events occur constituting a change in control of the Company, the Company must obtain the letter of credit upon which directors may draw for defense or settlement of any claim relating to performance of their duties as directors. The Company has similar agreements with certain of its officers providing up to $10 million in indemnification which are not secured by the obligation to obtain a letter of credit. 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. The Company 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. The Company and its subsidiaries, like other life and health insurers, from time to time are involved in lawsuits, in which the plaintiff may seek punitive damage awards in addition to compensatory damage awards. To date, no such lawsuit has resulted in the award of any material amount of damages against the Company. Although the outcome of any litigation cannot be predicted with certainty, the Company believes that such litigation will not have a material adverse effect on the financial position of the Company. NOTE D - BUSINESS SEGMENTS The Company operates predominantly in the life and accident and health insurance industry. The following table sets forth total revenues, income (loss) before income tax and minority interest, and identifiable assets of the Company's business segments. NINE MONTHS ENDED SEPTEMBER 30 1995 1994 AMOUNT PERCENT AMOUNT PERCENT (dollars in thousands) TOTAL REVENUES: Acquisitions $144,712 21.9% $114,123 18.6% Financial Institutions 29,189 4.4 81,249 13.3 Group 134,909 20.4 108,407 17.7 Guaranteed Investment Contracts 150,221 22.7 138,972 22.7 Individual Life 108,553 16.4 90,949 14.9 Investment Products 80,975 12.2 64,413 10.5 Corporate and Other 12,604 1.9 13,671 2.2 Unallocated Realized Investment Gains (Losses) 609 0.1 474 0.1 -------- ----- -------- ----- $661,772 100.0% $612,258 100.0% ======== ===== ======== ===== INCOME (LOSS) BEFORE INCOME TAX AND MINORITY INTEREST: Acquisitions $ 36,295 39.8% $ 28,605 36.9% Financial Institutions 6,564 7.2 6,825 8.8 Group 9,403 10.3 7,045 9.1 Guaranteed Investment Contracts 24,146 26.5 25,276 32.6 Individual Life 13,582 14.9 12,590 16.3 Investment Products 7,403 8.1 3,186 4.1 Corporate and Other (6,856) (7.5) (6,535) (8.4) Unallocated Realized Investment Gains (Losses) 609 0.7 474 0.6 -------- ----- -------- ----- $ 91,146 100.0% $ 77,466 100.0% ======== ===== ======== ===== SEPTEMBER 30, 1995 DECEMBER 31, 1994 AMOUNT PERCENT AMOUNT PERCENT (dollars in thousands) IDENTIFIABLE ASSETS: Acquisitions $1,372,676 19.3% $1,131,722 19.4% Financial Institutions 237,054 3.4 207,511 3.5 Group 268,951 3.8 212,070 3.6 Guaranteed Investment Contracts 2,533,920 35.7 2,187,962 37.4 Individual Life 847,674 11.9 683,013 11.7 Investment Products 1,539,824 21.7 1,122,218 19.2 Corporate and Other 295,921 4.2 302,071 5.2 ---------- ----- ---------- ----- $7,096,020 100.0% $5,846,567 100.0% ========== ===== ========== ===== NOTE E - STATUTORY REPORTING PRACTICES Financial statements prepared in conformity with generally accepted accounting principles ("GAAP") differ in some respects from the statutory accounting practices prescribed or permitted by insurance regulatory authorities. At September 30, 1995 and for the nine months then ended, the Company's life insurance subsidiaries had stockholder's equity and net income prepared in conformity with statutory reporting practices of $325.5 million and $74.0 million, respectively. NOTE F - RECENTLY ADOPTED ACCOUNTING STANDARDS At December 31, 1993, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." For purposes of adopting SFAS No. 115 the Company has classified all of its investments in fixed maturities, equity securities, and short-term investments as "available for sale." As prescribed by SFAS No. 115, these investments are recorded at their market values with the resulting net unrealized gain or loss, net of income tax and a related adjustment to deferred policy acquisition costs, recorded as a component of stockholders' equity. The Company's balance sheets at September 30, 1995 and December 31, 1994, prepared on the basis of reporting investments at amortized cost rather than at market values, are as follows: SEPTEMBER 30, 1995 DECEMBER 31, 1994 (IN THOUSANDS) Total investments $5,941,364 $5,501,064 Deferred policy acquisition costs 419,980 400,724 All other assets 699,850 393,929 ---------- ---------- $7,061,194 $6,295,717 ========== ========== Deferred income taxes $ 36,840 $ 43,806 All other liabilities 6,569,978 5,874,006 ---------- ---------- 6,606,818 5,917,812 Stockholders' equity 454,376 377,905 ---------- ---------- $7,061,194 $6,295,717 ========== ========== On January 1, 1995 the Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures." Under the new standards, a loan is considered impaired, based on current information and events, if it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. Since the Company'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 the Company's evaluation of its mortgage loan portfolio, the Company does not expect any material losses on its mortgage loans, and therefore no allowance for losses is required under SFAS No. 114 at January 1, 1995 or September 30, 1995. NOTE G - STOCK SPLIT On May 1, 1995, the Company's Board of Directors approved a two-for-one split of the Company's Common Stock in the form of a 100% stock dividend distributed on June 1, 1995. Stockholders' equity has been restated to give retroactive recognition to the stock split for all periods presented by reclassifying from retained earnings to common stock the par value of the additional shares arising from the stock split. In addition, all references to number of shares and per share amounts included herein have been restated to reflect the stock split. NOTE H - STOCKHOLDER RIGHTS PLAN On August 7, 1995, the Company's Board of Directors adopted a new stockholder rights plan. The new rights plan replaced the Company's existing rights plan, which was adopted in 1987. On August 7, 1995, the Company filed a Form 8-K with the Securities and Exchange Commission which describes the new stockholder rights plan. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Protective Life Corporation through its subsidiaries provides financial services through the production, distribution, and administration of insurance and investment products. Founded in 1907, Protective Life Insurance Company ("Protective Life") is the Company's principal operating subsidiary. Unless the context otherwise requires, the "Company" refers to the consolidated group of Protective Life Corporation and its subsidiaries. RESULTS OF OPERATIONS PREMIUMS AND POLICY FEES The following table sets forth for the periods shown the amount of premiums and policy fees and the percentage change from the prior period: PREMIUMS AND POLICY FEES NINE MONTHS PERCENTAGE ENDED AMOUNT INCREASE SEPTEMBER 30 (IN THOUSANDS) (DECREASE) 1994 $289,362 5.8% 1995 277,460 (4.1) Premiums and policy fees decreased $11.9 million or 4.1% in the first nine months of 1995 over the first nine months of 1994. Premiums and policy fees from the Financial Institutions Division decreased $54.6 million in the first nine months of 1995 as compared to the first nine months of 1994. This resulted from a reinsurance arrangement begun in the 1995 first quarter whereby a significant portion of the Division's new sales are being ceded to a reinsurer. Increases in premiums and policy fees from the Group and Individual Life Divisions represent increases of $12.6 million and $10.2 million, respectively. Policy fees related to the Company's variable annuity increased $2.1 million in the first nine months of 1995 as compared to the same period in 1994. The assumption of a block of payroll deduction policies in the second quarter of 1994 resulted in a $1.8 million increase in premiums and policy fees in 1995. The assumption of a block of policies in the fourth quarter of 1994 resulted in a $17.0 million increase in premiums and policy fees in 1995. On June 15, 1995, the Company coinsured a block of policies which resulted in a $4.7 million increase in premiums and policy fees in 1995. Decreases in older acquired blocks resulted in a $5.8 million decrease in premiums and policy fees. NET INVESTMENT INCOME The following table sets forth for the periods shown the amount of net investment income and the percentage change from the prior period: NINE MONTHS NET INVESTMENT INCOME ENDED AMOUNT PERCENTAGE SEPTEMBER 30 (IN THOUSANDS) INCREASE 1994 $304,647 16.2% 1995 354,603 16.4 Net investment income in the first nine months of 1995 was $50.0 million or 16.4% higher than the corresponding period of the preceding year primarily due to increases in the average amount of invested assets. Invested assets have increased primarily due to receiving annuity and guaranteed investment contract ("GIC") deposits and to acquisitions. Annuity and GIC deposits are not considered revenues in accordance with generally accepted accounting principles. These deposits are included in the liability section of the balance sheet. The assumption of two blocks of policies in 1994 and one block of policies in the second quarter of 1995 resulted in an increase in net investment income of $10.1 million in the first nine months of 1995. REALIZED INVESTMENT GAINS The Company generally purchases its investments with the intent to hold to maturity by purchasing investments that match future cash-flow needs. However, the Company may sell any of its investments to maintain proper matching of assets and liabilities. Accordingly, the Company has classified its fixed maturities and certain other securities as "available for sale." The sales of investments that have occurred have largely resulted from portfolio management decisions to maintain proper matching of assets and liabilities. The following table sets forth realized investment gains for the periods shown: NINE MONTHS REALIZED ENDED INVESTMENT GAINS SEPTEMBER 30 (IN THOUSANDS) 1994 $4,855 1995 3,401 Realized investment gains for the first nine months of 1995 were $1.5 million lower than the corresponding period of 1994. OTHER INCOME The following table sets forth other income for the periods shown: NINE MONTHS ENDED OTHER INCOME SEPTEMBER 30 (IN THOUSANDS) 1994 $13,394 1995 26,308 Other income consists primarily of revenues of the Company's broker-dealer subsidiary, fees from administrative-services-only types of group accident and health insurance contracts, and revenues of the Company's wholly-owned insurance marketing organizations and other small noninsurance subsidiaries. Other income in the first nine months of 1995 was $12.9 million higher than the corresponding period of 1994. Other income for the first nine months of 1994 included $4.2 million related to the sale of a subsidiary. On March 20, 1995, the Company completed its acquisition of National Health Care Systems of Florida, Inc. ("NHCS"), based in Jacksonville, Florida. NHCS operates prepaid dental plans (also referred to as dental health maintenance organizations or dental capitation plans). NHCS, known as "Denticare", currently has over 283,000 members located primarily in Florida, Tennessee, Georgia, and Alabama. The acquisition resulted in a $14.4 million increase in other income in the first nine months of 1995. Other income from all other sources decreased $1.5 million in the first nine months of 1995 as compared with the first nine months of 1994. INCOME BEFORE INCOME TAX AND MINORITY INTEREST The following table sets forth income or loss before income tax and minority interest by business segment for the periods shown: INCOME (LOSS) BEFORE INCOME TAX AND MINORITY INTEREST NINE MONTHS ENDED SEPTEMBER 30 (IN THOUSANDS) BUSINESS SEGMENT 1994 1995 Acquisitions $28,605 $36,295 Financial Institutions 6,825 6,564 Group 7,045 9,403 Guaranteed Investment Contracts 25,276 24,146 Individual Life 12,590 13,582 Investment Products 3,186 7,403 Corporate and Other (6,535) (6,856) Unallocated Realized Investment Gains 474 609 ------- ------- $77,466 $91,146 ======= ======= Percentage Increase 34.9% 17.7% Pretax earnings from the Acquisitions Division increased $7.7 million in the first nine months of 1995 as compared to the same period of 1994. Earnings from the Acquisitions Division 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. As previously discussed, the Company assumed two blocks of policies during 1994 and one block of policies during the second quarter of 1995. These acquisitions represent $6.8 million of the increase. Improved mortality experience in older acquired blocks of policies resulted in a $0.9 million increase in pretax earnings in the first nine months of 1995 as compared to the first nine months of 1994. Pretax earnings of the Financial Institutions Division were $0.2 million lower in the first nine months of 1995 as compared to the same period in 1994. The Division has entered into a reinsurance arrangement whereby a significant portion of the Division's new sales are being ceded to a reinsurer. In the 1995 second quarter the Division also reinsured a block of older policies. Though the Division's reported earnings were reduced by approximately $0.8 million, these reinsurance transactions are expected to improve the Division's return on investment. Group pretax earnings were $2.4 million higher in the first nine months of 1995 as compared to the first nine months of 1994 due to improved earnings from accident and health products and dental products which were partially offset by lower earnings from life and cancer products. NHCS represented $1.4 million of the increase. The Guaranteed Investment Contract ("GIC") Division had pretax operating earnings of $24.9 million in the first nine months of 1995 and $20.4 million in the corresponding period of 1994. This increase was due to the growth in GIC deposits placed with the Company. At September 30, 1995, GIC deposits totaled $2.5 billion compared to $2.3 billion one year earlier. Realized investment losses associated with this Division in the first nine months of 1995 were $0.8 million as compared to realized investment gains of $4.9 million in the same period last year. As a result, total pretax earnings were $24.1 million in the first nine months of 1995 compared to $25.3 million for the same period last year. Individual Life pretax earnings increased $1.0 million in the first nine months of 1995 as compared to the first nine months of 1994. At December 31, 1994 the Company reduced certain statutory policy liabilities for certain term- like products to be more consistent with current regulation and industry practice. This reduced investment income allocated to the Division in the first nine months of 1995 by approximately $2.3 million when compared to the same period in 1994. Additionally, expenses to develop new marketing ventures were $1.5 million higher in the first nine months of 1995 as compared to the first nine months of 1994. Also reflected in the Division's operating results for 1995 is a $1.2 million loss related to the Company's broker-dealer (previously reported within the Investment Products Division). These decreases were offset by earnings from a growing amount of business in force. Investment Products Division pretax earnings were $4.2 million higher in the first nine months of 1995 compared to the same period of 1994. Realized investment gains associated with the Division, net of related amortization of deferred policy acquisition costs, were $2.5 million higher than the same period last year. During 1994 the Division completed the amortization of the deferred policy acquisition costs related to its book value annuities. Accordingly, 1995 operating earnings were $5.2 million higher due to lower amortization. This increase was largely offset by higher expenses related to the Company's variable annuity which was introduced in early 1994, and to increases in other expenses. The Corporate and Other segment consists of several small insurance lines of business, net investment income and expenses not identified with the preceding operating divisions (including interest on substantially all debt), and the operations of several small noninsurance subsidiaries. Pretax earnings for this segment declined $0.3 million in the first nine months of 1995 as compared to the first nine months of 1994. Unallocated realized investment gains occurred due to sales of investments that occurred to maintain proper matching of assets and liabilities. INCOME TAXES The following table sets forth the effective income tax rates for the periods shown: NINE MONTHS ENDED ESTIMATED EFFECTIVE SEPTEMBER 30 INCOME TAX RATES 1994 32% 1995 34 The effective income tax rate for 1994 was 32%. The estimated income tax rate for the first nine months of 1995 was increased from 33% to 34% during the third quarter. NET INCOME The following table sets forth net income and the net income per share for the periods shown: NINE MONTHS NET INCOME ENDED TOTAL PERCENTAGE SEPTEMBER 30 (IN THOUSANDS) PER SHARE INCREASE 1994 $51,685 $1.89 36.8% 1995 57,743 2.03 11.7 Compared to the same period in 1994, net income in the first nine months of 1995 increased 11.7%, reflecting improved operating earnings in the Acquisitions, Financial Institutions, Group, Guaranteed Investment Contracts, Individual Life, and Investment Products Divisions, which were partially offset by lower earnings in the Corporate and Other segment. RECENTLY ISSUED ACCOUNTING STANDARDS In January 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 120, "Accounting and Reporting by Mutual Life Insurance Enterprises and by Insurance Enterprises for Certain Long-Duration Participating Contracts." In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to Be Disposed Of." In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing Rights." In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock Based Compensation." The Company anticipates that the impact of adopting these accounting standards will be immaterial to its financial condition. LIQUIDITY AND CAPITAL RESOURCES The Company's operations usually produce a positive cash flow. This cash flow is used to fund an investment portfolio to finance future benefit payments including those arising from various types of deposit contracts. Since future benefit payments largely represent long-term obligations reserved using certain assumed interest rates, the Company's investments are predominantly in medium and long-term, fixed-rate investments such as bonds and mortgage loans which provide a sufficient return to cover these obligations. Many of the Company's products contain surrender charges and other features which reward persistency and penalize the early withdrawal of funds. With respect to such products, surrender charges are generally sufficient to cover the Company's unamortized deferred policy acquisition costs with respect to the policy being surrendered. GICs and certain annuity contracts have market-value adjustments which protect the Company against investment losses if interest rates are higher at the time of surrender as compared to interest rates at the time of issue. The Company has adopted Statement of Financial Accounting Standards No. 115, "Accounting For Certain Investments In Debt And Equity Securities." Accordingly, the Company's investments in debt and equity securities are reported in the financial statements at market value, and investments in mortgage loans are reported at amortized cost. At September 30, 1995, the fixed maturity investments (bonds, bank loan participations, and redeemable preferred stocks) had a market value of $3,962.5 million, which is 1.0% above amortized cost (less allowances for uncollectible amounts on investments) of $3,923.0 million. The Company had $1,718.2 million in mortgage loans at September 30, 1995. While the Company's mortgage loans do not have quoted market values, at September 30, 1995, the Company estimates the market value of its mortgage loans to be $1,846.7 million (using discounted cash flows from the next call date) which is 7.5% in excess of amortized book value. Most of the Company's mortgage loans have significant prepayment penalties. These assets are invested for terms approximately corresponding to anticipated future benefit payments. Thus, market value fluctuations should not adversely affect liquidity. For several years the Company has offered a commercial loan product under which the Company will permit a slightly higher loan-to-value ratio in exchange for a participating interest in the cash flows from the underlying real estate. Approximately $207 million of the Company's mortgage loans have this participation feature. At September 30, 1995, delinquent mortgage loans and foreclosed real estate were 0.6% of assets. Bonds rated less than investment grade were 1.0% of assets. Additionally, the Company had bank loan participations that were less than investment grade representing 2.9% of assets. The Company does not expect these investments to adversely affect its liquidity or ability to hold its other investments to maturity. The Company's allowance for uncollectible amounts on investments was $35.9 million at September 30, 1995. Policy loans at September 30, 1995 were $145.7 million, a decrease of $2.0 million from December 31, 1994. Policy loan rates are generally in the 4.5% to 8.0% range. Such rates at least equal the assumed interest rates used for future policy benefits. The Company believes its asset/liability matching practices and certain product features provide significant protection for the Company against the effects of changes in interest rates. However, approximately one-fourth of the Company's liabilities relate to products (primarily whole life insurance) the profitability of which may be affected by changes in interest rates. The effect of such changes in any one year is not expected to be material. Additionally, the Company believes its asset/liability matching practices provide sufficient liquidity to enable it to fulfill its obligation to pay benefits under its various insurance and deposit contracts. The Company's asset/liability matching practices 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 the Company's policy to maintain asset and liability durations within 10% of one another. A combination of futures contracts and options on treasury notes are currently being used as hedges for asset/liability management of certain investments, primarily mortgage loans on real estate, and liabilities arising from interest-sensitive products such as GICs and annuities. Realized investment gains and losses of such contracts are deferred and amortized over the life of the hedged asset. The Company also uses interest rate swap contracts to convert certain investments from a variable to a fixed rate of interest and from a fixed to a variable rate of interest and to convert its Senior Notes and Monthly Income Preferred Securities from a fixed rate to a variable rate of interest. At September 30, 1995, related open interest rate swap contracts with a notional amount of $210.0 million were in a $2.1 million net unrealized gain position. The Company entered the GIC market in late 1989. Most GIC contracts written by the Company have maturities of 3 to 5 years. Prior to 1993, few GIC contracts were maturing because the contracts were newly written. Beginning in 1993, GIC contracts began to mature as contemplated when the contracts were sold. Withdrawals related to GIC contracts were approximately $700 million during 1994. Withdrawals related to GIC contracts are estimated to be approximately $700 million in 1995. The Company's asset/liability matching practices take into account maturing contracts. Accordingly, the Company does not expect maturing contracts to have an unusual effect on the future operations and liquidity of the Company. The Company is exploring the prospects for securitizing a portion of its commercial mortgage portfolio as a means to enhance its liquidity and provide an alternative source of funding for its commercial mortgage loan origination business. In anticipation of receiving GIC and annuity deposits, the life insurance subsidiaries were committed at September 30, 1995 to fund mortgage loans and to purchase fixed maturity and other long-term investments in the amount of $329.2 million. The Company's subsidiaries held $102.2 million in cash and short-term investments at September 30, 1995. Protective Life Corporation had an additional $0.7 million in cash and short-term investments available for general corporate purposes. While the Company generally anticipates that the cash flows of its subsidiaries will be sufficient to meet their investment commitments and operating cash needs, the Company recognizes that investment commitments scheduled to be funded may from time to time exceed the funds then available. Therefore, the Company has arranged sources of credit for its insurance subsidiaries to utilize to fund investments in such circumstances. The Company expects that the rate received on its investments will equal or exceed its borrowing rate. Additionally, the Company may from time to time sell short- duration GICs to complement its cash management practices. At September 30, 1995, Protective Life Corporation had borrowed $40.5 million of a $60.0 million revolving line of credit and an additional $8.0 million of short-term bank borrowings, and the Company's insurance subsidiaries had borrowed $17.0 million to fund investments, all on notes bearing interest rates averaging 6.4%. The Company's bank borrowings (excluding temporary borrowings of the Company's insurance subsidiaries) have increased $25.5 million since December 31, 1994. Proceeds have been primarily used to contribute additional statutory capital to the Company's insurance subsidiaries, and for general corporate purposes. On March 20, 1995, the Company acquired National Health Care Systems of Florida, Inc. In connection with the acquisition, the Company reissued 1,316,458 shares of its Common Stock previously held as Treasury Stock. On November 7, 1994, the Company's Board of Directors authorized a program for the repurchase of up to 600,000 shares of Company Common Stock for an aggregate purchase price not to exceed $15 million. No shares have been repurchased under the program. The program expires December 31, 1995. Protective Life Corporation's cash flow is dependent on cash dividends from its subsidiaries, payments on surplus notes, revenues from investment, data processing, legal, and management services rendered to the subsidiaries, and investment income. At December 31, 1994, approximately $196 million of consolidated stockholders' equity, excluding net unrealized losses on investments, represented net assets of the Company's insurance subsidiaries that cannot be transferred in the form of dividends, loans, or advances to the parent company. In addition, the states in which the Company's insurance subsidiaries are domiciled impose certain restrictions on the insurance subsidiaries' ability to pay dividends to Protective Life Corporation. Also, distributions, including cash dividends to Protective Life Corporation from its life insurance subsidiaries, in excess of approximately $248 million, would be subject to federal income tax at rates then effective. The Company does not anticipate involuntarily making distributions that would be subject to income tax. For the foregoing reasons and due to the expected growth of the Company's insurance sales, the Company will retain substantial portions of the earnings of its life insurance subsidiaries in those companies primarily to support their future growth. Because Protective Life Corporation's cash disbursements have from time to time exceeded its cash receipts, such shortfalls have been funded through various external financings. Therefore, Protective Life Corporation may from time to time require additional external financing. To give the Company flexibility in connection with future acquisition opportunities, the Company has registered debt securities, preferred and common stock of Protective Life Corporation, and additional preferred securities of PLC Capital L.L.C., under the Securities Act of 1933 on a delayed (or "shelf") basis. 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 generally accepted accounting principles and are intended to reflect a more conservative view by, for example, requiring immediate expensing of policy acquisition costs. The achievement of long-term growth will require growth in the statutory capital of the Company's insurance subsidiaries. The subsidiaries may secure additional statutory capital through various sources, such as internally generated statutory earnings or equity contributions by the Company from funds generated through debt or equity offerings. 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 September 30, 1995 statutory financial reports of the Company's insurance subsidiaries, the Company's insurance subsidiaries are adequately capitalized under the formula. Under insurance guaranty fund laws, in most states, insurance companies doing business in a participating state can be assessed up to prescribed limits for policyholder losses incurred by insolvent companies. The Company does not believe that any such assessments will be materially different from amounts already provided for in the financial statements. A number of civil jury verdicts have been returned against life and health insurers in the jurisdictions in which the Company does business involving the insurers' sales practices, alleged agent misconduct, failure to properly supervise agents, and other matters. Some of the lawsuits have resulted in the award of substantial judgments against the insurers, including material amounts of punitive damages. In some states in which the Company does business, juries have substantial discretion in awarding punitive damages in these circumstances, and the state appellate courts have affirmed significant punitive awards. The Company and its subsidiaries, like other life and health insurers, in the course of business are involved in such litigation. To date, no such lawsuit has resulted in the award of any significant amount of damages against the Company. Although the outcome of any litigation cannot be predicted with certainty, the Company believes that such litigation will not have a material adverse effect on the financial position of the Company. The Company is not aware of any material pending or threatened regulatory action with respect to the Company or any of its subsidiaries. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a). Exhibit 15 - Letter re: unaudited interim financial statements (b). Exhibit 27 - Financial data schedule (c). A report on Form 8-K was filed July 25, 1995, concerning the Company's 1995 second quarter earnings press release. A second report on Form 8-K was filed August 7, 1995 concerning the redemption of rights relating to the Company's Share Purchase Rights Plan dated July 13, 1987 and the adoption of a new Share Purchase Rights Plan dated August 7, 1995. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PROTECTIVE LIFE CORPORATION Date: November 13, 1995 /S/ JERRY W. DEFOOR Jerry W. DeFoor Vice President and Controller, and Chief Accounting Officer (Duly authorized officer) EX-15 2 Exhibit 15 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Protective Life Corporation We are aware that our report dated October 25, 1995, on our review of interim consolidated financial information of Protective Life Corporation and subsidiaries for the period ended September 30, 1995, and included in the Company's quarterly report on Form 10-Q for the quarter then ended, is incorporated by reference in the Company's registration statements on Form S-8 and Form S-3. Pursuant to Rule 436 under the Securities Act of 1933, this report should not be considered a part of the registration statements prepared or certified by us within the meaning of Sections 7 and 11 of that Act. COOPERS & LYBRAND L.L.P. Birmingham, Alabama October 25, 1995 EX-27 3
7 This schedule contains summary financial information extracted from the consolidated financial statements of Protective Life Corporation and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS DEC-31-1995 JAN-01-1995 SEP-30-1995 3,909,950 0 0 47,456 1,718,200 21,173 5,983,666 5,748 223,457 412,504 7,096,020 1,869,029 154,969 0 144,468 140,500 15,668 0 0 461,345 7,096,020 277,460 354,603 3,401 26,308 383,039 63,218 124,369 91,146 30,990 57,743 0 0 0 57,743 2.03 2.03 0 0 0 0 0 0 0 Reflects two for one stock split effective June 1, 1995. Net of minority interest in income of consolidated subsidiaries of $2,413.
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