-----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, Du9OGOPahDdDAHCyMwGSh/6jDWTJ9ittNZZz4o7nAPW3VWdboPd9VWUw2Pd3rxpc eIn7jwNF7OUnyVw/6F3mwQ== 0000355429-98-000023.txt : 19980817 0000355429-98-000023.hdr.sgml : 19980817 ACCESSION NUMBER: 0000355429-98-000023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 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: SEC FILE NUMBER: 001-12332 FILM NUMBER: 98689681 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 JUNE 30, 1998 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 1-12332 PROTECTIVE LIFE CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 95-2492236 (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) 2801 HIGHWAY 280 SOUTH BIRMINGHAM, ALABAMA 35223 (Address of principal executive offices and zip code) (205) 879-9230 (Registrant's telephone number, including area code) ------------------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Number of shares of Common Stock, $.50 par value, outstanding as of August 7, 1998: 61,774,852 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 Six Months ended June 30, 1998 and 1997 (unaudited)...................... Consolidated Condensed Balance Sheets as of June 30, 1998 (unaudited) and December 31, 1997.................................... Consolidated Condensed Statements of Cash Flows for the Six Months ended June 30, 1998 and 1997 (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 5. 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 June 30, 1998, and the related consolidated condensed statements of income for the three-month and six-month periods ended June 30, 1998 and 1997, and consolidated condensed statements of cash flows for the six-month periods ended June 30, 1998 and 1997. 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, 1997, 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 11, 1998, except for Note N as to which the date is March 2, 1998, we expressed an unqualified opinion which contains an explanatory paragraph regarding the changes in accounting for stock-based employee compensation plans in 1995 on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated condensed balance sheet as of December 31, 1997, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. PricewaterhouseCoopers LLP Birmingham, Alabama July 28, 1998, except for Note J as to which the date is August 7, 1998 2
PROTECTIVE LIFE CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Dollars in thousands except per share amounts) (Unaudited) THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 -------------------------------------------------------- 1998 1997 1998 1997 ---- ---- ---- ---- REVENUES Premiums and policy fees (net of reinsurance ceded: three months: 1998 - $109,703; 1997 - $71,873 six months: 1998 - $209,331; 1997 - $125,916) $154,833 $117,993 $ 304,018 $247,571 Net investment income 153,006 137,475 310,655 267,805 Realized investment gains (losses) 2,023 1,143 2,034 725 Other income 19,150 8,906 32,665 13,668 --------- --------- --------- --------- 329,012 265,517 649,372 529,769 -------- -------- --------- -------- BENEFITS AND EXPENSES Benefits and settlement expenses (net of reinsurance ceded: three months: 1998 - $82,964; 1997 - $24,394 six months: 1998 - $126,727; 1997 - $40,833) 186,076 169,813 373,800 332,832 Amortization of deferred policy acquisition costs 33,434 18,210 58,269 39,045 Other operating expenses (net of reinsurance ceded: three months: 1998 - $34,239; 1997 - $22,042 six months: 1998 - $65,948; 1997 - $36,616) 54,014 33,513 111,789 75,143 -------- -------- -------- --------- 273,524 221,536 543,858 447,020 -------- -------- -------- -------- INCOME BEFORE INCOME TAX AND MINORITY INTEREST 55,488 43,981 105,514 82,749 Income tax expense 19,921 14,954 36,930 28,135 -------- --------- -------- --------- INCOME BEFORE MINORITY INTEREST 35,567 29,027 68,584 54,614 Minority interest in net income of consolidated subsidiaries 3,025 1,497 6,049 2,301 -------- --------------------------- ---------- NET INCOME $ 32,542 $ 27,530 $ 62,535 $ 52,313 ======== ======== ======== ======== NET INCOME PER SHARE - BASIC $ .52 $ .44 $ 1.00 $ .84 ========== ========== ========= ========== NET INCOME PER SHARE - DILUTED $ .52 $ .43 $ .99 $ .83 ========== =========== ========= ========== DIVIDENDS PAID PER SHARE $ .11 $ .10 $ .21 $ .19 ========== ========== ========= ========== Average shares outstanding - basic 62,704,433 62,462,192 62,655,854 62,390,230 Average shares outstanding - diluted 63,582,011 62,843,476 63,422,767 62,756,852
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 3
PROTECTIVE LIFE CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS (Dollars in thousands) JUNE 30 DECEMBER 31 1998 1997 ------------------------------------- ASSETS (Unaudited) Investments: Fixed maturities $ 6,400,684 $ 6,374,328 Equity securities 13,131 15,006 Mortgage loans on real estate 1,484,075 1,312,778 Investment real estate, net 11,063 13,602 Policy loans 190,491 194,109 Other long-term investments 67,021 63,511 Short-term investments 82,451 76,086 ------------ ------------- Total investments 8,248,916 8,049,420 Cash 4,594 47,502 Accrued investment income 97,769 95,616 Accounts and premiums receivable, net 35,842 47,784 Reinsurance receivables 614,608 591,613 Deferred policy acquisition costs 675,495 632,737 Property and equipment, net 38,612 36,957 Other assets 105,981 78,541 Assets held in separate accounts 1,201,399 931,465 ------------- ------------- $11,023,216 $10,511,635 LIABILITIES Policy liabilities and accruals $ 3,920,968 $ 3,725,151 Guaranteed investment contract deposits 2,653,241 2,684,676 Annuity deposits 1,550,783 1,511,553 Other policyholders' funds 189,506 183,233 Other liabilities 268,649 306,241 Accrued income taxes (183) 4,907 Deferred income taxes 26,422 41,212 Debt 154,958 120,000 Liabilities related to separate accounts 1,201,399 931,465 ------------ ------------- 9,965,743 9,508,438 ------------ ------------ COMMITMENTS AND CONTINGENT LIABILITIES - NOTE B GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S SUBORDINATED DEBENTURES 9% Cumulative Monthly Income Preferred Securities, Series A 55,000 55,000 8.25% Trust Originated Preferred Securities 75,000 75,000 6.5% FELINE PRIDES 115,000 115,000 ------------ ------------- 245,000 245,000 ------------ ------------- STOCKHOLDERS' EQUITY Preferred Stock, $1 par value Shares authorized: 3,600,000; Issued: none Junior Participating Cumulative Preferred Stock, $1 par value Shares authorized: 400,000; Issued: none Common Stock, $0.50 par value Shares authorized: 1998 - 160,000,000; 1997 - 80,000,000 Shares issued: 1998 and 1997 - 66,672,924 33,336 33,336 Additional paid-in capital 170,903 167,923 Treasury stock (1998 - 4,898,326 shares; 1997 - 5,030,640 shares) (13,140) (13,455) Unallocated stock in Employee Stock Ownership Plan (1998 - 1,291,194 shares; 1997 - 1,386,244 shares) (4,277) (4,592) Retained earnings 562,820 513,258 Accumulated other comprehensive income Net unrealized gains on investments (net of income tax: 1998 - $33,832; 1997 - $33,238) 62,831 61,727 ------------- -------------- 812,473 758,197 ------------- -------------- $11,023,216 $10,511,635 ============= ==============
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 4
PROTECTIVE LIFE CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited) SIX MONTHS ENDED JUNE 30 1998 1997 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income $62,535 $52,313 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of deferred policy acquisition costs 58,269 39,045 Capitalization of deferred policy acquisition costs (103,844) (49,406) Depreciation expense 3,908 473 Deferred income taxes (16,725) (17,592) Accrued income taxes (5,091) 15,209 Interest credited to universal life and investment products 166,829 220,542 Policy fees assessed on universal life and investment products (67,322) (63,778) Change in accrued investment income and other receivables (13,206) 1,483 Change in policy liabilities and other policyholders' funds of traditional life and health products 332,756 (134,897) Change in other liabilities (37,502) (11,162) Other (net) (23,258) (6,419) ------------- -------------- Net cash provided by operating activities 357,349 45,811 ------------ ------------- CASH FLOWS FROM INVESTING ACTIVITIES Maturities and principal reductions of investments Investments available for sale 4,986,996 2,218,195 Other 94,343 58,635 Sale of investments Investments available for sale 306,944 1,012,132 Other 124,129 3,247 Cost of investments acquired Investments available for sale (5,443,497) (3,266,759) Other (264,455) (202,403) Acquisitions and bulk reinsurance assumptions 0 (149,304) Purchase of property and equipment (4,294) (2,788) Sale of property and equipment 19 2,681 ---------------- -------------- Net cash used in investing activities (199,815) (326,364) ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from borrowings under line of credit arrangements and debt 339,500 1,090,138 Principal payments on line of credit arrangements and debt (304,500) (1,140,038) Issuance of preferred securities 75,000 Dividends to stockholders (12,974) (11,711) Investment product deposits and changes in universal life deposits 459,471 465,132 Investment product withdrawals (681,939) (311,251) ------------- ------------- Net cash provided by (used in) financing activities (200,442) 167,270 ------------- ------------- INCREASE (DECREASE) IN CASH (42,908) (113,283) CASH AT BEGINNING OF PERIOD 47,502 121,051 ------------- ------------- CASH AT END OF PERIOD $ 4,594 $ 7,768 ============= ============== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period: Interest on debt $ 3,264 $ 6,108 Income taxes $ 45,607 $ 26,437 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Reissuance of treasury stock to ESOP $ 199 $ 84 Unallocated stock in ESOP $ 315 $ 333 Reissuance of treasury stock $ 3,098 $ 225 Acquisitions Assets acquired $ 3,398 $ 941,462 Liabilities assumed (347) (784,799) Reissuance of treasury stock (3,005) --------- --------- Net $ 46 $ 156,663 ========= =========
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 5 PROTECTIVE LIFE CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) NOTE A - BASIS OF PRESENTATION; STOCK SPLIT 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 six month period ended June 30, 1998, are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. The year-end consolidated condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. 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, 1997. 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 April 1, 1998. 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, unless indicated otherwise, all references to number of shares and per share amounts included herein have been restated to reflect the stock split. NOTE B - 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. A number of civil jury verdicts have been returned against 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. Increasingly these lawsuits have resulted in 6 the award of substantial judgments against the insurer that are disproportionate to the actual damages, including material amounts of punitive damages. In addition, in some class action and other lawsuits involving insurers' sales practices, insurers have made material settlement payments. In some states (including Alabama), juries have substantial discretion in awarding punitive damages which creates the potential for unpredictable material adverse judgments in any given punitive damages suit. The Company and its subsidiaries, like other insurers, in the ordinary course of business, are involved in such litigation. Although the outcome of any such litigation cannot be predicted with certainty, the Company 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 the Company. NOTE C - GUARANTEED PREFERRED BENEFICIAL INTERESTS In 1994 a special purpose finance subsidiary of the Company, PLC Capital L.L.C. ("PLC Capital"), issued $55 million of 9% Cumulative Monthly Income Preferred Securities, Series A ("MIPS(SM)"). On April 29, 1997, another special purpose finance subsidiary, PLC Capital Trust I ("PLC Capital Trust I") issued $75 million of 8.25% Trust Originated Preferred Securities ("TOPrS(SM)"). The MIPS and 8.25% TOPrS are guaranteed on a subordinated basis by the Company. This guarantee, considered together with the other obligations of the Company with respect to the MIPS and 8.25% TOPrS, constitutes a full and unconditional guarantee by the Company of PLC Capital and PLC Capital Trust I's obligations with respect to the MIPS and 8.25% TOPrS. PLC Capital and PLC Capital Trust I were formed solely to issue securities and use the proceeds thereof to purchase subordinated debentures of the Company. The sole assets of PLC Capital are $69.6 million of Protective Life Corporation 9% Subordinated Debentures due June 30, 2024, Series A. The sole assets of PLC Capital Trust I are $77.3 million of Protective Life Corporation 8.25% Subordinated Debentures due 2027, Series B. The Company has the right under the subordinated debentures to extend interest payment periods up to five consecutive years, and, as a consequence, dividends on the MIPS and 8.25% TOPrS may be deferred (but will continue to accumulate, together with additional dividends on any accumulated but unpaid dividends at the dividend rate) by PLC Capital and PLC Capital Trust I, respectively, during any such extended interest payment period. The MIPS are redeemable by PLC Capital at any time on or after June 30, 1999. The 8.25%TOPrS are redeemable by PLC Capital Trust I at any time on or after April 29, 2002. On November 20, 1997, another special purpose finance subsidiary, PLC Capital Trust II, issued $115 million of FELINE PRIDES(SM) which are comprised of a stock purchase contract and a beneficial ownership of 6.5% TOPrS. The sole assets of PLC Capital Trust II are $118.6 million of Protective Life Corporation 6.5% Subordinated Debentures due 2003, Series C. Under the stock purchase contract, on February 16, 2001, the holders will purchase shares of the Company's Common Stock from the Company. The holders may generally settle the contract in cash or by exercising their right to put, in effect, the 6.5% TOPrS back to the Company. The shares of Common Stock issuable range from approximately 3.6 million shares if the price of the Company's Common Stock is greater than or equal to $32.52 to approximately 4.4 million shares if the stock price is less than or equal to $26.66. The 6.5% TOPrS are guaranteed on a subordinated basis by the Company. Dividends on the 6.5% TOPrS may be deferred until maturity. The dividend rate on 7 the 6.5% TOPrS which remain outstanding after February 16, 2001, will be reset by a formula specified in the agreement. The MIPS, 8.25% TOPrS, and FELINE PRIDES are reported in the accompanying balance sheets as "guaranteed preferred beneficial interests in Company's subordinated debentures" and the related dividends are reported in the accompanying statements of income as "minority interest in net income of consolidated subsidiaries". 8 NOTE D - BUSINESS SEGMENTS The Company operates predominantly in the life and accident and health insurance industry. 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 reclassification and tax effecting of pretax minority interest in the Corporate and Other segment, and the recognition of income tax expense. There are no asset adjustments.
OPERATING SEGMENT INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1998 (IN THOUSANDS) SPECIALTY INSURANCE LIFE INSURANCE PRODUCTS DENTAL AND INDIVIDUAL CONSUMER FINANCIAL ACQUISITIONS LIFE WEST COAST BENEFITS INSTITUTIONS Premiums and policy fees $ 48,249 $ 66,945 $13,052 $108,422 $58,323 Net investment income 52,176 27,060 31,142 7,601 11,597 Realized investment gains (losses) Other income 1,600 16,377 1,445 9,655 -------- -------- ---------- -------- -------- Total revenues 102,025 110,382 44,194 117,468 79,575 ------- ------- ------- ------- ------- Benefits and settlement expenses 56,892 54,273 29,238 74,068 27,385 Amortization of deferred policy acquisition costs 9,638 15,194 2,188 5,487 16,181 Other operating expenses 11,698 26,264 2,815 29,882 26,692 -------- ------- -------- ------- ------- Total benefits and expenses 78,228 95,731 34,241 109,437 70,258 -------- ------- ------- ------- ------- Income before tax 23,797 14,651 9,953 8,031 9,317 RETIREMENT SAVINGS AND INVESTMENT PRODUCTS GUARANTEED CORPORATE INVESTMENT INVESTMENT AND TOTAL CONTRACTS PRODUCTS OTHER ADJUSTMENTS CONSOLIDATED Premiums and policy fees $ 8,899 $ 128 $304,018 Net investment income $107,142 52,536 21,401 310,655 Realized investment gains (losses) (59) 678 $ 1,415 2,034 Other income 4,330 (742) 32,665 ----------- -------- --------- ---------- --------- Total revenues 107,083 66,443 20,787 1,415 649,372 -------- ------- ------- ------- -------- Benefits and settlement expenses 89,959 41,772 213 373,800 Amortization of deferred policy acquisition costs 363 9,208 10 58,269 Other operating expenses 987 9,286 13,471 (9,306) 111,789 -------- -------- ------- -------- -------- Total benefits and expenses 91,309 60,266 13,694 (9,306) 543,858 ------- ------- ------- -------- -------- Income before tax 15,774 6,177 7,093 105,514 Income tax expense 36,930 36,930 Minority interest 6,049 6,049 --------- Net income $ 62,535 ========
9
OPERATING SEGMENT INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1997 (IN THOUSANDS) SPECIALTY INSURANCE LIFE INSURANCE PRODUCTS DENTAL AND INDIVIDUAL CONSUMER FINANCIAL ACQUISITIONS LIFE WEST COAST BENEFITS INSTITUTIONS Premiums and policy fees $ 52,914 $64,965 $2,238 $104,182 $18,057 Net investment income 55,750 23,595 4,534 8,351 6,297 Realized investment gains (losses) Other income 10 6,756 643 671 ----------- -------- ---------- ---------- -------- Total revenues 108,674 95,316 6,772 113,176 25,025 -------- ------- ------- -------- ------- Benefits and settlement expenses 60,022 60,055 3,355 74,511 7,667 Amortization of deferred policy acquisition costs 8,532 12,558 1,200 3,145 6,536 Other operating expense 11,939 16,757 1,127 25,292 4,901 --------- ------- ------- -------- -------- Total benefits and expenses 80,493 89,370 5,682 102,948 19,104 --------- ------- ------- -------- ------- Income before income tax 28,181 5,946 1,090 10,228 5,921 RETIREMENT SAVINGS AND INVESTMENT PRODUCTS GUARANTEED CORPORATE INVESTMENT INVESTMENT AND TOTAL CONTRACTS PRODUCTS OTHER ADJUSTMENTS CONSOLIDATED Premiums and policy fees $ 5,087 $ 128 $247,571 Net investment income $104,425 51,603 13,250 $ 29 267,805 Realized investment gains (losses) 107 589 725 Other 2,586 3,002 13,668 ------------ ------- -------- ---------- --------- Total revenues 104,532 59,865 16,380 29 529,769 -------- ------- ------- --------- --------- Benefits and settlement expenses 86,678 40,275 269 332,832 Amortization of deferred policy acquisition costs 273 6,785 16 39,045 Other operating expenses 1,781 6,861 10,026 (3,541) 75,143 -------- ------- ------- -------- --------- Total benefits and expenses 88,732 53,921 10,311 (3,541) 447,020 -------- ------- ------- -------- -------- Income before tax 15,800 5,944 6,069 82,749 Income tax expense 28,135 28,135 Minority interest 2,301 2,301 --------- Net income $ 52,313 ========
10
OPERATING SEGMENT ASSETS JUNE 30, 1998 (IN THOUSANDS) SPECIALTY INSURANCE LIFE INSURANCE PRODUCTS DENTAL AND INDIVIDUAL CONSUMER FINANCIAL ACQUISITIONS LIFE WEST COAST BENEFITS INSTITUTIONS Investments and other assets $1,260,337 $1,021,041 $ 972,470 $254,903 $652,027 Deferred policy acquisition costs 128,529 273,252 129,000 24,973 55,675 ----------- ------------ ----------- --------- --------- Total assets $1,388,866 $1,294,293 $1,101,470 $279,876 $707,702 ========== ========== ========== ======== ======== RETIREMENT SAVINGS AND INVESTMENT PRODUCTS GUARANTEED CORPORATE INVESTMENT INVESTMENT AND TOTAL CONTRACTS PRODUCTS OTHER CONSOLIDATED Investments and other assets $2,851,616 $2,666,629 $668,698 $10,347,721 Deferred policy acquisition costs 1,624 62,432 10 675,495 ------------ ------------ ----------- ------------- Total assets $2,853,240 $2,729,061 $668,708 $11,023,216 ========== ========== ======== =========== OPERATING SEGMENT ASSETS DECEMBER 31, 1997 (IN THOUSANDS) SPECIALTY INSURANCE LIFE INSURANCE PRODUCTS DENTAL AND INDIVIDUAL CONSUMER FINANCIAL ACQUISITIONS LIFE WEST COAST BENEFITS INSTITUTIONS Investments and other assets $1,401,294 $ 963,661 $ 910,030 $264,083 $544,085 Deferred policy acquisition costs 138,052 252,321 108,126 22,459 52,837 ----------- ----------- ----------- --------- --------- Total assets $1,539,346 $1,215,982 $1,018,156 $286,542 $596,922 ========== ========== ========== ======== ======== RETIREMENT SAVINGS AND INVESTMENT PRODUCTS GUARANTEED CORPORATE INVESTMENT INVESTMENT AND TOTAL CONTRACTS PRODUCTS OTHER CONSOLIDATED Investments and other assets $2,887,732 $2,316,495 $591,518 $ 9,878,898 Deferred policy acquisition costs 1,785 56,074 1,083 632,737 ------------- ------------ ---------- ------------- Total assets $2,889,517 $2,372,569 $592,601 $10,511,635 ========== ========== ======== ===========
11 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 June 30, 1998 and for the six months then ended, the Company's life insurance subsidiaries had consolidated stockholder's equity and net income prepared in conformity with statutory reporting practices of $618.3 million and $46.2 million, respectively. NOTE F - INVESTMENTS As prescribed by Statement of Financial Accounting Standards ("SFAS") No. 115, certain investments 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 stockholders' equity. The market values of fixed maturities increase or decrease as interest rates fall or rise. Therefore, although the adoption of SFAS No. 115 does not affect the Company's operations, its reported stockholders' equity will fluctuate significantly as interest rates change. The Company's balance sheets at June 30, 1998 and December 31, 1997, prepared on the basis of reporting investments at amortized cost rather than at market values, are as follows:
JUNE 30, 1998 DECEMBER 31, 1997 ------------- ----------------- (IN THOUSANDS) Total investments $ 8,127,932 $ 7,933,017 Deferred policy acquisition costs 699,816 654,175 All other assets 2,098,805 1,829,478 ------------ ------------ $10,926,553 $10,416,670 =========== =========== Deferred income taxes $ (7,410) $ 7,974 All other liabilities 9,939,321 9,467,226 ------------ ------------ 9,931,911 9,475,200 Guaranteed preferred beneficial interests in Company's sub- ordinated debentures 245,000 245,000 Stockholders' equity 749,642 696,470 ------------- ------------- $10,926,553 $10,416,670 =========== ===========
NOTE G - ACCOUNTING POLICIES FOR DERIVATIVE FINANCIAL INSTRUMENTS The Company does not use derivative financial instruments for trading purposes. Combinations 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, mortgage-backed securities, and liabilities arising from interest-sensitive products such as guaranteed investment contracts and annuities. Realized investment gains and losses on such contracts are 12 deferred and amortized over the life of the hedged asset. At June 30, 1998, options and open futures contracts with a notional amount of $975.0 million were in a $0.5 million net unrealized loss position. The Company uses interest rate swap contracts to convert certain investments from a variable to a fixed rate of interest. The Company also uses interest rate swap contracts and options to enter into interest rate swaps (swaptions) to convert a portion of its Senior Notes, Medium-Term Notes, MIPS, and 8.25% TOPrS from a fixed rate to a variable rate of interest. Amounts paid or received related to the initiation of interest rate swap contracts and swaptions are deferred and amortized over the life of the related debt. At June 30, 1998, related open interest rate swap contracts with a notional amount of $365.3 million were in a $4.1 million net unrealized gain position. In connection with a commercial mortgage loan securitization, the Company entered into interest rate swap contracts converting a fixed rate of interest to a floating rate of interest and converting a floating rate of interest to a fixed rate of interest with a notional amount at June 30, 1998, of $332.4 million. In the aggregate, there were no net unrealized gains or losses associated with these swap contracts at June 30, 1998. NOTE H - NET INCOME PER SHARE Net income per share - basic is net income divided by the average number of shares of Common Stock outstanding including shares that are issuable under various deferred compensation plans. The average shares outstanding used to compute net income per share - basic were 62,655,854 and 62,390,230 for the six months ended June 30, 1998 and 1997, respectively. Net income per share - diluted is net income divided by the average number of shares outstanding including all dilutive potentially issuable shares that are issuable under various stock-based compensation plans and stock purchase contracts. The average shares outstanding used to compute net income per share - diluted were 63,422,767 and 62,756,852 for the six months ended June 30, 1998 and 1997, respectively. A reconciliation of average shares outstanding for the six months ended June 30 is summarized as follows:
RECONCILIATION OF AVERAGE SHARES OUTSTANDING JUNE 30 1998 1997 ---- ---- Issued and outstanding 61,758,403 61,617,489 Issuable under various deferred compensation plans 897,451 772,741 ------------ ----------- Basic 62,655,854 62,390,230 Stock appreciation rights 156,909 Issuable under various other stock-based compensation plans 448,035 366,622 FELINE PRIDES stock purchase contracts 161,969 ------------ ---------- Diluted 63,422,767 62,756,852 ========== ==========
13 NOTE I - COMPREHENSIVE INCOME The following table sets forth the Company's comprehensive income for the six months ended June 30, 1998 and 1997:
SIX MONTHS ENDED JUNE 30 (IN THOUSANDS) 1998 1997 ---- ---- Net income $62,535 $52,313 Increase (decrease) in net unrealized gains on investments (net of income tax: 1998 - $1,306; 1997 - $3,255) 2,426 6,044 Reclassification adjustment for amounts included in net income (net of income tax: 1998 - $(712); 1997 - $(254)) (1,322) (471) -------- --------- Comprehensive income $63,639 $57,886 ======= =======
NOTE J - ACQUISITIONS On March 11, 1998, the Company announced a definitive agreement under which the Company will acquire United Dental Care, Inc. ("United Dental Care"). United Dental Care is a leading provider of managed dental care plans with over 1.8 million members. The purchase price per share of United Dental Care common stock is payable in a combination of $9.31 in cash and 0.2893 shares of the Company's common stock. The transaction is subject to approval by United Dental Care stockholders and regulators and other closing conditions. United Dental Care (subject to the Company's right to increase the merger consideration) or the Company may terminate the agreement if the price of the Company's common stock is below $27.50 per share and the Company may terminate the agreement if the price of the Company's common stock is above $39.50 per share. United Dental Care has approximately 8.9 million shares of its common stock outstanding. On August 7, 1998, the Company announced that one of its subsidiaries has agreed to acquire, through a coinsurance transaction, a block of approximately 260,000 individual life insurance policies from Lincoln National Corporation. The transaction represents approximately $330 million of life insurance reserves and approximately $65 million of annual premium. NOTE K - 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, total assets or stockholders' equity. 14 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. The Company has seven operating divisions: Acquisitions, Individual Life, West Coast, Dental and Consumer Benefits ("Dental"), Financial Institutions, Guaranteed Investment Contracts ("GIC"), and Investment Products. The Company also has an additional business segment which is described herein as Corporate and Other. This report includes "forward-looking statements" which express expectations of future events and/or results. All statements based on future expectations rather than on historical facts are forward- looking statements that involve a number of risks and uncertainties, and the Company cannot give assurance that such statements will prove to be correct. Please refer to Exhibit 99 for more information about factors which could affect future results. 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: SIX MONTHS PREMIUMS AND POLICY FEES ENDED PERCENTAGE JUNE 30 AMOUNT INCREASE/ (IN THOUSANDS) DECREASE 1997 $247,571 (0.1)% 1998 304,018 22.8 Premiums and policy fees increased $56.4 million or 22.8% in the first six months of 1998 over the first six months of 1997. Premiums and policy fees from the Acquisitions Division decreased $4.7 million. The Individual Life Division's premiums and policy fees increased $2.0 million. The acquisition of West Coast Life Insurance Company ("West Coast") in the second quarter of 1997 increased premiums and policy fees $10.8 million. The Dental Division's exit from the group major medical business resulted in an $6.0 million decrease in premiums and policy fees. Premiums and policy fees related to the Dental Division's other businesses increased $10.2 million in the first six months of 1998 as compared to the same period in 1997. Premiums and policy fees from the Financial Institutions Division increased $40.3 million in the first six months of 1998 as 15 compared to the first six months of 1997. The acquisition of the Western Diversified Group ("Western Diversified") and the coinsurance of an unrelated closed block of credit insurance policies in late 1997 increased premiums and policy fees $38.7 million. Decreases of $4.8 million relate to the normal decrease in premiums on a closed block of credit insurance policies reinsured in 1996. The increase in premiums and policy fees from the Investment Products Division was $3.8 million. 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: SIX MONTHS NET INVESTMENT INCOME ENDED AMOUNT PERCENTAGE JUNE 30 (IN THOUSANDS) INCREASE 1997 $267,805 5.1 % 1998 310,655 16.0 Net investment income in the first six months of 1998 was $42.9 million or 16.0% higher than the corresponding period of the preceding year primarily due to increases in the average amount of invested assets and an increase in participating mortgage loan income. Invested assets have increased primarily due to acquisitions and due to receiving annuity deposits. The acquisition of West Coast, Western Diversified, and a block of credit insurance policies in 1997 resulted in an increase in net investment income of $32.5 million in the first six months of 1998 as compared to the same period in 1997. 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 approximate 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 resulted principally from portfolio management decisions to maintain approximate matching of assets and liabilities. The following table sets forth net realized investment gains for the periods shown: SIX MONTHS REALIZED INVESTMENT ENDED GAINS (LOSSES) JUNE 30 (IN THOUSANDS) 1997 $ 725 1998 2,034 Realized investment gains were $2.0 million for the first six months of 1998 compared to $0.7 million for the corresponding period of 1997. 16 OTHER INCOME The following table sets forth other income for the periods shown: SIX MONTHS ENDED OTHER INCOME JUNE 30 (IN THOUSANDS) 1997 $13,668 1998 32,665 Other income consists primarily of revenues of the Company's broker-dealer subsidiary, investment management fees from variable insurance products, revenues of the Company's wholly-owned insurance marketing organizations and small noninsurance subsidiaries, and the results of the Company's 50%-owned joint venture in Hong Kong. Other income in the first six months of 1998 was $19.0 million higher than the corresponding period of 1997. Revenues from the Company's broker-dealer subsidiary increased $8.8 million in the first six months of 1998 as compared to the same period in 1997. The acquisition of Western Diversified in late 1997 resulted in a $4.9 million increase in other income in the first six months of 1998 as compared to the same period in 1997. Other income from all other sources increased $5.3 million in the first six months of 1998 as compared with the first six months of 1997. 17 INCOME BEFORE INCOME TAX AND MINORITY INTEREST The following table sets forth operating income or loss and income or loss before income tax for the periods shown:
OPERATING INCOME (LOSS) AND INCOME (LOSS) BEFORE INCOME TAX SIX MONTHS ENDED JUNE 30 (IN THOUSANDS) 1998 1997 ---- ---- Operating Income (Loss) (1),(2) Life Insurance Acquisitions $23,797 $28,181 Individual Life 14,651 5,946 West Coast 9,953 1,090 Specialty Insurance Products Dental and Consumer Benefits 8,031 10,229 Financial Institutions 9,317 5,921 Retirement Savings and Investment Products Guaranteed Investment Contracts 15,833 15,693 Investment Products 5,866 5,728 Corporate and Other2 7,093 6,069 -------- -------- Total operating income 94,541 78,857 ------- ------- Realized Investment Gains (Losses) Guaranteed Investment Contracts (59) 107 Investment Products 678 589 Unallocated Realized Investment Gains (Losses) 1,415 29 Related Amortization Deferred Poilcy Acquisition Costs Investment Products (367) (373) --------- --------- Total net 1,667 352 -------- -------- Income (Loss) Before Income Tax 2 Life Insurance Acquisitions 23,797 28,181 Individual Life 14,651 5,946 West Coast 9,953 1,090 Specialty Insurance Products Dental and Consumer Benefits 8,031 10,229 Financial Institutions 9,317 5,921 Retirement Savings and Investment Products Guaranteed Investment Contracts 15,774 15,800 Investment Products 6,177 5,944 Corporate and Other2 7,093 6,069 Unallocated Realized Investment Gains (Losses) 1,415 29 -------- ---------- Total income before income tax $96,208 $79,209 ======= =======
(1) Income before income tax excluding realized investment gains and losses and related amortization of deferred acquisition costs. (2) Operating income and income before income tax for the Corporate and Other segment have been reduced by pretax minority interest in income of consolidated subsidiaries of $3,541 in the first six months of 1997 and $9,306 in the first six months of 1998. Such minority interest related to payments made on the Company's MIPS(sm), 8.25% TOPrS(sm), and FELINE PRIDE (sm). 18 Pretax earnings from the Acquisitions Division decreased $4.4 million in the first six months of 1998 as compared to the same period of 1997. 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. In addition, the Division's mortality experience was approximately $2.1 million worse than expected in the first six months of 1998 as compared to being approximately $1.7 million better than expected in the first six months of 1997. The Individual Life Division's pretax earnings of $14.7 million in the first six months of 1998 were $8.7 million above the same period of 1997. In the second quarter of 1997, the Division experienced record high mortality. Mortality experience was at expected levels in the second quarter of 1998 after having been above expected levels in the first quarter of 1998. West Coast had pretax earnings of $10.0 million for the first six months of 1998 compared to $1.1 million in the first six months of 1997. The Division was acquired by the Company in June 1997, therefore last year's results represent only one month of operations. Dental Division pretax earnings were $2.2 million lower in the first six months of 1998 as compared to the first six months of 1997. Last year's results include $3.1 million of earnings from the group major medical business which the Division exited last year. Pretax earnings of the Financial Institutions Division were $3.4 million higher in the first six months of 1998 as compared to the same period in 1997. At the end of the 1997 third quarter, the Division acquired the Western Diversified Group and coinsured an unrelated block of policies. These acquisitions increased earnings $3.1 million in the first six months of 1998 as compared to the same period last year. The GIC Division had pretax operating earnings of $15.8 million in the first six months of 1998 and $15.7 million in the corresponding period of 1997. Realized investment losses associated with this Division in the first six months of 1998 were less than $0.1 million as compared to $0.1 million of realized investment gains in the same period last year. As a result, total pretax earnings were $15.7 million in the first six months of 1998 compared to $15.8 million for the same period last year. Investment Products Division pretax operating earnings of $5.9 million were $0.1 million lower in the first six months of 1998 compared to the same period of 1997. Realized investment gains associated with the Division, net of related amortization of deferred policy acquisition costs, were approximately $0.3 million in the first six months of 1998 compared to $0.2 million in the first six months of 1997. Total pretax earnings were $6.2 million in the first six months of 1998 as compared to $5.9 million in the same period of 1997. The Corporate and Other segment consists primarily of net investment income on capital, interest expense on substantially all debt, the Company's 50%-owned joint venture in Hong Kong, several small insurance lines of business, and the operations of several small noninsurance subsidiaries. Pretax earnings for this segment increased $1.0 million in the first six months of 1998 as compared to the first six months of 1997. 19 INCOME TAXES The following table sets forth the effective income tax rates for the periods shown: SIX MONTHS ENDED ESTIMATED EFFECTIVE JUNE 30 INCOME TAX RATES 1997 34.0 % 1998 35.0 The effective income tax rate for the full year of 1997 was 34%. Management's estimate of the effective income tax rate for 1998 is 35%. NET INCOME The following table sets forth net income and the net income per share for the periods shown, and the percentage change from the prior period:
SIX MONTHS NET INCOME ENDED TOTAL PER SHARE- PERCENTAGE PER SHARE- PERCENTAGE JUNE 30 (IN THOUSANDS) BASIC INCREASE DILUTED INCREASE - ----------- ------------- --------------- ------------- ------------ ---------- 1997 $52,313 $ .84 12.0% $.83 10.7% 1998 62,535 1.00 19.1 .99 19.3
Compared to the same period in 1997, net income per share-basic in the first six months of 1998 increased 19.1%, reflecting improved operating earnings in the Individual Life, West Coast, Financial Institutions, Guaranteed Investment Contracts and Investment Products Divisions and the Corporate and Other segment, and higher realized investment gains (net of related amortization of deferred policy acquisition costs), which were partially offset by lower operating earnings in the Acquisitions and Dental Divisions. RECENTLY ISSUED ACCOUNTING STANDARDS The Financial Accounting Standards Board ("FASB") has issued Statement of Financial Accounting Standards No. ("SFAS") 132, "Employer's Disclosures About Pension and Other Postretirement Benefits" which revises the footnote disclosures about pension and other postretirement benefit plans. The FASB has also issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The adoption of these accounting standards are not expected to have a material effect on the Company's financial condition. 20 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. Since future benefit payments largely represent medium- and 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. Many of the Company's products contain surrender charges and other features that reward persistency and penalize the early withdrawal of funds. Surrender charges for these products generally are 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 that protect the Company against investment losses if interest rates are higher at the time of surrender than at the time of issue. The Company's investments in debt and equity securities are reported at market value, and investments in mortgage loans are reported at amortized cost. At June 30, 1998, the fixed maturity investments (bonds, bank loan participations, and redeemable preferred stocks) had a market value of $6,400.7 million, which is 2.1% above amortized cost (less allowances for uncollectible amounts on investments) of $6,267.8 million. The Company had $1,484.1 million in mortgage loans at June 30, 1998. While the Company's mortgage loans do not have quoted market values, at June 30, 1998, the Company estimates the market value of its mortgage loans to be $1,589.8 million (using discounted cash flows from the next call date) which is 7.1% 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 type of commercial loan 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 $384.9 million of the Company's mortgage loans have this participation feature. At June 30, 1998, delinquent mortgage loans and foreclosed real estate were 0.2% of assets. Bonds rated less than investment grade were 2.2% of assets. The Company does not expect these investments to adversely affect its liquidity or ability to maintain proper matching of assets and liabilities. The Company's allowance for uncollectible amounts on investments was $22.0 million at June 30, 1998. Policy loans at June 30, 1998, were $190.5 million, a decrease of $3.6 million from December 31, 1997. Policy loan rates are generally in the 4.5% to 8.0% range and are at least equal to the assumed interest rates used for future policy benefits. The Company believes its asset/liability management programs and procedures 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 21 Company 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. The Company'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 the Company's general policy to generally maintain asset and liability durations within one half year of one another, although from time to time broader interval may be allowed. The Company does not use derivative financial instruments for trading purposes. Combinations 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, mortgage-backed securities, and liabilities arising from interest-sensitive products such as guaranteed investment contracts and annuities. Realized investment gains and losses on such contracts are deferred and amortized over the life of the hedged asset. At June 30, 1998, options and open futures contracts with a notional amount of $975.0 million were in a $0.5 million net unrealized loss position. The Company uses interest rate swap contracts to convert certain investments from a variable to a fixed rate of interest. The Company also uses interest rate swap contracts and options to enter into interest rate swaps (swaptions) to convert a portion of its Senior Notes, Medium-Term Notes, MIPS, and TOPrS from a fixed rate to a variable rate of interest. Amounts paid or received related to the initiation of interest rate swap contracts and swaptions are deferred and amortized over the life of the related debt. At June 30, 1998, related open interest rate swap contracts with a notional amount of $365.3 million were in a $4.1 million net unrealized gain position. In connection with a commercial mortgage loan securitization, the Company entered into interest rate swap contracts converting a fixed rate of interest to a floating rate of interest and converting a floating rate of interest to a fixed rate of interest with a notional amount at June 30, 1998, of $332.4 million. In the aggregate, there were no net unrealized gains or losses associated with these swap contracts at June 30, 1998. Withdrawals related to GICs were approximately $700 million during 1997. Withdrawals related to GICs are estimated to be approximately $900 million in 1998. The Company's asset/liability management programs and procedures take into account GIC withdrawals. Accordingly, the Company does not expect GIC withdrawals to have an unusual effect on the future operations and liquidity of the Company. In anticipation of receiving GIC and annuity deposits, the life insurance subsidiaries were committed at June 30, 1998, to fund mortgage loans and to purchase fixed maturity and other long-term investments in the amount of $618.8 million. The Company's subsidiaries held $87.0 million in cash and short-term investments at June 30, 1998. 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 use when needed. The Company expects that the rate received on its investments will equal or exceed 22 its borrowing rate. Additionally, the Company may from time to time sell short-duration GICs to complement its cash management practices. At June 30, 1998, Protective Life Corporation had no borrowings outstanding under its $70 million revolving line of credit. However, at June 30, 1998, Protective Life Insurance Company had $35.0 million of short-term borrowings with an interest rate of 5.9%. Protective Life Corporation's cash flow is dependent on cash dividends and payments on surplus notes from its subsidiaries, revenues from investment, data processing, legal, and management services rendered to the subsidiaries, and investment income. At December 31, 1997, approximately $154 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 $727 million, would be subject to federal income tax at rates then effective. Due to the expected growth of the Company's insurance sales, the Company plans to retain substantial portions of the earnings of its life insurance subsidiaries in those companies primarily to support their future growth. Protective Life Corporation's cash disbursements have from time to time exceeded its cash receipts, and these 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 acquisitions and other growth opportunities, the Company has registered common stock 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 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 the Company's insurance subsidiaries. The subsidiaries may secure additional statutory capital through various sources, such as retained statutory earnings or equity contributions by the Company. 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 reflected in the financial statements. A number of civil jury verdicts have been returned against 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. Increasingly these lawsuits have resulted in the award of substantial judgments against the insurer that are disproportionate to the actual damages, including material amounts of punitive damages. In addition, in some class action and other lawsuits 23 involving insurers' sales practices, insurers have made material settlement payments. In some states (including Alabama), juries have substantial discretion in awarding punitive damages which creates the potential for unpredictable material adverse judgments in any given punitive damages suit. The Company and its subsidiaries, like other insurers, in the ordinary course of business, are involved in such litigation. Although the outcome of any such litigation cannot be predicted with certainty, the Company 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 the Company. President Clinton's recent budget proposal contains provisions that would change the way insurance companies and certain of their products are taxed, which, if enacted by Congress would negatively affect 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. YEAR 2000 DISCLOSURE. Computer hardware and software often denote the year using two digits rather than four; for example, the year 1998 often is denoted by such hardware and software as "98." It is probable that such hardware and software will malfunction when calculations involving the year 2000 are attempted because the hardware and/or software will interpret "00" as representing the year 1900 rather that the year 2000. This "Year 2000" issue potentially affects all individuals and companies (including the Company, its customers, business partners, suppliers, banks, custodians and administrators). The problem is most prevalent in older mainframe systems, but personal computers and equipment containing computer chips could also be affected. The Company began to work on the year 2000 problem in 1995 and has developed and has implemented a Year 2000 transition plan intended to identify and modify or replace important hardware and/or software systems on which it relies that have Year 2000 issues or to develop appropriate contingency measures. Substantial resources are being devoted to this effort; however, the total costs to develop and implement these plans are not expected to be material. The Company is also confirming that its service providers are implementing plans to identify and modify or replace their systems that have a Year 2000 issue. The majority of the modifications necessary for the Company's mainframe systems to be able to process transactions dated beyond 1999 have been completed. The Company currently anticipates that its remaining systems with Year 2000 issues will be addressed and appropriate action taken before December 31, 1999. Due to the fact that the Company does not control all of the factors that could impact its year 2000 readiness, there can be no assurances that the Company's efforts will be successful, that interactions with other service providers with Year 2000 issues will not impair the Company's operations, or that the Year 2000 issue will not otherwise adversely affect the Company. The Company is developing detailed contingency plans for a large percentage of its remaining Year 2000 issues. The Company is also using research, direct inquiry, and/or testing to determine the Year 2000 readiness of critical vendors and business partners. Should some of the Company's systems not be available due to Year 2000 problems, in a reasonably likely worst case scenario, the Company may experience significant delays in its ability to perform certain functions, but does not expect an inability to perform critical functions or to otherwise conduct business. 24 PART II Item 5. OTHER INFORMATION The federal proxy rules specify what constitutes timely submission for a stockholder proposal to be included in the proxy statement. If a stockholder desires to bring business before an annual meeting of stockholders which is not the subject of a proposal to be included in the proxy statement, the shareholder must follow procedures outlined in the Company's By-laws. A copy of these procedures is available upon request from the Secretary of the Company, P.O. Box 2606, Birmingham, Alabama 35202. One of the procedural requirements in the By-laws is the timely notice in writing of the business the stockholder proposes to bring before an annual meeting of stockholders. Such notice must be received by the Secretary of the Company not less than 60 days nor more than 90 days prior to the first anniversary of the preceding year's annual stockholder meeting. With respect to the 1999 Annual Meeting of Stockholders, such notice must be received between December 27, 1998 and January 26, 1999. Item 6. EXHIBITS AND REPORTS ON FORM 8-K 3(a)(1) 1985 Restated Certificate of Incorporation of Protective Life Corporation (incorporated by reference to Exhibit 3(a) to Protective Life Corporation's Form 10-K Annual Report for the year ended December 31, 1993). 3(a)(2) Certificate of Amendment of 1985 Restated Certificate of Incorporation of Protective Life Corporation filed with the Secretary of State of Delaware on June 1, 1987 (incorporated by reference to Exhibit 3(a)(1) to Protective Life Corporation's Form 10-K Annual Report for the year ended December 31, 1993). 3(a)(3) Certificate of Amendment of 1985 Restated Certificate of Incorporation of Protective Life Corporation filed with the Secretary of State of Delaware on May 5, 1994 (incorporated by reference to Exhibit 3(a)(5) to Protective Life Corporation's Form 10-Q Quarterly Report for the period ended March 31, 1994). 3(a)(4) Certificate of Amendment of 1985 Restated Certificate of Incorporation of Protective Life Corporation filed with the Secretary of State of Delaware on April 30, 1998 (incorporated by reference to Exhibit 4(a)(4) to Protective Life Corporation's Amendment No. 1 to Form S-4 Registration Statement filed on August 6, 1998 (Reg. No. 333-60535)). 3(a)(5) Certificate of Designation of Junior Participating Cumulative Preferred Stock of Protective Life Corporation filed with the Secretary of State of Delaware on August 9, 1995 (incorporated by reference to Exhibit A to Exhibit 1 to Protective Life Corporation's Form 8-A Report filed on August 7, 1995). 25 3(a)(6) Certificate of Decrease of Shares Designated as Junior Participating Cumulative Preferred Stock of Protective Life Corporation filed with the Secretary of State of Delaware on August 8, 1995 (incorporated by reference to Exhibit 3(a)(4) to Protective Life Corporation's Form 10-K Annual Report for the year ended December 31, 1995). 3(b)(1) 1995 Amended and Restated By-laws of Protective Life Corporation (incorporated by reference to Exhibit 3(b) to Protective Life Corporation's Form 10-K Annual Report for the year ended December 31, 1996). 3(b)(2) Amendment dated March 3, 1997 to the 1995 Amended and Restated By-laws of Protective Life Corporation (incorporated by reference to Exhibit 3(b) to Protective Life Corporation's Form 10-K Annual Report for the year ended December 31, 1996). 3(b)(3) Amendment dated March 2, 1998 to the 1995 Amended and Restated By-laws of Protective Life Corporation (incorporated by reference to Exhibit 4(b)(2) to Protective Life Corporation's Amendment No. 1 to Form S-4 Registration Statement filed on August 6, 1998 (Reg. No. 333-60535)). 15 Letter re: unaudited interim financial statements 27 Financial Data Schedule 99 Safe harbor for Forward Looking Statements (b). A current report on Form 8-K was filed April 23, 1998, reporting under Item 5 and Item 7 the Company's 1998 first quarter earnings press release. 26 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: August 14, 1998 /S/ JERRY W. DEFOOR ---------------------- Jerry W. DeFoor Vice President and Controller, and Chief Accounting Officer (Duly authorized officer) 27 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 July 28, 1998, on our review of interim consolidated financial information of Protective Life Corporation and subsidiaries for the period ended June 30, 1998, 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, Form S-3, and Form S-4. Pursuant to Rule 436(c) 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. PricewaterhouseCoopers LLP Birmingham, Alabama August 14, 1998 EX-27 3
7 This schedule contains summary financial information extracted from the consolidated financial statements of Protectove Life Corporation and is qualified in its entirety by reference to such financial statements. 1,000 6-MOS 6-MOS DEC-31-1998 DEC-31-1997 JAN-01-1998 JAN-01-1997 JUN-30-1998 Jun-30-1997 6,400,684 5,216,866 0 0 0 0 13,131 24,425 1,484,075 1,737,542 11,063 12,072 8,248,916 7,427,491 4,594 7,768 614,608 442,759 675,495 621,445 11,023,216 9,480,662 3,527,827 3,115,898 393,141 249,499 0 0 189,506 167,479 154,958 131,100 0 0 0 0 33,336 33,336 779,137 628,796 11,023,216 9,480,662 304,018 247,571 310,655 267,805 2,034 725 32,665 13,668 373,800 332,832 58,269 39,045 111,789 75,143 105,514 82,749 36,930 28,135 62,535 52,313 0 0 0 0 0 0 62,535 52,313 1.00 0.84 0.99 0.83 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Reflects two for one stock split effective April 1, 1998. Net of minority interest in income of consolidated subsidiaries of $6,049. Net of minority interest in income of consolidated subsidiaries of $2,301.
EX-99 4 Exhibit 99 to Form 10-Q of Protective Life Corporation for the six months ended June 30, 1998 Safe Harbor for Forward-Looking Statements The Private Securities Litigation Reform Act of 1995 (the "Act") encourages companies to make "forward-looking statements" by creating a safe harbor to protect the companies from securities law liability in connection with forward-looking statements. Forward-looking statements can be identified by use of words such as "expect," "estimate," "project, " budget," "forecast," "anticipate," "plan," and similar expressions. Protective Life Corporation (the "Company") intends to qualify both its written and oral forward-looking statements for protection under the Act. To qualify oral forward-looking statements for protection under the Act, a readily available written document must identify important factors that could cause actual results to differ materially from those in the forward-looking statements. The Company provides the following information to qualify forward-looking statements for the safe harbor protection of the Act. The operating results of companies in the insurance industry have historically been subject to significant fluctuations due to competition, economic conditions, interest rates, investment performance, maintenance of insurance ratings, and other factors. Certain known trends and uncertainties which may affect future results of the Company are discussed more fully below. MATURE INDUSTRY; COMPETITION. Life and health insurance is a mature industry. In recent years, the industry has experienced virtually no growth in life insurance sales, though the aging population has increased the demand for retirement savings products. Insurance is a highly competitive industry and the Company encounters significant competition in all lines of business from other insurance companies, many of which have greater financial resources than the Company, as well as competition from other providers of financial services. The life and health insurance industry is consolidating, with larger, more efficient organizations emerging from consolidation. Also, mutual insurance companies are converting to stock ownership which will give them greater access to capital markets. Management believes that the Company'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 claims-paying and financial strength ratings from rating agencies. The Company competes against other insurance companies and financial institutions in the origination of commercial mortgage loans. RATINGS. Ratings are an important factor in the competitive position of life insurance companies. Rating organizations periodically review the financial performance and condition of insurers, including the Company's insurance subsidiaries. A downgrade in the ratings of the Company's life insurance subsidiaries could adversely affect its ability to sell its products and its ability to compete for attractive acquisition opportunities. Rating organizations assign ratings based upon several factors. While most of the considered factors relate to the rated company, some of the factors relate to general economic conditions and circumstances outside the rated company's control. For the past several years rating downgrades in the industry have exceeded upgrades. POLICY CLAIMS FLUCTUATIONS. The Company's results may fluctuate from year to year on account of fluctuations in policy claims received by the Company. LIQUIDITY AND INVESTMENT PORTFOLIO. Many of the products offered by the Company's life insurance subsidiaries allow policyholders and contractholders to withdraw their funds under defined circumstances. The Company's insurance subsidiaries design products and configure investment portfolios so as to provide and maintain sufficient liquidity to support anticipated withdrawal demands and contract benefits and maturities. Formal asset/liability management programs and procedures are used to monitor the relative duration of the Company's assets and liabilities. While the Company's life insurance subsidiaries own a significant amount of liquid assets, many of their assets are relatively illiquid. Significant unanticipated withdrawal or surrender activity could, under some circumstances, compel the Company's insurance subsidiaries to dispose of illiquid assets on unfavorable terms, which could have a material adverse effect on the Company. INTEREST RATE FLUCTUATIONS. Sudden and/or 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 rates paid on outstanding policies. Both rising and declining interest rates can negatively affect the Company's spread income. For example, certain of the Company's insurance and investment products guarantee a minimum credited interest rate. While the Company 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 significant changes in interest rates will not materially affect such spreads. Lower interest rates may result in lower sales of the Company's insurance and investment products. REGULATION AND TAXATION. The Company's 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 all aspects of the insurance business including premium rates, marketing practices, advertising, policy forms, and capital adequacy, and is concerned primarily with the protection of policyholders rather than stockholders. The Company cannot predict the form of any future regulatory initiatives. 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 the Company's products a competitive advantage over other non-insurance products. Congress is currently reviewing certain proposals contained in President Clinton's Fiscal Year 1999 Budget which, if enacted, would adversely impact the tax treatment of variable annuity and certain other life 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 the Company's subsidiaries, would be adversely affected with respect to their ability to sell such products, and, depending on grandfathering provisions, the surrenders of existing annuity contracts and life insurance policies. The Company cannot predict what future initiatives the President or Congress may propose which may affect the Company. LITIGATION. A number of civil jury verdicts have been returned against 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. Increasingly these lawsuits have resulted in the award of substantial judgments against the insurer that are disproportionate to the actual damages, including material amounts of punitive damages. In some states (including Alabama), juries have substantial discretion in awarding punitive damages which creates the potential for unpredictable material adverse judgments in any given punitive damages suit. The Company and its subsidiaries, like other insurers, in the ordinary course of business, are involved in such litigation. The outcome of any such litigation cannot be predicted with certainty. In addition, in some class action and other lawsuits involving insurers' sales practices, insurers have made material settlement payments. INVESTMENT RISKS. The Company's invested assets are subject to customary risks of defaults and changes in market values. The value of the Company's commercial mortgage portfolio depends in part on the financial condition of the tenants occupying the properties which the Company has financed. Factors that may affect the overall default rate on, and market value of, the Company's invested assets include interest rate levels, financial market performance, and general economic conditions, as well as particular circumstances affecting the businesses of individual borrowers and tenants. CONTINUING SUCCESS OF ACQUISITION STRATEGY. The Company has actively pursued a strategy of acquiring blocks of insurance policies. This acquisition strategy has increased the Company's earnings in part by allowing the Company to position itself to realize certain operating efficiencies associated with economies of scale. There can be no assurance, however, that suitable acquisitions, presenting opportunities for continued growth and operating efficiencies, will continue to be available to the Company, or that the Company will realize the anticipated financial results from its acquisitions. RELIANCE UPON THE PERFORMANCE OF OTHERS. The Company has entered into various ventures involving other parties. Examples include, but are not limited to: many of the Company's products are sold through independent distribution channels; the Investment Products Division's variable annuity deposits are invested in funds managed by unaffiliated investment managers; a portion of the sales in the Individual Life, Dental, and Financial Institutions Divisions comes from arrangements with unrelated marketing organizations; and the Company has entered the Hong Kong insurance market in a joint venture. Therefore the Company's results may be affected by the performance of others. YEAR 2000. Computer hardware and software often denote the year using two digits rather than four; for example, the year 1998 often is denoted by such hardware and software as "98." It is probable that such hardware and software will malfunction when calculations involving the year 2000 are attempted because the hardware and/or software will interpret "00" as representing the year 1900 rather that the year 2000. This "Year 2000" issue potentially affects all individuals and companies (including the Company, its customers, business partners, suppliers, banks, custodians and administrators). The problem is most prevalent in older mainframe systems, but personal computers and equipment containing computer chips could also be affected. The Company began to work on the year 2000 problem in 1995 and has developed and has implemented a Year 2000 transition plan intended to identify and modify or replace important hardware and/or software systems on which it relies that have Year 2000 issues or to develop appropriate contingency measures. Substantial resources are being devoted to this effort; however, the total costs to develop and implement these plans are not expected to be material. The Company is also confirming that its service providers are implementing plans to identify and modify or replace their systems that have a Year 2000 issue. The majority of the modifications necessary for the Company's mainframe systems to be able to process transactions dated beyond 1999 have been completed. The Company currently anticipates that its remaining systems with Year 2000 issues will be addressed and appropriate action taken before December 31, 1999. Due to the fact that the Company does not control all of the factors that could impact its year 2000 readiness, there can be no assurances that the Company's efforts will be successful, that interactions with other service providers with Year 2000 issues will not impair the Company's operations, or that the Year 2000 issue will not otherwise adversely affect the Company. The Company is developing detailed contingency plans for a large percentage of its remaining Year 2000 issues. The Company is also using research, direct inquiry, and/or testing to determine the Year 2000 readiness of critical vendors and business partners. Should some of the Company's systems not be available due to Year 2000 problems, in a reasonably likely worst case scenario, the Company may experience significant delays in its ability to perform certain functions, but does not expect an inability to perform critical functions or to otherwise conduct business. REINSURANCE. As is customary in the insurance industry, the Company's insurance subsidiaries cede insurance to other insurance companies. However, the ceding insurance company remains liable with respect to ceded insurance should any reinsurer fail to meet the obligations assumed by it. Additionally, the Company assumes policies of other insurers. Any regulatory or other adverse development affecting the ceding insurer could also have an adverse effect on the Company. Forward-looking statements express expectations of future events and/or results. All forward-looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected. Due to these inherent uncertainties, investors are urged not to place undue reliance on forward-looking statements. In addition, the Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events, or changes to projections over time. -----END PRIVACY-ENHANCED MESSAGE-----