-----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, RR2npY3zty6o5ekfgFQ3aSJalAQv1la/rRvTxPd3mzwWsvxuG0pmbwlnHsa4kA4S DAQmGyyB44GgqsGVGZIUYQ== 0000355429-97-000018.txt : 19970815 0000355429-97-000018.hdr.sgml : 19970815 ACCESSION NUMBER: 0000355429-97-000018 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 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: 97661964 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, 1997 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 8, 1997: 30,814,136 shares. PROTECTIVE LIFE CORPORATION INDEX PAGE NUMBER 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, 1997 and 1996 (unaudited)................. Consolidated Condensed Balance Sheets as of June 30, 1997 (unaudited) and December 31, 1996............................... Consolidated Condensed Statements of Cash Flows for the Six Months ended June 30, 1997 and 1996 (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 June 30, 1997, and the related consolidated condensed statements of income for the three-month and six-month periods ended June 30, 1997 and 1996 and consolidated condensed statements of cash flows for the six-month periods ended June 30, 1997 and 1996. 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, 1996, 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, 1997, 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, 1996, 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 July 23, 1997 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 ------------------------------------------------------- 1997 1996 1997 1996 ---- ---- ---- ---- REVENUES Premiums and policy fees (net of reinsurance ceded: three months: 1997 - $71,873; 1996 - $88,232 six months: 1997 - $125,916; 1996 - $166,535) $117,993 $132,251 $247,571 $247,837 Net investment income 137,475 130,560 267,805 254,840 Realized investment gains (losses) 1,143 600 725 5,021 Other income 8,906 4,972 13,668 10,430 --------- --------- -------- -------- 265,517 268,383 529,769 518,128 -------- -------- -------- -------- BENEFITS AND EXPENSES Benefits and settlement expenses (net of reinsurance ceded: three months: 1997 - $24,394; 1996 - $61,030 six months: 1997 - $40,833; 1996 - $117,781) 169,813 164,057 332,832 317,197 Amortization of deferred policy acquisition costs 18,210 29,522 39,045 51,340 Other operating expenses (net of reinsurance ceded: three months: 1997 - $22,042; 1996 - $25,007 six months: 1997 - $36,616; 1996 - $42,809) 33,513 38,281 75,143 79,928 -------- -------- ------- -------- 221,536 231,860 447,020 448,465 -------- -------- -------- -------- INCOME BEFORE INCOME TAX AND MINORITY INTEREST 43,981 36,523 82,749 69,663 Income tax expense 14,954 12,417 28,135 23,685 -------- -------- ------- ------- INCOME BEFORE MINORITY INTEREST 29,027 24,106 54,614 45,978 Minority interest in net income of consolidated subsidiaries 1,497 805 2,301 1,609 -------- -------- -------- -------- NET INCOME $ 27,530 $ 23,301 $ 52,313 $ 44,369 ======== ======== ======== ======== NET INCOME PER SHARE $ .88 $ .78 $ 1.68 $ 1.51 ========== ========== ========== ========== DIVIDENDS PAID PER SHARE $ .20 $ .18 $ .38 $ .34 ========== ========== =========== =========== Average shares outstanding 31,243,771 29,805,228 31,203,065 29,412,794
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 3
PROTECTIVE LIFE CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS (Dollars in thousands) JUNE 30 DECEMBER 31 1997 1996 ------------------------------------- ASSETS (Unaudited) Investments: Fixed maturities $5,216,866 $4,686,072 Equity securities 24,425 35,250 Mortgage loans on real estate 1,737,542 1,503,080 Investment real estate, net 12,072 14,305 Policy loans 195,635 166,704 Other long-term investments 32,298 32,506 Short-term investments 208,653 114,258 ----------- ----------- Total investments 7,427,491 6,552,175 Cash 7,768 121,051 Accrued investment income 83,398 70,544 Accounts and premiums receivable, net 42,349 47,371 Reinsurance receivables 442,759 332,614 Deferred policy acquisition costs 621,445 488,384 Property and equipment, net 38,283 36,091 Other assets 70,943 64,278 Assets held in separate accounts 746,226 550,697 ----------- ----------- $9,480,662 $8,263,205 ========== ========== LIABILITIES Policy liabilities and accruals $3,365,397 $2,709,386 Guaranteed investment contract deposits 2,545,193 2,474,728 Annuity deposits 1,516,256 1,331,067 Other policyholders' funds 167,479 142,221 Other liabilities 178,050 170,442 Accrued income taxes 8,457 (4,521) Deferred income taxes 30,372 37,869 Debt 131,100 181,000 Liabilities related to separate accounts 746,226 550,697 ------------ ------------ 8,688,530 7,592,889 ----------- ----------- 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 ------------- ------------ 130,000 55,000 ------------ ------------ 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: 80,000,000 Issued: 1997 and 1996 - 33,336,462 16,668 16,668 Additional paid-in capital 166,972 166,713 Net unrealized gains (losses) on investments (net of income tax: 1997 - $6,612; 1996 - $3,601) 12,261 6,688 Retained earnings 482,647 442,046 Treasury stock (1997 - 2,522,326 shares; 1996 - 2,561,344 shares) (11,824) (11,874) Unallocated stock in Employee Stock Ownership Plan (1997 - 693,120 shares; 1996 - 743,462 shares) (4,592) (4,925) ------------ ------------ 662,132 615,316 ----------- ----------- $9,480,662 $8,263,205 ========== ==========
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 1997 1996 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 52,313 $ 44,369 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of deferred policy acquisition costs 39,045 51,340 Capitalization of deferred policy acquisition costs (49,406) (47,816) Depreciation expense 473 3,265 Deferred income taxes (17,592) (11,502) Accrued income taxes 15,209 5,116 Interest credited to universal life and investment products 220,542 135,915 Policy fees assessed on universal life and investment products (63,778) (53,936) Change in accrued investment income and other receivables 1,483 (69,529) Change in policy liabilities and other policyholders' funds of traditional life and health products (134,897) 109,484 Change in other liabilities (11,162) 17,886 Other (net) (6,419) (11,986) ---------- ----------- Net cash provided by operating activities 45,811 172,606 ------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Maturities and principal reductions of investments Investments available for sale 2,218,195 394,592 Other 58,635 35,649 Sale of investments Investments available for sale 1,012,132 559,300 Other 3,247 560,840 Cost of investments acquired Investments available for sale (3,266,759) (1,671,234) Other (202,403) (244,164) Acquisitions and bulk reinsurance assumptions (149,304) 172,726 Purchase of property and equipment (2,788) (2,859) Sale of property and equipment 2,681 334 ------------ ------------- Net cash used in investing activities (326,364) (194,816) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from borrowings under line of credit arrangements and debt 1,090,138 731,734 Principal payments on line of credit arrangements and debt (1,140,038) (708,734) Issuance of Common Stock 0 70,538 Issuance of preferred securities 75,000 0 Dividends to stockholders (11,711) (9,799) Investment product deposits and changes in universal life deposits 465,132 425,110 Investment product withdrawals (311,251) (479,124) ----------- ------------ Net cash provided by (used in) financing activities 167,270 29,725 ----------- ------------ INCREASE (DECREASE) IN CASH (113,283) 7,515 CASH AT BEGINNING OF PERIOD 121,051 11,392 ----------- ------------ CASH AT END OF PERIOD $ 7,768 $ 18,907 ============ =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period: Interest on debt $ (6,108) $ (5,291) Income taxes $ (26,437) $ (28,896) SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Reissuance of treasury stock to ESOP $ 84 $ 669 Unallocated stock in ESOP $ 333 $ 334 Reissuance of treasury stock $ 225 231 Acquisitions Assets acquired $ 941,462 $ 204,435 Liabilities assumed (784,799) (253,480) ----------- ---------- Net $ 156,663 $(49,045) ======== ========
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 5 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 six month period ended June 30, 1997, are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. 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, 1996. 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 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. 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 life and health 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, 6 in some lawsuits involving insurers' sales practices, insurers have made material settlement payments to end litigation. Pending litigation includes a class action filed in Jefferson County (Birmingham), Alabama with respect to the refund of certain cancer insurance premiums. Although the outcome of any 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 - PREFERRED SECURITIES 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"). On April 29, 1997, another special purpose finance subsidiary, PLC Capital Trust I ("PLC Capital Trust") issued $75 million of 8.25% Trust Originated Preferred Securities ("TOPrS"). The MIPS and 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 TOPrS, constitutes a full and unconditional guarantee by the Company of PLC Capital and PLC Capital Trust's obligations with respect to the MIPS and TOPrS. PLC Capital and PLC Capital Trust 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% Series A Subordinated Debentures due June 30, 2024. The sole assets of PLC Capital Trust 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 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, 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 TOPrS are redeemable by PLC Capital Trust at any time on or after April 29, 2002. The MIPS and TOPrS 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". 7 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.
SIX MONTHS ENDED JUNE 30 1997 1996 ---- ---- AMOUNT PERCENT AMOUNT PERCENT (dollars in thousands) TOTAL REVENUES: Acquisitions $115,446 21.8 % $105,803 20.4% Dental and Consumer Benefits 113,176 21.4 103,609 20.0 Financial Institutions 25,025 4.7 47,090 9.1 Guaranteed Investment Contracts 104,532 19.7 103,989 20.0 Individual Life 95,316 18.0 88,912 17.2 Investment Products 59,865 11.3 58,458 11.3 Corporate and Other 16,380 3.1 8,456 1.6 Unallocated Realized Investment Gains (Losses) 29 0.0 1,811 0.4 ----------- ------ ---------- ------ $529,769 100.0 % $518,128 100.0% ======== ===== ======== ===== INCOME (LOSS) BEFORE INCOME TAX AND MINORITY INTEREST: Acquisitions $ 29,271 35.4 % $ 25,626 36.8% Dental and Consumer Benefits 10,228 12.4 6,700 9.6 Financial Institutions 5,921 7.1 3,852 5.5 Guaranteed Investment Contracts 15,800 19.1 15,093 21.7 Individual Life 5,946 7.2 7,049 10.1 Investment Products 5,944 7.2 7,938 11.4 Corporate and Other 9,610 11.6 1,594 2.3 Unallocated Realized Investment Gains (Losses) 29 0.0 1,811 2.6 ---------- ------ --------- ------ $ 82,749 100.0 % $ 69,663 100.0% ======== ===== ======== ===== JUNE 30, 1997 DECEMBER 31, 1996 ------------- ----------------- AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- (dollars in thousands) IDENTIFIABLE ASSETS: Acquisitions $2,422,091 25.5 % $1,579,253 19.1% Dental and Consumer Benefits 281,426 3.0 278,926 3.4 Financial Institutions 327,319 3.5 352,021 4.3 Guaranteed Investment Contracts 2,690,020 28.4 2,608,149 31.5 Individual Life 1,120,206 11.8 1,037,386 12.5 Investment Products 2,155,801 22.7 1,873,119 22.7 Corporate and Other 483,799 5.1 534,351 6.5 ----------- ------ ----------- ------ $9,480,662 100.0 % $8,263,205 100.0% ========== ===== ========== =====
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 June 30, 1997 and for the six months then ended, the Company's life insurance subsidiaries had stockholder's equity and net income prepared in conformity with statutory reporting practices of $407.5 million and $60.0 million, respectively. 8 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, 1997 and December 31, 1996, prepared on the basis of reporting investments at amortized cost rather than at market values, are as follows:
JUNE 30, 1997 DECEMBER 31, 1996 ------------- ----------------- (IN THOUSANDS) Total investments $7,402,320 $6,534,122 Deferred policy acquisition costs 627,743 496,148 All other assets 1,431,726 1,222,646 ---------- ---------- $9,461,789 $8,252,916 ========== ========== Deferred income taxes $ 23,760 $ 34,268 All other liabilities 8,788,158 7,610,020 ---------- ---------- 8,811,918 7,644,288 Stockholders' equity 649,871 608,628 ----------- ----------- $9,461,789 $8,252,916 ========== ==========
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 deferred and amortized over the life of the hedged asset. At June 30, 1997, open option contracts with a notional amount of $1,225.0 million were in a $1.0 million 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. The proceeds from the sale of swaptions are deferred and amortized over the life of the related securities. At June 30, 1997, related open interest rate swap contracts with a notional amount of $500.3 million where in a $0.3 million net unrealized gain position. 9 NOTE H - RECENTLY ISSUED ACCOUNTING STANDARDS In June 1996 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This statement is effective for transactions entered into after January 1, 1997. NOTE I - 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. 10 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 six operating divisions: Acquisitions, Dental and Consumer Benefits ("Dental"), Financial Institutions, Guaranteed Investment Contracts ("GIC"), Individual Life, and Investment Products. The Company also has an additional business segment which is described herein as Corporate and Other. The Dental Division (formerly known as the Group Division) recently exited from the traditional group major medical business, fulfilling the Division's strategy to focus primarily on dental and related products. Accordingly, the Division was renamed the Dental and Consumer Benefits Division. 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 SIX MONTHS PERCENTAGE ENDED AMOUNT INCREASE/ JUNE 30 (IN THOUSANDS) (DECREASE) 1996 $247,837 13.9 % 1997 247,571 (0.1) Premiums and policy fees decreased $0.3 million or 0.1% in the first six months of 1997 over the first six months of 1996. The coinsurance by the Acquisitions Division of a block of policies and the acquisition of a small life insurance company in the fourth quarter of 1996 and the acquisition of West Coast Life Insurance Company ("West Coast") in the second quarter of 1997 resulted in a $6.6 million increase in premiums and policy fees. Decreases in older acquired blocks resulted in a $4.6 million decrease in premiums and policy fees. Premiums and policy fees from the Dental Division increased $9.8 million in the first six months of 1997 as compared to the same period in 1996. Premiums and policy fees related to the Division's dental business increased $15.0 million in the first six months of 1997 as compared to the same period in 1996. This increase was partially offset by a decrease in premiums related to the Division's exit from the group major medical business. Premiums and policy fees from the Financial 11 Institutions Division decreased $21.0 million in the first six months of 1997 as compared to the first six months of 1996. Decreases of $11.9 million resulted from a reinsurance arrangement begun in 1995 whereby most of the Division's new credit insurance sales are being ceded to a reinsurer. Decreases of $9.1 million relate to the normal decrease in premiums on a closed block of credit insurance policies reinsured in 1996. Increases in premiums and policy fees from the Individual Life and Investment Product Divisions were $8.0 million and $1.3 million, respectively. 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 1996 $254,840 10.5% 1997 267,805 5.1 Net investment income in the first six months of 1997 was $13.0 million or 5.1% 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 deposits and to acquisitions. The coinsurance of a block of policies and the acquisition of a small life insurance company in the fourth quarter of 1996 and the acquisition of West Coast in the second quarter of 1997 resulted in an increase in net investment income of $8.4 million in the first six months of 1997 as compared to the same period in 1996. REALIZED INVESTMENT GAINS (LOSSES) 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 NET REALIZED ENDED INVESTMENT GAINS JUNE 30 (IN THOUSANDS) 1996 $5,021 1997 725 Net realized investment gains were $0.7 million for the first six months of 1997 compared to $5.0 million for the corresponding period of 1996. In the 1996 first quarter, the Company sold $554 million of its commercial mortgage loans in a securitization transaction, resulting in a $6.1 million realized investment gain. 12 OTHER INCOME The following table sets forth other income for the periods shown: SIX MONTHS ENDED OTHER INCOME JUNE 30 (IN THOUSANDS) 1996 $10,430 1997 13,668 Other income consists primarily of revenues of the Company's broker-dealer subsidiary, fees from variable insurance products and administrative-services-only types of group accident and health insurance contracts, 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 1997 was $3.2 million higher than the corresponding period of 1996. Revenues from the Company's broker-dealer subsidiary increased $2.3 million in the first six months of 1997 as compared to the same period in 1996. Other income from all other sources increased $0.9 million in the first six months of 1997 as compared with the first six months of 1996. 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 SIX MONTHS ENDED JUNE 30 (IN THOUSANDS) BUSINESS SEGMENT 1997 1996 ---------------- ---- ---- Acquisitions $29,271 $25,626 Dental and Consumer Benefits 10,228 6,700 Financial Institutions 5,921 3,852 Guaranteed Investment Contracts 15,800 15,093 Individual Life 5,946 7,049 Investment Products 5,944 7,938 Corporate and Other 9,610 1,594 Unallocated Realized Investment Gains (Losses) 29 1,811 --------- -------- $82,749 $69,663 ======= ======= Percentage Increase 17.9% 20.3%
13 Pretax earnings from the Acquisitions Division increased $3.6 million in the first six months of 1997 as compared to the same period of 1996. 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. The Division's most recent acquisitions resulted in a $2.8 million increase in pretax earnings. In addition, the Division's mortality experience was approximately $2.1 million more favorable in the first six months of 1997 as compared to the same period last year. Dental Division pretax earnings were $3.5 million higher in the first six months of 1997 as compared to the first six months of 1996. $1.8 million of the increase was a one-time release of reserves associated with exiting the group major medical business. Lower cancer earnings partially offset improved traditional group life and health results. Dental earnings were $4.4 million (including expenses of $1.0 million to develop a new discounted fee-for-service program) in the first six months of 1997 as compared to $4.6 million in the first six months of 1996. Pretax earnings of the Financial Institutions Division were $2.1 million higher in the first six months of 1997 as compared to the same period in 1996. Included in the Division's results are earnings from the coinsurance of a block of policies in the second quarter of 1996. The GIC Division had pretax operating earnings of $15.7 million in the first six months of 1997 and $19.5 million in the corresponding period of 1996. In December, 1996, the Company sold a major portion of its bank loan participations in a securitization transaction which has subsequently reduced the Division's earnings. The decrease was partially offset by a related improvement in earnings in the Corporate and Other segment. In addition, the Division has shortened the duration of its invested assets which also reduced earnings. Realized investment gains associated with this Division in the first six months of 1997 were $0.1 million as compared to realized investment losses of $4.4 million in the same period last year. As a result, total pretax earnings were $15.8 million in the first six months of 1997 compared to $15.1 million for the same period last year. The Individual Life Division had pretax operating earnings of $5.9 million in both the first six months of 1997 and in the same period of 1996. During the second quarter of 1997 the Division experienced record high mortality. After an extensive audit of second quarter claims, management concluded this experience was a random fluctuation. Furthermore, claims in July 1997 were at expected levels. This decrease was partially offset by earnings from Empire General (an insurance subsidiary which distributes products through brokerage general agencies) which improved $1.9 million in the first six months of 1997 as compared to the same period in 1996 and by reductions in expenses related to new marketing ventures. Realized investment gains, net of related amortization of deferred policy acquisition costs, associated with this Division were $1.1 million in 1996. As a result, total pretax earnings were $5.9 million in the first six months of 1997 as compared to $7.0 million in the first six months of 1996. Investment Products Division pretax operating earnings of $5.7 million were $0.1 million lower in the first six months of 1997 compared to the same period of 1996. The Division's 1996 results included a one-time $0.9 million addition to earnings. Realized investment gains associated with the Division, net of related amortization of deferred policy acquisition costs, were $0.2 million in the first six months of 1997 as compared to $2.1 million in 1996, resulting in total pretax earnings of $5.9 million in the first six months of 1997 as compared to $7.9 million in the same period of 1996. 14 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 $8.0 million in the first six months of 1997 as compared to the first six months of 1996. In the 1997 second quarter the Company sold its interest in a money management joint venture resulting in a gain of $4.1 million. The remaining increase in earnings relate primarily to increased net investment income on capital. 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 1996 34% 1997 34 The effective income tax rate for the full year of 1996 was 34%. Management's estimate of the effective income tax rate for 1997 is also 34%. 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 PERCENTAGE JUNE 30 (IN THOUSANDS) PER SHARE INCREASE ----------------- ------------- --------- ----------- 1996 $44,369 $1.51 15.3% 1997 52,313 1.68 11.3
Compared to the same period in 1996, net income per share in the first six months of 1997 increased 11.3%, reflecting improved operating earnings in the Acquisitions, Dental, Financial Institutions, and Individual Life Divisions and the Corporate and Other segment, which were partially offset by lower operating earnings in the Guaranteed Investment Contracts and Investment Products Divisions and lower realized investment gains (net of related amortization of deferred policy acquisition costs.) RECENTLY ISSUED ACCOUNTING STANDARDS In February 1997 the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings per Share" effective for financial statements issued for periods ending after December 15, 1997. In June 1997 the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" effective for financial statements issued for periods beginning after December 15, 1997. The Company anticipates that the impact of adopting these accounting standards will not be significant. 15 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, 1997, the fixed maturity investments (bonds, bank loan participations, and redeemable preferred stocks) had a market value of $5,216.9 million, which is 0.1% above amortized cost (less allowances for uncollectible amounts on investments) of $5,195.9 million. The Company had $1,737.5 million in mortgage loans at June 30, 1997. While the Company's mortgage loans do not have quoted market values, at June 30, 1997, the Company estimates the market value of its mortgage loans to be $1,807.7 million (using discounted cash flows from the next call date) which is 4.0% 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 $559.4 million of the Company's mortgage loans have this participation feature. At June 30, 1997, delinquent mortgage loans and foreclosed real estate were 0.3% of assets. Bonds rated less than investment grade were 1.5% of assets. Additionally, the Company had bank loan participations that were less than investment grade representing 0.3% 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 $31.6 million at June 30, 1997. Policy loans at June 30, 1997, were $195.6 million, a decrease of $2.0 million from December 31, 1996 (after excluding approximately $30.9 million of policy loans associated with an acquisition in the second quarter of 1997). Policy loan rates are generally in the 4.5% to 8.0% range and are at least equal the assumed interest rates used for future policy benefits. 16 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 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 policy to generally maintain asset and liability durations within one half year of one another, although from time to time broader duration matching is allowed. The Company does not use derivative financial instruments for trading purposes. Combinations of futures contracts, interest rate options, and interest rate swaps are sometimes 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 GICs and annuities. Realized investment gains and losses of such contracts are deferred and amortized over the life of the hedged asset. At June 30, 1997, open option contracts with a notional amount of $1,225.0 million were in a $1.0 million unrealized loss position. The Company may also sometimes use interest rate swap contracts and options to enter into interest rate swap contracts (swaptions) 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 a portion of its Senior Notes, Medium-Term Notes, Monthly Income Preferred Securities, and Trust Originated Preferred Securities from a fixed rate to a variable rate of interest. The proceeds from the sale of swaptions are deferred and amortized over the life of the related debt. At June 30, 1997, related open interest rate swap contracts with a notional amount of $500.3 million were in a $0.3 million net unrealized gain position. Withdrawals related to GICs were approximately $786 million during 1996. Withdrawals related to GICs are estimated to be approximately $600 million in 1997. The Company's asset/liability management programs and procedures 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. In anticipation of receiving GIC and annuity deposits, the life insurance subsidiaries were committed at June 30, 1997 to fund mortgage loans and to purchase fixed maturity and other long-term investments in the amount of $368.7 million. The Company's subsidiaries held $211.6 million in cash and short-term investments at June 30, 1997. Protective Life Corporation had an additional $4.8 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 17 use when needed. 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. On April 29, 1997, a special purpose finance subsidiary of the Company, PLC Capital Trust I ("PLC Capital Trust") issued $75 million of 8.25% Trust Originated Preferred Securities ("TOPrS"), guaranteed on a subordinated basis by the Company. PLC Capital Trust was formed solely to issue TOPrS and other securities and use the proceeds thereof to purchase subordinated debentures of the Company. The Company has the right under the subordinated debentures to extend interest payment periods up to 20 consecutive quarters, and, as a consequence, quarterly dividends on the 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 Trust during any such extended interest payment period. The TOPrS are redeemable by PLC Capital Trust at any time on or after April 29, 2002. Net proceeds of approximately $72.6 million were used to repay bank borrowings. In related transactions, the Company entered into interest rate swap agreements which effectively converted the TOPrS from a fixed dividend rate to the floating 90 day London Interbank Offered Rate ("LIBOR") plus 74 basis points. The effective interest rate at June 30, 1997 was 6.52%. At June 30, 1997, Protective Life Corporation had borrowed $7.1 million of a $70 million revolving line of credit bearing interest rates averaging 6.0%. In addition, Protective Life Insurance Company had borrowed $4.0 million at a rate of 6.6%. 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, 1996, approximately $173 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 $439 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 $200 million of debt securities, preferred and common stock and stock purchase contracts of Protective Life Corporation, and additional preferred securities of special purpose finance subsidiaries 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 18 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. The Company and its subsidiaries, like other life and health insurers, in the course of business are involved in litigation. Pending litigation includes a class action filed in Jefferson County (Birmingham), Alabama with respect to the refund of certain cancer insurance premiums. Although the outcome of any 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. Rating downgrades have exceeded upgrades for the past several years, and public pronouncements by the rating agencies indicate that this trend is expected to continue for the near future. The Company is not aware of any material pending or threatened regulatory action with respect to the Company or any of its subsidiaries. 19 PART II Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a). Exhibit 15 - Letter re: unaudited interim financial statements Exhibit 27 - Financial Data Schedule Exhibit 99 - Safe Harbor for Forward Looking Statements (b). A report on Form 8-K dated April 23, 1997, was filed reporting under Item 5 and Item 7, the Company's 1997 first quarter earnings press release. 20 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, 1997 /S/ JERRY W. DEFOOR -------------------- Jerry W. DeFoor Vice President and Controller, and Chief Accounting Officer (Duly authorized officer) 21 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 23, 1997, on our review of interim consolidated financial information of Protective Life Corporation and subsidiaries for the period ended June 30, 1997, 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(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. COOPERS & LYBRAND L.L.P. Birmingham, Alabama August 14, 1997 22 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 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 5,216,866 0 0 24,425 1,737,542 12,072 7,427,491 7,768 442,759 621,445 9,480,662 3,115,898 249,499 0 167,479 131,100 130,000 0 16,668 645,464 9,480,662 247,571 267,805 725 13,668 332,832 39,045 75,143 54,614 28,135 52,313 0 0 0 52,313 1.68 1.68 0 0 0 0 0 0 0 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, 1997 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. 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. Life and health insurance is a highly competitive industry and the Company's Divisions encounter significant competition in all their respective 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. 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. 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 life 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. 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 life insurance subsidiaries to dispose of illiquid assets on unfavorable terms, which could have a material adverse effect on the Company. INTEREST RATE FLUCTUATIONS. Significant changes in interest rates expose life insurance companies to the risk of not earning anticipated spreads between the interest rate earned on investments and the interest rate credited to its life insurance and investment products. 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 life insurance and investment products. INVESTMENT RISKS. The Company's invested assets are subject to inherent 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 on which the Company has made loans. Factors that may affect the overall default rate on, and market value of, the Company's invested assets include the level of interest rates, performance of the financial markets, 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. 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, benefits, marketing practices, advertising, policy forms, underwriting standards, 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. 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. The Company cannot predict what future initiatives the President or Congress may propose which may affect the life and health insurance industry and the Company. LITIGATION. 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. 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 life and health 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 lawsuits involving insurers' sales practices, insurers have made material settlement payments to end litigation. 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 four unaffiliated investment managers; a portion of the sales in the Financial Institutions, Dental and Consumer Benefits, and Individual Life Divisions comes from arrangements with unrelated marketing organizations; and the Company has entered the Hong Kong insurance market in a joint venture with the Lippo Group. Therefore the Company's results may be affected by the performance of others. 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-----