-----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, VTGrhOJ9Bgj1riePRuhnPX/LQQT45AApbPpmZvc8lYGEZ4IQ0Z1J1N48Omv17chz qc+18ivfHMW6K7RBMphywQ== 0000355429-99-000021.txt : 19990816 0000355429-99-000021.hdr.sgml : 19990816 ACCESSION NUMBER: 0000355429-99-000021 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 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: 99688542 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, 1999 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 6, 1999: 64,502,092 shares. PROTECTIVE LIFE CORPORATION INDEX Item 1. Financial Statements: Report of Independent Accountants Consolidated Condensed Statements of Income for the Three and Six Months ended June 30, 1999 and 1998 (unaudited) Consolidated Condensed Balance Sheets as of June 30, 1999 (unaudited) and December 31, 1998 Consolidated Condensed Statements of Cash Flows for the Six Months ended June 30, 1999 and 1998 (unaudited) Notes to Consolidated Condensed Financial Statements (unaudited) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Part II. Other Information: Item 6. Exhibits and Reports on Form 8-K Signature REPORT OF INDEPENDENT ACCOUNTANTS To the Directors and Share Owners Protective Life Corporation Birmingham, Alabama We have reviewed the accompanying consolidated condensed balance sheet of Protective Life Corporation and subsidiaries as of June 30, 1999, and the related consolidated condensed statements of income for the three-month and six-month periods ended June 30, 1999 and 1998 and consolidated condensed statements of cash flows for the six-month periods ended June 30, 1999 and 1998. 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 interim financial statements referred to above for them to be in conformity with generally accepted accounting principles. We previously audited in accordance with generally accepted auditing standards, the consolidated balance sheet as of December 31, 1998, and the related consolidated statements of income, share-owners' equity, and cash flows for the year then ended (not presented herein), and in our report dated February 11, 1999, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated condensed balance sheet as of December 31, 1998, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Birmingham, Alabama July 27, 1999
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 --------------------------------------------------------------- 1999 1998 1999 1998 ---- ---- ---- ---- REVENUES Premiums and policy fees $326,805 $258,524 $642,174 $501,356 Reinsurance ceded (130,345) (103,691) (248,297) (197,338) -------- -------- -------- -------- Premiums and policy fees, net of reinsurance ceded 196,460 154,833 393,877 304,018 Net investment income 170,818 153,006 333,253 310,655 Realized investment gains (losses) (682) 2,023 644 2,034 Other income 25,244 19,150 43,247 32,665 --------- --------- --------- -------- 391,840 329,012 771,021 649,372 -------- -------- -------- -------- BENEFITS AND EXPENSES Benefits and settlement expenses (net of reinsurance ceded: three months: 1999 - $77,085; 1998 - $82,964 six months: 1999 - $157,523; 1998 - $126,727) 217,719 186,076 430,812 373,800 Amortization of deferred policy acquisition costs 28,274 33,434 59,226 58,269 Other operating expenses (net of reinsurance ceded: three months: 1999 - $36,941; 1998 - $34,239 six months: 1999 - $69,371; 1998 - $65,948) 81,420 54,014 154,607 111,789 --------- --------- -------- -------- 327,413 273,524 644,645 543,858 -------- -------- -------- -------- INCOME BEFORE INCOME TAX 64,427 55,488 126,376 105,514 Income tax expense 23,195 19,921 45,495 36,930 --------- -------- -------- --------- INCOME BEFORE MINORITY INTEREST AND EXTRAORDINARY LOSS 41,232 35,567 80,881 68,584 Minority interest in net income of consolidated subsidiaries 3,024 3,025 6,049 6,049 --------- --------- -------- --------- INCOME BEFORE EXTRAORDINARY LOSS 38,208 32,542 74,832 62,535 Extraordinary loss on early extinguishment of debt 1,763 1,763 --------- ------------ --------- ------------ NET INCOME $ 36,445 $ 32,542 $ 73,069 $ 62,535 ======== ======== ======== ======== EARNINGS PER SHARE - BASIC Income before extraordinary loss $ .58 $ .52 $ 1.14 $ 1.00 Extraordinary loss .03 .03 ---------- ------------ ---------- ------------ Net income $ .55 $ .52 $ 1.11 $ 1.00 ========== ========== ========= ========= EARNINGS PER SHARE - DILUTED Income before extraordinary loss $ .57 $ .52 $ 1.13 $ .99 Extraordinary loss .03 .03 --------- ------------ ---------- ------------ Net income $ .54 $ .52 $ 1.10 $ .99 ========= ========== ========= ========== DIVIDENDS PAID PER SHARE $ .12 $ .11 $ .23 $ .21 ========= ========== ========== ========== Average shares outstanding - basic 65,519,483 62,704,433 65,504,726 62,655,854 Average shares outstanding - diluted 66,189,219 63,295,035 66,132,684 63,260,798
See notes to consolidated condensed financial statements
PROTECTIVE LIFE CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS (Dollars in thousands) JUNE 30 DECEMBER 31 1999 1998 --------------------------------------------- ASSETS (Unaudited) Investments: Fixed maturities $ 6,240,948 $ 6,437,756 Equity securities 29,707 12,258 Mortgage loans on real estate 1,949,662 1,622,903 Investment real estate, net 16,339 14,868 Policy loans 232,316 232,670 Other long-term investments 71,708 69,906 Short-term investments 106,824 216,249 ------------ ------------ Total investments 8,647,504 8,606,610 Cash 53,029 9,486 Accrued investment income 108,904 102,359 Accounts and premiums receivable, net 62,700 40,794 Reinsurance receivables 846,738 756,370 Deferred policy acquisition costs 914,151 841,425 Goodwill, net 201,186 202,615 Property and equipment, net 57,688 50,585 Other assets 70,240 76,211 Assets related to separate accounts Variable annuity 1,528,316 1,285,952 Variable universal life 24,533 13,606 Other 3,437 3,482 -------------- -------------- $12,518,426 $11,989,495 ============== ============== LIABILITIES Policy liabilities and accruals $4,800,501 $ 4,534,461 Stable value contract account balances 2,792,768 2,691,697 Annuity account balances 1,532,954 1,519,820 Other policyholders' funds 125,597 222,704 Other liabilities 434,718 327,108 Accrued income taxes (14,776) (15,200) Deferred income taxes (30,625) 44,636 Debt 274,350 172,035 Liabilities related to separate accounts Variable annuity 1,528,316 1,285,952 Variable universal life 24,533 13,606 Other 3,437 3,482 -------------- -------------- 11,471,773 10,800,301 ------------ ----------- 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 8.25% Trust Originated Preferred Securities 75,000 75,000 6.5% FELINE PRIDES 115,000 115,000 ------------- ------------- 190,000 245,000 ------------- ------------- SHARE-OWNERS' 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 34,667 34,667 Shares authorized: 160,000,000 Shares issued: 69,333,117 Additional paid-in capital 256,057 254,705 Treasury stock (1999 - 4,831,025 shares; 1998 - 4,898,100 shares) (12,960) (13,140) Stock held in trust (1999 -10,950 shares) (366) Unallocated stock in Employee Stock Ownership Plan (1999 - 1,220,534 shares; 1998 -1,291,194 shares) (4,043) (4,277) Retained earnings 675,426 617,182 Accumulated other comprehensive income Net unrealized gains (losses) on investments (net of income tax: 1999 - $(49,607); 1998 - $29,646) (92,128) 55,057 -------------- -------------- 856,653 944,194 -------------- -------------- $12,518,426 $11,989,495 ============== ==============
See notes to consolidated condensed financial statements
PROTECTIVE LIFE CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited) SIX MONTHS ENDED JUNE 30 ------------------------------ 1999 1998 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 73,069 $ 62,535 Adjustments to reconcile net income to net cash provided by operating activities: Realized investment gains (644) (2,034) Amortization of deferred policy acquisition costs 59,226 58,269 Capitalization of deferred policy acquisition costs (110,884) (103,844) Depreciation expense 4,699 3,908 Deferred income taxes 3,990 (16,725) Accrued income taxes 424 (5,091) Amortization of goodwill 1,429 542 Interest credited to universal life and investment products 162,794 166,829 Policy fees assessed on universal life and investment products (73,423) (67,322) Change in accrued investment income and other receivables (118,818) (13,206) Change in policy liabilities and other policyholders' funds of traditional life and health products 81,400 332,756 Change in other liabilities 107,610 (37,502) Other (net) (300) (23,800) ------------- ------------ Net cash provided by operating activities 190,572 355,315 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Maturities and principal reductions of investments Investments available for sale 1,978,571 4,986,996 Other 144,736 94,343 Sale of investments Investments available for sale 181,712 306,944 Other 3,368 124,129 Cost of investments acquired Investments available for sale (2,110,002) (5,441,463) Other (478,758) (264,455) Purchase of property and equipment (11,638) (4,294) Sale of property and equipment 126 19 ----------------------------- Net cash used in investing activities (291,885) (197,781) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from borrowings under line of credit arrangements and debt 2,124,717 339,500 Principal payments on line of credit arrangements and debt (2,022,402) (304,500) Payment of preferred securities (55,000) Dividends to share owners (14,825) (12,974) Investment product deposits and changes in universal life deposits 659,108 459,471 Investment product withdrawals (546,742) (681,939) ------------ ------------ Net cash provided by (used in) financing activities 144,856 (200,442) ------------ ------------ INCREASE (DECREASE) IN CASH 43,543 (42,908) CASH AT BEGINNING OF PERIOD 9,486 47,502 ------------- ------------- CASH AT END OF PERIOD $ 53,029 $ 4,594 ============ ============= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period: Interest on debt $ 6,860 3,264 Income taxes $ 30,243 $ 45,607 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Reissuance of treasury stock to ESOP $ 199 Unallocated stock in ESOP $ 264 $ 315 Reissuance of treasury stock $ 1,500 $ 3,098 Acquisitions Assets acquired $ 3,398 Liabilities assumed (347) Reissuance of treasury stock (3,005) -------------- Net $ 46 ==============
See notes to consolidated condensed financial statements PROTECTIVE LIFE CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) NOTE A - BASIS OF PRESENTATION The accompanying unaudited consolidated condensed financial statements of Protective Life Corporation (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the disclosures required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. Operating results for the six month period ended June 30, 1999, are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. 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, 1998. 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 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 or alternatively in arbitration. Although the outcome of any such litigation or arbitration 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 On April 29, 1997, a special purpose finance subsidiary of the Company, PLC Capital Trust I issued $75 million of 8.25% Trust Originated Preferred Securities ("TOPrS(SM)"). The 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 8.25% TOPrS, constitutes a full and unconditional guarantee by the Company of PLC Capital Trust I's obligations with respect to the 8.25% TOPrS. PLC Capital Trust I was formed solely to issue securities and use the proceeds thereof to purchase subordinated debentures of the Company. 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 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 Trust I during any such extended interest payment period. 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 3.5 million shares if the price of the Company's Common Stock is greater than or equal to $32.52 to approximately 4.3 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 the 6.5% TOPrS which remain outstanding after February 16, 2001, will be reset by a formula specified in the agreement. The 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". NOTE D - EXTRAORDINARY LOSS - EARLY REDEMPTION OF MONTHLY INCOME PREFERRED SECURITIES In 1994 a special purpose 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 June 30, 1999, the Company caused PLC Capital to redeem the $55 million of MIPS. In a related transaction the Company redeemed its $69.6 million of Subordinated Debentures which were held by PLC Capital. The redemption of the Subordinated Debentures resulted in an extraordinary loss of $1.8 million. The extraordinary loss was comprised primarily of unamortized deferred debt issue costs and losses related to the termination of related interest rate swap agreements, net of an income tax benefit of $0.9 million. NOTE E - OPERATING SEGMENTS The Company operates seven divisions whose principal strategic focuses can be grouped into three general categories: life insurance, specialty insurance products and retirement savings and investment products. 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, 1999 --------------------------------------------------------------------------------- (In Thousands) SPECIALTY INSURANCE LIFE INSURANCE PRODUCTS Dental and Individual Consumer Financial Life West Coast Acquisitions Benefits Institutions ------------------------------------------------------------------------------- Premiums and policy fees $130,663 $37,649 $ 80,032 $242,543 $139,864 Reinsurance ceded (79,143) (26,269) (16,995) (36,027) (89,863) --------- ------- -------- --------- ---------- Net of reinsurance ceded 51,520 11,380 63,037 206,516 50,001 Net investment income 30,314 37,158 66,197 8,941 11,578 Realized investment gains (losses) 0 0 0 0 0 Other income 21,533 484 (9) 2,349 11,542 --------- --------- ------------ --------- --------- Total revenues 103,367 49,022 129,225 217,806 73,121 -------- ------- -------- -------- --------- Benefits and settlement expenses 37,137 31,466 65,969 139,698 24,938 Amortization of deferred policy acquisition costs 17,569 2,512 12,497 5,035 11,249 Other operating expenses 31,476 2,676 14,790 56,471 26,419 -------- -------- --------- --------- --------- Total benefits and expenses 86,182 36,654 93,256 201,204 62,606 -------- -------- --------- --------- --------- Income before income tax 17,185 12,368 35,969 16,602 10,515 RETIREMENT SAVINGS AND INVESTMENT PRODUCTS Stable Corporate Value Investment and Total Products Products Other Adjustments Consolidated ------------------------------------------------------------------------------ Premiums and policy fees $11,331 $ 92 $642,174 Reinsurance ceded 0 0 (248,297) ---------- --------- -------- Net of reinsurance ceded 11,331 92 393,877 Net investment income $102,951 51,938 24,176 333,253 Realized investment gains (losses) 222 892 0 $ (470) 644 Other income 0 4,752 2,596 43,247 ----------- -------- ------- ---------- --------- Total revenues 103,173 68,913 26,864 (470) 771,021 -------- ------- ------- -------- -------- Benefits and settlement expenses 86,835 42,432 2,337 430,812 Amortization of deferred policy acquisition costs 382 9,982 0 59,226 Other operating expenses 1,656 10,002 20,423 (9,306) 154,607 ---------- ------- ------- ------- -------- Total benefits and expenses 88,873 62,416 22,760 (9,306) 644,645 --------- ------- ------- ------- -------- Income before income tax 14,300 6,497 4,104 126,376 Income tax expense 45,495 45,495 Minority interest 6,049 6,049 Extraordinary loss 1,763 1,763 --------- Net income $ 73,069 ======== Operating Segment Income for the Six Months Ended June 30, 1998 --------------------------------------------------------------------------------- (In Thousands) SPECIALTY INSURANCE LIFE INSURANCE PRODUCTS Dental and Individual Consumer Financial Life West Coast Acquisitions Benefits Institutions -------------------------------------------------------------------------------- Premiums and policy fees $108,782 $36,057 $ 56,009 $155,394 $136,087 Reinsurance ceded (41,837) (23,005) (7,760) (46,972) (77,764) --------- -------- --------- --------- --------- Net of reinsurance ceded 66,945 13,052 48,249 108,422 58,323 Net investment income 27,060 31,142 52,176 7,601 11,597 Realized investment gains (losses) Other income 16,377 1,600 1,445 9,655 --------- ---------- --------- --------- --------- Total revenues 110,382 44,194 102,025 117,468 79,575 -------- ------- -------- -------- -------- Benefits and settlement expenses 54,273 29,238 56,892 74,068 27,385 Amortization of deferred policy acquisition costs 15,194 2,188 9,638 5,487 16,181 Other operating expenses 26,264 2,815 11,698 29,882 26,692 -------- ------- -------- --------- -------- Total benefits and expenses 95,731 34,241 78,228 109,437 70,258 -------- ------- -------- -------- ------- Income before income tax 14,651 9,953 23,797 8,031 9,317 RETIREMENT SAVINGS AND INVESTMENT PRODUCTS Stable Corporate Value Investment and Total Products Products Other Adjustments Consolidated ----------------------------------------------------------------------------------- Premiums and policy fees $ 8,899 $ 128 $501,356 Reinsurance ceded 0 0 (197,338) ------------ --------- ---------- -------- Net of reinsurance ceded 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 income 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 ========
Operating Segment Assets June 30, 1999 --------------------------------------------------------------------------------- (In Thousands) SPECIALTY INSURANCE LIFE INSURANCE PRODUCTS Dental and Individual Consumer Financial Life West Coast Acquisitions Benefits Institutions -------------------------------------------------------------------------------- Investments and other assets $1,136,353 $1,243,749 $1,554,460 $281,301 $745,618 Deferred policy acquisition costs and goodwill 337,210 170,328 242,850 223,629 41,576 ----------- ----------- ----------- -------- --------- Total assets $1,473,563 $1,414,077 $1,797,310 $504,930 $787,194 ========== ========== ========== ======== ======== RETIREMENT SAVINGS AND INVESTMENT PRODUCTS Stable Corporate Value Investment and Total Products Products Other Consolidated ----------------------------------------------------------------------------- Investments and other assets $2,909,075 $2,792,264 $740,269 $11,403,089 Deferred policy acquisition costs and goodwill 1,382 98,245 117 1,115,337 ------------ ------------ ---------- ------------ Total assets $2,910,457 $2,890,509 $740,386 $12,518,426 ========== ========== ======== =========== Operating Segment Assets December 31, 1998 --------------------------------------------------------------------------------- (In Thousands) SPECIALTY INSURANCE LIFE INSURANCE PRODUCTS Dental and Individual Consumer Financial Life West Coast Acquisitions Benefits Institutions ------------------------------------------------------------------------------- Investments and other assets $1,083,388 $1,149,642 $1,600,123 $272,586 $655,684 Deferred policy acquisition costs and goodwill 301,941 144,455 255,347 223,953 41,710 ----------- ----------- ----------- -------- --------- Total assets $1,385,329 $1,294,097 $1,855,470 $496,539 $697,394 ========== ========== ========== ======== ======== RETIREMENT SAVINGS AND INVESTMENT PRODUCTS Stable Corporate Value Investment and Total Products Products Other Consolidated ----------------------------------------------------------------------------- Investments and other assets $2,869,304 $2,545,364 $769,364 $10,945,455 Deferred policy acquisition costs and goodwill 1,448 75,177 9 1,044,040 ------------ ------------ ------------ ------------ Total assets $2,870,752 $2,620,541 $769,373 $11,989,495 ========== ========== ======== ===========
NOTE F - 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, 1999 and for the six months then ended, the Company's life insurance subsidiaries had consolidated share-owner's equity and net income prepared in conformity with statutory reporting practices of $561.3 million and $44.4 million, respectively. NOTE G - 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 share-owners' 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 share-owners' equity will fluctuate significantly as interest rates change. The Company's balance sheets at June 30, 1999 and December 31, 1998, prepared on the basis of reporting investments at amortized cost rather than at market values, are as follows:
JUNE 30, 1999 DECEMBER 31, 1998 ------------- ----------------- (IN THOUSANDS) Total investments $ 8,793,627 $ 8,501,646 Deferred policy acquisition costs 909,572 857,948 All other assets 2,956,771 2,545,197 ------------ ------------ $12,659,970 $11,904,791 =========== =========== Deferred income taxes $ 18,789 $ 12,798 All other liabilities 11,502,400 10,757,856 ------------ ----------- 11,521,189 10,770,654 Guaranteed preferred beneficial interests in Company's sub- ordinated debentures 190,000 245,000 Share-owners' equity 948,781 889,137 ------------- ------------- $12,659,970 $11,904,791 =========== ===========
NOTE H - ACCOUNTING POLICIES FOR DERIVATIVE FINANCIAL INSTRUMENTS The Company does not currently use derivative financial instruments for trading purposes. Combinations of options and futures contracts are sometimes used as hedges against changes in interest rates for certain investments, primarily outstanding mortgage loan commitments, mortgage loans and mortgage-backed securities, and liabilities arising from interest-sensitive products. Realized investment gains and losses on such contracts are deferred and amortized over the life of the hedged asset. No realized investment gains or losses were deferred in the first six months of 1999 or the full year of 1998. At June 30, 1999, options with a notional amount of $375 million were in a $0.6 million net unrealized loss position. The Company uses interest rate swap contracts, swaptions (options to enter into interest rate swap contracts), caps, and floors to convert certain investments from a variable to a fixed rate of interest and from a fixed rate of interest to a variable rate of interest, and 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. Swap contracts are also used to alter the effective durations of assets and liabilities. At June 30, 1999, interest rate swap contracts, swaptions, caps and floors with a notional amount of $949 million were in an $1.5 million net unrealized gain position. During the six months ended June 30, 1999, a $5.4 million loss was recognized on interest rate swap contracts, with a notional amount of $130.0 million related to the Company's MIPS and 8.25% TOPrS. NOTE I - 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. Net income per share - diluted is adjusted 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. A reconciliation of net income and adjusted net income, and basic and diluted average shares outstanding for the six months ended June 30 is summarized as follows:
RECONCILIATION OF NET INCOME AND AVERAGE SHARES OUTSTANDING June 30 ------------------------------------ 1999 1998 ---- ---- Net income $73,069 $62,535 Dividends on FELINE PRIDES (1) (1) --------- ------- Adjusted net income $73,069 $62,535 ======= ======= Average shares issued and outstanding 64,461,568 61,758,403 Issuable under various deferred compensation plans 1,043,158 897,451 ----------- ----------- Average shares outstanding - basic 65,504,726 62,655,854 Stock appreciation rights 192,740 156,909 Issuable under various other stock-based compensation plans 435,218 448,035 FELINE PRIDES stock purchase contracts (1) (1) ---------- ---------- Average shares outstanding - diluted 66,132,684 63,260,798 ========== ==========
(1) Excluded because the effect is anti-dilutive. NOTE J - COMPREHENSIVE INCOME (LOSS) The following table sets forth the Company's comprehensive income (loss) for the six months ended June 30, 1999 and 1998:
Six Months Ended June 30 ---------------------------------- (In Thousands) 1999 1998 ---- ---- Net income $73,069 $62,535 Increase (decrease) in net unrealized gains on investments (net of income tax: 1999 - $(79,028); 1998 - $1,306) (146,766) 2,426 Reclassification adjustment for amounts included in net income (net of income tax: 1999 - $(225); 1998 - $(712)) (419) (1,322) ---------- -------- Comprehensive income (loss) $(74,116) $63,639 ========= =======
NOTE K - ACQUISITIONS In September 1998, the Company acquired United Dental Care, Inc. ("United Dental Care"). The transaction has been accounted for as a purchase, and the results of the transaction have been included in the accompanying financial statements since its effective date. Summarized below are the consolidated results of operations for the six months ended June 30, 1998, on an unaudited pro forma basis, as if the United Dental Care acquisition had occurred as of January 1, 1998. The pro forma information is based on the Company's consolidated results of operations for the six months ended June 30, 1998, and on data provided by United Dental Care, after giving effect to certain pro forma adjustments. The pro forma financial information does not purport to be indicative of results of operations that would have occurred had the transaction occurred on the basis assumed above nor are they indicative of results of the future operations of the combined enterprises. Six Months Ended June 30, 1998 ----------------- (In Thousands) (Unaudited) Total revenues $ 732,451 Net income $ 63,337 Net income per share-basic $ 0.97 Net income per share-dilute $ 0.96 NOTE L - STOCK HELD IN TRUST The Company sponsors a deferred compensation plan for certain of its agents in the form of a trust. Company stock owned by the trust is accounted for as treasury stock under generally accepted accounting principles. NOTE M - 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 share-owners' equity. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Protective Life Corporation is a holding company whose subsidiaries provide financial services through the production, distribution, and administration of insurance and investment products. Founded in 1907, Protective Life Insurance Company 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 operates seven divisions whose principal strategic focuses can be grouped into three general categories: life insurance, specialty insurance products, and retirement savings and investment products. The Company's Divisions are: Individual Life, West Coast, Acquisitions, Dental and Consumer Benefits (Dental), Financial Institutions, Stable Value Products, and Investment Products. The Company also has an additional business segment which is Corporate and Other. The Stable Value Products Division (formerly known as the Guaranteed Investment Contracts ("GIC") Division) was renamed during the second quarter of 1999 to reflect its broader product offerings and customer base. This report includes "forward-looking statements" which express the expectations of future events and/or results. The words "believe", "expect", "anticipate" and similar expressions identify forward-looking statements which are based on future expectations rather than on historical facts and are therefore subject to 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, net of reinsurance ("premiums and policy fees") and the percentage change from the prior period:
PREMIUMS AND POLICY FEES --------------------------------- SIX MONTHS ENDED AMOUNT PERCENTAGE JUNE 30 (IN THOUSANDS) INCREASE ------------- ---------------- --------------- 1998 $304,018 22.8% 1999 393,877 29.6
Premiums and policy fees increased $89.9 million or 29.6% in the first six months of 1999 as compared to the first six months of 1998. Premiums and policy fees in the Individual Life and West Coast Divisions decreased $15.4 million and $1.7 million, respectively, in the first six months of 1999 as compared to the same period in 1998 due to increased usage of reinsurance by these Divisions. The coinsurance of a block of policies from Lincoln National Corporation ("Lincoln National") in October 1998 resulted in a $17.8 million increase in premiums and policy fees in the Acquisitions Division, whereas decreases in older acquired blocks resulted in a $3.0 million decrease in premiums and policy fees. The September 1998 acquisition of United Dental Care, Inc. ("United Dental Care") resulted in a $69.5 million increase in premiums and policy fees in the Dental Division. Premiums and policy fees related to the Dental Division's other businesses increased $28.6 million in the first six months of 1999 as compared to the same period in 1998. Premiums and policy fees from the Financial Institutions Division decreased $8.3 million in the first six months of 1999 as compared to the first six months of 1998 of which $3.5 million related to the normal decrease in premiums on closed blocks of policies acquired in prior years. Premiums and policy fees related to the Financial Institutions Division's other businesses increased only slightly due to the continued use of reinsurance. The increase in premiums and policy fees from the Investment Products Division was $2.4 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:
NET INVESTMENT INCOME SIX MONTHS -------------------------------------- ENDED AMOUNT PERCENTAGE JUNE 30 (IN THOUSANDS) INCREASE --------- --------------- ------------- 1998 $310,655 16.0 % 1999 333,253 7.3
Net investment income in the first six months of 1999 was $22.6 million or 7.3% 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 acquisitions and due to receiving stable value contract (guaranteed investment contract and funding agreement) and annuity deposits. 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. 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 JUNE 30 (IN THOUSANDS) ---------- --------------------- 1998 $2,034 1999 644
Realized investment gains were $0.6 million for the first six months of 1999 compared to $2.0 million for the corresponding period of 1998. Other Income The following table sets forth other income for the periods shown: SIX MONTHS ENDED OTHER INCOME JUNE 30 (IN THOUSANDS -------------- ---------------- 1998 $32,665 1999 43,247 Other income consists primarily of revenues of the Company's broker-dealer subsidiary, fees from variable insurance products, revenues of the Company's wholly-owned insurance marketing organizations, small noninsurance subsidiaries and automobile warranty business, and the results of the Company's joint venture in Hong Kong. Other income in the first six months of 1999 was $10.6 million higher than the corresponding period of 1998. Revenues from the Company's broker-dealer subsidiary and automobile warranty business increased $7.3 million and $5.9 million, respectively, in the first six months of 1999 as compared to the same period in 1998. Other income from all other sources decreased $2.6 million in the first six months of 1999 as compared with the first six months of 1998. Income Before Income Tax 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 1999 ---- ---- Operating Income (Loss) (1)(2) Life Insurance Individual Life $14,651 $ 17,185 West Coast 9,953 12,368 Acquisitions 23,797 35,969 Specialty Insurance Products Dental and Consumer Benefits 8,031 16,602 Financial Institutions 9,317 10,515 Retirement Savings and Investment Products Stable Value Products 15,833 14,078 Investment Products 5,866 6,497 Corporate and Other (2) 7,093 4,104 -------- --------- Total operating income 94,541 117,318 ------- -------- Realized Investment Gains (Losses) Stable Value Products (59) 222 Investment Products 678 892 Unallocated Realized Investment Gains (Losses) 1,415 (470) Related Amortization of Deferred Policy Acquisition Costs Investment Products (367) (892) --------- --------- Total net 1,667 (248) -------- --------- Income (Loss) Before Income Tax (2) Life Insurance Individual Life 14,651 17,185 West Coast 9,953 12,368 Acquisitions 23,797 35,969 Specialty Insurance Products Dental and Consumer Benefits 8,031 16,602 Financial Institutions 9,317 10,515 Retirement Savings and Investment Products Stable Value Products 15,774 14,300 Investment Products 6,177 6,497 Corporate and Other(2) 7,093 4,104 Unallocated Realized Investment Gains (Losses) 1,415 (470) -------- ----------- Total income before income tax $96,208 $117,070 ======= ======== (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 $9,306 in the first six months of 1999 and 1998. Such minority interest related to payments made on the Company's MIPSsm, 8.25% TOPrSsm, and FELINE PRIDESsm.
The Individual Life Division's pretax operating income was $17.2 million in the first six months of 1999 compared to $14.7 million in the same period of 1998. The Division's 1999 results include a $2.0 million loss relating to a venture to sell term and term-like products through direct response and other expenses to support future growth. The Division has reinsured most of its mortality risk, therefore earnings fluctuations due to mortality experience have been significantly reduced. West Coast had pretax operating income of $12.4 million for the first six months of 1999 compared to $10.0 million for the same period last year. This increase reflects the Division's growth through sales. Pretax operating income from the Acquisitions Division was $36.0 million in the first six months of 1999 as compared to $23.8 million in the same period of 1998. The Division's mortality experience was approximately $3.1 million better than expected in the first six months of 1999 as compared to being approximately $2.1 million worse than expected in the first six months of 1998. 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 October 1998, the Company coinsured a block of policies from Lincoln National resulting in earnings of $4.2 million in the first six months of 1999. The Dental Division's pretax operating income was $16.6 million in the first six months of 1999 compared to $8.0 million in the first six months of 1998. The recent acquisition of United Dental Care contributed earnings of $8.3 million in 1999. The pretax operating earnings of the Division's other dental businesses increased $0.3 million in the first six months of 1999 as compared to the same period last year. Pretax operating income of the Financial Institutions Division was $10.5 million in the first six months of 1999 as compared to $9.3 million last year. Several of the Division's lines of business improved in the first six months of 1999 as compared to the same period of 1998. The Stable Value Products Division had pretax operating income of $14.1 million in the first six months of 1999 and $15.8 million in the corresponding period of 1998. This decrease was primarily due to lower interest rate spreads which resulted from the Division shortening the duration of its invested assets in order to better match assets to liabilities. Realized investment gains associated with this Division in the first six months of 1999 were $0.2 million as compared to losses of less than $0.1 million in the same period last year. As a result, total pretax earnings were $14.3 million in the first six months of 1999 compared to $15.8 million for the same period last year. Investment Products Division pretax operating income was $6.5 million in the first six months of 1999 compared to $5.9 million in the same period of 1998. The Division had no realized investment gains or losses (net of related amortization of deferred policy acquisition costs) in the first six months of 1999 as compared to approximately $0.3 million of realized gains in the same period of 1998. Total pretax earnings were $6.5 million in the first six months of 1999 as compared to $6.2 million in the same period of 1998. Earnings from the Corporate and Other segment consist primarily of net investment income on unallocated capital, interest expense on substantially all debt, the Company's joint venture in Hong Kong, several small insurance lines of business, and the operations of several small noninsurance subsidiaries. Pretax earnings for this segment decreased $3.0 million in the first six months of 1999 as compared to the first six months of 1998, primarily due to the allocation of capital to the United Dental Care acquisition and the coinsurance of a block of policies from Lincoln National. 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 --------------- --------------------- 1998 35% 1999 36 The effective income tax rate for the full year of 1998 was approximately 35.3%. Management's estimate of the effective income tax rate for 1999 is 36%. The increase in the effective tax rate primarily relates to nondeductible goodwill associated with the acquisition of United Dental Care. Net Income Before Extraordinary Loss The following table sets forth net income before extraordinary loss and the net income before extraordinary loss per share for the periods shown, and the percentage change from the prior period:
Net Income Six Months --------------------------------------------------------------------------------- Ended Total Per Share- Percentage Per Share- Percentage June 30 (In thousands) Basic Increase Diluted Increase ------------- ------------- --------------- ------------- ------------ ------------ 1998 $62,535 $1.00 19.1% $ .99 19.3% 1999 73,069 1.11 11.0 1.10 11.1
Compared to the same period in 1998, net income per share-diluted in the first six months of 1999 increased 11.1%, reflecting improved operating earnings in the Individual Life, West Coast, Acquisitions, Dental, Financial Institutions, and Investment Products Divisions and higher realized investment gains (net of related amortization of deferred policy acquisition costs), which were partially offset by lower operating earnings in the Stable Value Products Division and the Corporate and Other segment. Extraordinary Loss On June 30, 1999, the Company caused PLC Capital L.L.C. ("PLC Capital"), a special purpose finance subsidiary, to redeem its $55 million of 9% Cumulative Monthly Income Preferred Securities, Series A ("MIPS"). In a related transaction, the Company redeemed its $69.6 million of Subordinated Debentures which were held by PLC Capital. The redemption resulted in an extraordinary loss of $1.8 million or $0.03 per share on both a basic and diluted basis. The extraordinary loss was comprised primarily of unamortized deferred debt issue costs and losses related to the termination of related interest rate swap agreements, net of an income tax benefit of $0.9 million. Recently Issued Accounting Standards The Financial Accounting Standards Board (FASB) has issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 will require the Company to report derivative financial instruments on the balance sheet and to carry such derivatives at fair value. The fair values of derivatives increase or decrease as interest rates change. Under SFAS No. 133, changes in fair value are reported as a component of net income or as a change to share-owners' equity, depending upon the nature of the derivative. Although the adoption of SFAS No. 133 will not affect the Company's operations, adoption will introduce volatility into the Company's reported net income and share-owners' equity as interest rates change. SFAS No. 133 is effective January 1, 2001. The FASB has also issued SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise," and the American Institute of Certified Public Accountants has issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The adoption of these accounting standards in 1999 is not expected to have a material effect on the Company's financial condition. LIQUIDITY AND CAPITAL RESOURCES The Company's operations usually produce a positive cash flow. This cash flow is used to fund an investment portfolio to finance future benefit payments. 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. INVESTMENTS The Company generally purchases its investments with the intent to hold to maturity by purchasing investments that match future cash flow needs. However, the Company may sell any of its investments to maintain proper matching of assets and liabilities. Accordingly, the Company has classified its fixed maturities and certain other securities as "available for sale." The 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, 1999, the fixed maturity investments (bonds and redeemable preferred stocks) had a market value of $6,240.9 million, which is 2.3% below amortized cost (less allowances for uncollectible amounts on investments) of $6,386.9 million. The Company had $1,949.0 million in mortgage loans at June 30, 1999. While the Company's mortgage loans do not have quoted market values, at June 30, 1999, the Company estimates the market value of its mortgage loans to be $1,998.3 million (using discounted cash flows from the next call date) which is 2.5% above amortized cost. 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. As of June 30, 1999, approximately $535.2 million of the Company's mortgage loans have this participation feature. At June 30, 1999, delinquent mortgage loans and foreclosed real estate were 0.2% of assets. Bonds rated less than investment grade were 2.0% 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 $21.7 million at June 30, 1999. Policy loans at June 30, 1999, were $232.3 million, a decrease of $0.4 million from December 31, 1998. Policy loan rates are generally in the 4.5% to 8.0% range; such rate is at least equal to the assumed interest rates used for future policy benefits. In the ordinary course of its commercial mortgage lending operations, the Company will commit to provide a mortgage loan before the property to be mortgaged has been built or acquired. The mortgage loan commitment is a contractual obligation to fund a mortgage loan when called upon by the borrower. The commitment is not recognized in the Company's financial statements until the commitment is actually funded. The mortgage loan commitment contains terms, including the rate of interest. At June 30, 1999, the Company had outstanding mortgage loan commitments of $872.3 million. LIABILITIES 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. Certain stable value and 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. At June 30, 1999, the Company had policy liabilities and accruals of $4.8 billion. The Company's life insurance products have a weighted average minimum credited interest rate of approximately 4.3%. At June 30, 1999, the Company had $2.8 billion of stable value contract account balances and $1.5 billion of annuity account balances. DERIVATIVE FINANCIAL INSTRUMENTS The Company does not currently use derivative financial instruments for trading purposes. Combinations of options and futures contracts are sometimes used as hedges against changes in interest rates for certain investments, primarily outstanding mortgage loan commitments, mortgage loans and mortgage-backed securities, and liabilities arising from interest-sensitive products. Realized investment gains and losses on such contracts are deferred and amortized over the life of the hedged asset. No realized investment gains or losses were deferred in 1999 or 1998. At June 30, 1999, options with a notional amount of $375 million were in a $0.6 million net unrealized loss position. The Company uses interest rate swap contracts, swaptions (options to enter into interest rate swap contracts), caps, and floors to convert certain investments from a variable to a fixed rate of interest and from a fixed rate of interest to a variable rate of interest, and 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. Swap contracts are also used to alter the effective durations of assets and liabilities. At June 30, 1999, interest rate swap contracts, swaptions, caps and floors with a notional amount of $949 million were in an $1.5 million net unrealized gain position. During the six months ended June 30, 1999, a $5.4 million loss was recognized on interest rate swap contracts, with a notional amount of $130.0 million related to the Company's MIPS and 8.25% TOPrS. ASSET/LIABILITY MANAGEMENT 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 a broader interval may be allowed. Cash outflows related to stable value contracts (primarily maturing contracts and expected withdrawals) were approximately $1.0 billion during 1998. Cash outflows related to stable value contracts are estimated to be approximately $0.9 billion in 1999. The Company's asset/liability management programs and procedures take into account maturing contracts and expected withdrawals. Accordingly, the Company does not expect stable value contract related cash outflows to have an unusual effect on the future operations and liquidity of the Company. The life insurance subsidiaries were committed at June 30, 1999, to fund mortgage loans and to purchase fixed maturity and other long-term investments in the amount of $1.0 billion. The Company's subsidiaries held $159.1 million in cash and short-term investments at June 30, 1999. Protective Life Corporation had an additional $0.8 million in cash 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 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 Stable Value Products to complement its cash management practices. CAPITAL At June 30, 1999, Protective Life Corporation had $30.0 million outstanding under its $70.0 million revolving line of credit and an additional $84.0 million of bank borrowings at a weighted average interest rate of 5.6%. Included in these bank borrowings is a $55.0 million term loan borrowed on June 30, 1999, in order to redeem the MIPS. The remaining increase in borrowing by Protective Life Corporation since December 31, 1998, was used for general corporate purposes. In addition, Protective Life Insurance Company had borrowed $37.0 million at June 30, 1999, at an interest rate of 5.3%. 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, 1998, approximately $275 million of consolidated share-owners' equity, excluding net unrealized losses on investments, represented net assets of the Company's insurance subsidiaries that cannot be transferred to Protective Life Corporation. 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. 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 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 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. OTHER DEVELOPMENTS The NAIC has adopted the Codification of Statutory Accounting Principles (Codification). The Codification changes current statutory accounting rules in several areas. The Company has not estimated the potential effect the Codification will have on the statutory capital of the Company's insurance subsidiaries. The Codification has been proposed to become effective January 1, 2001. The NAIC has adopted a model regulation, commonly referred to as "Triple X" (i.e., roman numeral XXX), for universal life and level premium term-like insurance products. The Company is currently assessing the impact of Triple X on its products and what changes to the products might be necessary in response to Triple X. 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 is not aware of any material pending or threatened regulatory action with respect to the Company or any of its subsidiaries. The United States Congress is considering legislation that would eliminate the estate tax. Life insurance products are often used to fund estate tax obligations. If the estate tax was eliminated, the demand for certain life insurance products would be adversely affected. The United States Congress is also considering legislation that would permit commercial banks, insurance companies and investment banks to combine. Some insurers have recently lowered the premium rates for their level premium term and term-like products. The Company's Individual Life and West Coast Divisions' results, in part, depend upon their ability to maintain competitive level premium term and term-like products. 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 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 or alternatively in arbitration. Although the outcome of any such litigation or arbitration 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. YEAR 2000 DISCLOSURE Computer hardware and software often denote the year using two digits rather than four; for example, the year 1999 often is denoted by such hardware and software as "99." 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 than 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 work on the Year 2000 problem in 1995. At that time, the Company identified and assessed the Company's critical mainframe systems, and prioritized the remediation efforts that were to follow. During 1998 all other hardware and software, including non-information technology (non-IT) related hardware and software, were included in the process. The Company's Year 2000 plan includes all subsidiaries. The Company estimates that Year 2000 remediation is complete for most of its insurance administration systems and general administration systems. Of the general administration systems that are not yet remediated, the majority are new systems that were implemented during 1998 and are scheduled for year 2000 testing in August 1999 with the compliant, tested version to be placed in production by September 1999. All remediated systems are currently in production. Mainframe application remediation was completed December 31, 1998. Personal computer network hardware, software, and operating systems have been reviewed, with upgrades implemented where necessary. Remaining Year 2000 personal computer preparations are expected to be completed by September 30, 1999. In March 1999 a personal computer test lab was established to facilitate client server system testing. That testing is now materially complete and the lab facility is being used for desktop application testing. With respect to non-IT equipment and processes, the assessment and remediation is progressing on schedule and all known issues are expected to be remediated before December 31, 1999. Future date tests are complete for the majority of the Company's mission critical systems and are expected to be completed by August 31, 1999. Integrated tests involve multiple system testing and are used to verify the Year 2000 readiness of interfaces and connectivity across multiple systems. The Company is using its mainframe computer to simulate a Year 2000 production environment and to facilitate integrated testing. Current expectations are that integrated testing will be completed on or before September 30, 1999. Significant business partners and suppliers that provide products or services critical to Company operations are being reviewed for year 2000 readiness. To date, no partners or suppliers have reported that they expect to be unable to continue supplying products and services after January 1, 2000. The Company cannot specifically identify all of the costs to develop and implement its Year 2000 plan. The costs of new systems to replace non-compliant systems have been capitalized in the ordinary course of business. Other costs have been expensed as incurred. Through June 30, 1999, costs that have been specifically identified as relating to the Year 2000 problem total $4.7 million, with an additional $0.5 million estimated to be required to support continued Year 2000 preparations. The Company's Year 2000 efforts have not adversely affected its normal procurement and development of information technology. Although the Company believes that a process is in place to successfully address Year 2000 issues, there can be no assurance 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. A formal contingency plan is being prepared for senior management approval in September 1999. The plan will also be reviewed with the Finance and Investments Committee of the Company's Board of Directors at their October meeting. Those systems and functions identified as mission critical are included in the contingency plan. 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 to be unable to perform critical functions or to otherwise conduct business. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has been no material change from the disclosure in the Company's 1998 Form 10-K. PART II Item 6. Exhibits and Reports on Form 8-K (a) 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, 1999, reporting under Item 5 and Item 7 the Company's 1999 first quarter earnings press release. 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 13, 1999 /s/ Jerry W. DeFoor --------------------------------- Jerry W. DeFoor Vice President and Controller, and Chief Accounting Officer (Duly authorized officer)
EX-15 2 Exhibit 15 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Protective Life Corporation We are aware that our report dated July 27, 1999, on our review of interim consolidated financial information of Protective Life Corporation and subsidiaries for the period ended June 30, 1999, 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. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Birmingham, Alabama August 13, 1999 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-31-1999 JAN-01-1999 JUN-30-1999 6,240,948 0 0 29,707 1,949,662 16,339 8,647,504 53,029 846,738 914,151 12,518,426 4,396,832 467,308 0 125,597 274,350 0 0 34,667 821,986 12,518,426 393,877 333,253 644 43,247 430,812 59,226 154,607 126,376 45,495 74,832 0 (1,763) 0 73,069 1.11 1.10 0 0 0 0 0 0 0 Net of minority interest in income of consolidated subsidiaries of $6,049.
EX-99 4 Exhibit 99 to Form 10-Q of Protective Life Corporation for the six months ended June 30, 1999 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. Additionally, the United States Congress is considering legislation that would permit commercial banks, insurance companies and investment banks to combine. 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. 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 many aspects of the insurance business, which may include 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 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 with respect to their ability to sell such products, and, depending on grandfathering provisions, the surrenders of existing annuity contracts and life insurance policies. In addition, life insurance products are often used to fund estate tax obligations. If the estate tax was eliminated, the demand for certain life insurance products would be adversely affected. The Company cannot predict what 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 and derivative financial instruments 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. The Company has also from time to time acquired other companies and continued to operate them as subsidiaries. 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's results may be affected by the performance of others because 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, and a portion of the sales in the Individual Life, West Coast, Dental, and Financial Institutions Divisions comes from arrangements with unrelated marketing organizations. YEAR 2000. Computer hardware and software often denote the year using two digits rather than four; for example, the year 1999 often is denoted by such hardware and software as "99." 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. 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. Should some of the Company's systems not be available due to Year 2000 problems, in a reasonable 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. However, other worst case scenarios, depending upon their duration, could have a material adverse effect on the Company and its operations. REINSURANCE. The Company's insurance subsidiaries cede insurance to other insurance companies. However, the Company remains liable with respect to ceded insurance should any reinsurer fail to meet the obligations assumed by it. The cost of reinsurance is, in some cases, reflected in the premium rates charged by the Company. Under certain reinsurance agreements, the reinsurer may increase the rate it charges the Company for the reinsurance, though the Company does not anticipate increases to occur. Therefore, if the cost of reinsurance were to increase with respect to policies where the rates have been guaranteed by the Company, the Company could be adversely affected. 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.
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