-----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, UTAWntdaKLLA3t3A8FNaIF7scfZ5mVzf3RbHBgyKD5PW5jq1zGOyv5Q6wwetEeqk a4Et/HhObpSxfXNf919Fiw== 0000355429-99-000030.txt : 19991115 0000355429-99-000030.hdr.sgml : 19991115 ACCESSION NUMBER: 0000355429-99-000030 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 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: 99747775 BUSINESS ADDRESS: STREET 1: 2801 HGWY 280 S CITY: BIRMINGHAM STATE: AL ZIP: 35223 BUSINESS PHONE: 2058799230 MAIL ADDRESS: STREET 1: PO BOX 2606 CITY: BIRMINGHAM STATE: AL ZIP: 35202 10-Q 1 - ------------------------------------------------------------------------------ FORM 10-Q ------------------------------------ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 November 5, 1999: 64,502,092 shares. PROTECTIVE LIFE CORPORATION INDEX PART I. FINANCIAL INFORMATION: Item 1. Financial Statements: Report of Independent Accountants Consolidated Condensed Statements of Income for the Three and Nine Months ended September 30, 1999 and 1998 (unaudited) Consolidated Condensed Balance Sheets as of September 30, 1999 (unaudited) and December 31, 1998 Consolidated Condensed Statements of Cash Flows for the Nine Months ended September 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 September 30, 1999, and the related consolidated condensed statements of income for the three-month and nine-month periods ended September 30, 1999 and 1998 and consolidated condensed statements of cash flows for the nine-month periods ended September 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 October 26, 1999, except for Note N as to which the date is November 1, 1999
PROTECTIVE LIFE CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Dollars in thousands except per share amounts) (Unaudited) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ----------------------------- ----------------------------- 1999 1998 1999 1998 ---- ---- ---- ---- REVENUES Premiums and policy fees $325,654 $275,411 $ 967,828 $776,767 Reinsurance ceded (134,573) (107,677) (382,870) (305,015) -------- -------- ----------- -------- Premiums and policy fees, net of reinsurance ceded 191,081 167,734 584,958 471,752 Net investment income 170,318 164,537 503,570 475,192 Realized investment gains (losses) (3,984) 411 (3,340) 2,445 Other income 23,808 15,912 67,056 48,577 --------- --------- ----------- --------- 381,223 348,594 1,152,244 997,966 -------- -------- ---------- -------- BENEFITS AND EXPENSES Benefits and settlement expenses (net of reinsurance ceded: three months: 1999 - $85,055; 1998 - $109,513 nine months: 1999 - $242,578; 1998 - $236,241) 212,869 197,282 643,681 571,082 Amortization of deferred policy acquisition costs 23,088 30,784 82,315 89,053 Other operating expenses (net of reinsurance ceded: three months: 1999 - $33,457; 1998 - $47,133 nine months: 1999 - $102,828; 1998 - $112,985) 83,465 64,325 238,071 176,114 --------- --------- ----------- -------- 319,422 292,391 964,067 836,249 -------- -------- ----------- -------- INCOME BEFORE INCOME TAX 61,801 56,203 188,177 161,717 Income tax expense 22,248 19,671 67,744 56,601 --------- -------- ----------- --------- INCOME BEFORE MINORITY INTEREST AND EXTRAORDINARY LOSS 39,553 36,532 120,433 105,116 Minority interest in net income of consolidated subsidiaries 2,220 3,024 8,269 9,073 --------- --------- ------------ --------- INCOME BEFORE EXTRAORDINARY LOSS 37,333 33,508 112,164 96,043 Extraordinary loss on early extinguishment of debt 1,763 ------------ ------------ ------------ ------------ NET INCOME $ 37,333 $ 33,508 $ 110,401 $ 96,043 ======== ======== ========== ======== EARNINGS PER SHARE - BASIC Income before extraordinary loss $ .57 $ .53 $ 1.71 $ 1.53 Extraordinary loss .03 ------------ ------------ ------------- ------------ Net income $ .57 $ .53 $ 1.68 $ 1.53 ========== ========== ============ ========= EARNINGS PER SHARE - DILUTED Income before extraordinary loss $ .57 $ .52 $ 1.70 $ 1.51 Extraordinary loss .03 ------------ ------------ ------------- ------------ Net income $ .57 $ .52 $ 1.67 $ 1.51 ========== ========== ============ ========= DIVIDENDS PAID PER SHARE $ .12 $ .11 $ .35 $ .32 ========== ========== ============ ========== Average shares outstanding - basic 65,725,022 63,272,089 65,578,965 62,863,523 Average shares outstanding - diluted 66,180,351 63,790,168 66,148,748 63,439,194
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
PROTECTIVE LIFE CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS (Dollars in thousands) SEPTEMBER 30 DECEMBER 31 1999 1998 --------------------------------------------- ASSETS (Unaudited) Investments: Fixed maturities $ 6,265,531 $ 6,437,756 Equity securities 29,707 12,258 Mortgage loans on real estate 1,894,874 1,622,903 Investment real estate, net 16,201 14,868 Policy loans 231,824 232,670 Other long-term investments 68,740 69,906 Short-term investments 104,137 216,249 ------------- ------------ Total investments 8,611,014 8,606,610 Cash 90,745 9,486 Accrued investment income 102,645 102,359 Accounts and premiums receivable, net 76,093 40,794 Reinsurance receivables 802,808 756,370 Deferred policy acquisition costs 962,381 841,425 Goodwill, net 208,438 202,615 Property and equipment, net 57,267 50,585 Other assets 68,604 76,211 Assets related to separate accounts Variable annuity 1,494,634 1,285,952 Variable universal life 29,086 13,606 Other 3,408 3,482 -------------- -------------- $12,507,123 $11,989,495 ============== ============== LIABILITIES Policy liabilities and accruals $ 4,925,064 $ 4,534,461 Stable value contract account balances 2,669,845 2,691,697 Annuity account balances 1,559,579 1,519,820 Other policyholders' funds 122,720 222,704 Other liabilities 411,885 327,108 Accrued income taxes (7,440) (15,200) Deferred income taxes (22,041) 44,636 Debt 236,349 172,035 Liabilities related to separate accounts Variable annuity 1,494,634 1,285,952 Variable universal life 29,086 13,606 Other 3,408 3,482 -------------- -------------- 11,423,089 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 705,018 617,182 Accumulated other comprehensive income Net unrealized gains (losses) on investments (net of income tax: 1999 - $(45,413); 1998 - $29,646) (84,339) 55,057 -------------- -------------- 894,034 944,194 -------------- -------------- $12,507,123 $11,989,495 ============== ==============
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
PROTECTIVE LIFE CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited) NINE MONTHS ENDED SEPTEMBER 30 ------------------------ 1999 1998 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 110,401 $ 96,043 Adjustments to reconcile net income to net cash provided by operating activities: Realized investment gains (losses) 3,340 (2,445) Amortization of deferred policy acquisition costs 82,315 89,053 Capitalization of deferred policy acquisition costs (178,319) (156,148) Depreciation expense 5,415 5,494 Deferred income taxes 18,508 9,389 Accrued income taxes 7,760 (31,101) Amortization of goodwill 4,083 832 Interest credited to universal life and investment products 234,402 259,672 Policy fees assessed on universal life and investment products (118,452) (104,173) Change in accrued investment income and other receivables (69,521) (90,238) Change in policy liabilities and other policyholders' funds of traditional life and health products 123,193 514,633 Change in other liabilities 92,242 (4,224) Other (net) (7,153) (113,329) ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 308,214 473,458 ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES Maturities and principal reductions of investments Investments available for sale 3,585,675 6,727,599 Other 208,300 149,765 Sale of investments Investments available for sale 291,153 524,624 Other 267,676 270,257 Cost of investments acquired Investments available for sale (3,868,246) (7,640,041) Other (742,912) (433,390) Acquisition and bulk reinsurance assumptions 46,508 (76,896) Purchase of property and equipment (15,360) (9,754) Sale of property and equipment 3,130 15 ------------- --------------- NET CASH USED IN INVESTING ACTIVITIES (224,076) (487,821) ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from borrowings under line of credit arrangements and debt 4,430,677 1,634,996 Principal payments on line of credit arrangements and debt (4,366,363) (1,255,566) Payment of preferred securities (55,000) Dividends to share owners (22,565) (19,769) Investment product deposits and changes in universal life deposits 866,850 739,488 Investment product withdrawals (856,478) (1,099,299) ------------ ----------- NET CASH USED IN FINANCING ACTIVITIES (2,879) (150) ------------- -------------- INCREASE (DECREASE) IN CASH 81,259 (14,513) CASH AT BEGINNING OF PERIOD 9,486 47,502 ------------- ------------- CASH AT END OF PERIOD $ 90,745 $ 32,989 ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period: Interest on debt $ 13,438 $ 6,824 Income taxes $ 39,406 $ 62,388 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Reissuance of treasury stock to ESOP $ 205 Unallocated stock in ESOP $ 264 $ 315 Reissuance of treasury stock $ 1,500 $ 3,097 Acquisitions Assets acquired $ 198,676 Liabilities assumed (33,236) Issuance of common stock (88,131) ------------- Net $ 77,309 =============
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 and subsidiaries (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the disclosures required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. Operating results for the nine month period ended September 30, 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 (where the Company maintains its headquarters), juries have substantial discretion in awarding punitive and non-economic compensatory damages, which creates the potential for unpredictable material adverse judgments in any given lawsuit. The Company, like other insurers, in the ordinary course of business, is involved in such litigation or alternatively in arbitration. Although the outcome of any such litigation or arbitration cannot be predicted 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 ("TOPRSSM"). 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 PRIDESSM 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 NINE MONTHS ENDED SEPTEMBER 30, 1999 ------------------------------------------------------------------------------ (IN THOUSANDS) SPECIALTY INSURANCE LIFE INSURANCE PRODUCTS ------------------------------------------ ---------------------------- DENTAL AND INDIVIDUAL CONSUMER FINANCIAL LIFE WEST COAST ACQUISITIONS BENEFITS INSTITUTIONS ---------- ------------ ------------ ------------ -------------- Premiums and policy fees $200,912 $62,520 $113,526 $360,295 $212,751 Reinsurance ceded (126,454) (42,802) (24,420) (56,961) (132,233) -------- ------- --------- --------- -------- Net of reinsurance ceded 74,458 19,718 89,106 303,334 80,518 Net investment income 45,492 56,779 99,587 13,380 17,632 Realized investment gains (losses) Other income 32,738 1,302 (9) 3,395 19,923 -------- -------- ----------- --------- --------- Total revenues 152,688 77,799 188,684 320,109 118,073 -------- ------- -------- -------- -------- Benefits and settlement expenses 55,265 50,471 98,237 201,349 40,586 Amortization of deferred policy acquisition costs 20,317 5,055 15,309 7,629 18,654 Other operating expenses 52,469 2,839 23,266 82,348 42,235 -------- -------- -------- --------- --------- Total benefits and expenses 128,051 58,365 136,812 291,326 101,475 -------- ------- -------- -------- -------- Income before income tax 24,637 19,434 51,872 28,783 16,598 RETIREMENT SAVINGS AND INVESTMENT PRODUCTS ----------------------------- STABLE CORPORATE VALUE INVESTMENT AND TOTAL PRODUCTS PRODUCTS OTHER ADJUSTMENTS CONSOLIDATED --------- ------------- ---------- ------------ ------------- Premiums and policy fees $ 17,610 $ 214 $ 967,828 Reinsurance ceded (382,870) ------------ ---------- ---------- Net of reinsurance ceded 17,610 214 584,958 Net investment income $155,634 78,736 36,330 503,570 Realized investment gains (losses) (82) 892 $ (4,150) (3,340) Other income 7,111 2,596 67,056 ------------ --------- ------- ----------- ----------- Total revenues 155,552 104,349 39,140 (4,150) 1,152,244 -------- -------- ------- -------- ---------- Benefits and settlement expenses 131,016 64,477 2,280 643,681 Amortization of deferred policy acquisition costs 575 14,777 (1) 82,315 Other operating expenses 2,963 15,785 28,888 (12,722) 238,071 --------- -------- ------- ------- ---------- Total benefits and expenses 134,554 95,039 31,167 (12,722) 964,067 -------- -------- ------- ------- ---------- Income before income tax 20,998 9,310 7,973 8,572 188,177 Income tax expense 67,744 67,744 Minority interest 8,269 8,269 Extraordinary loss 1,763 1,763 ----------- Net income $ 110,401 ========= OPERATING SEGMENT INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 ------------------------------------------------------------------------------ (IN THOUSANDS) SPECIALTY INSURANCE LIFE INSURANCE PRODUCTS ------------------------------------------ ---------------------------- DENTAL AND INDIVIDUAL CONSUMER FINANCIAL LIFE WEST COAST ACQUISITIONS BENEFITS INSTITUTIONS ---------- ------------ ------------ ------------ -------------- Premiums and policy fees $167,329 $55,740 $ 82,435 $253,330 $203,954 Reinsurance ceded (69,504) (36,490) (11,651) (70,147) (117,223) -------- ------- -------- --------- -------- Net of reinsurance ceded 97,825 19,250 70,784 183,183 86,731 Net investment income 40,401 46,837 79,860 12,206 17,085 Realized investment gains (losses) Other income 26,161 1,600 2,475 12,293 --------- ----------- --------- --------- --------- Total revenues 164,387 66,087 152,244 197,864 116,109 -------- ------- -------- -------- -------- Benefits and settlement expenses 80,768 42,944 84,171 126,141 39,806 Amortization of deferred policy acquisition costs 24,376 3,866 13,594 7,731 25,182 Other operating expenses 38,902 3,604 17,489 51,229 36,810 -------- -------- -------- --------- -------- Total benefits and expenses 144,046 50,414 115,254 185,101 101,798 -------- ------- -------- -------- -------- Income before income tax 20,341 15,673 36,990 12,763 14,311 RETIREMENT SAVINGS AND INVESTMENT PRODUCTS ----------------------------- STABLE CORPORATE VALUE INVESTMENT AND TOTAL PRODUCTS PRODUCTS OTHER ADJUSTMENTS CONSOLIDATED --------- ------------- ---------- ------------ ------------- Premiums and policy fees $ 13,827 $ 152 $776,767 Reinsurance ceded (305,015) ------------ ----------- -------- Net of reinsurance ceded 13,827 152 471,752 Net investment income $160,735 79,525 38,543 475,192 Realized investment gains (losses) (895) 678 $ 2,662 2,445 Other income 6,599 (551) 48,577 ------------ --------- --------- ------------ --------- Total revenues 159,840 100,629 38,144 2,662 997,966 -------- -------- -------- --------- -------- Benefits and settlement expenses 134,531 62,283 438 571,082 Amortization of deferred policy acquisition costs 554 13,752 (2) 89,053 Other operating expenses 1,864 15,308 24,867 (13,959) 176,114 --------- -------- -------- -------- -------- Total benefits and expenses 136,949 91,343 25,303 (13,959) 836,249 -------- -------- -------- -------- -------- Income before income tax 22,891 9,286 12,841 16,621 161,717 Income tax expense 56,601 56,601 Minority interest 9,073 9,073 --------- Net income $ 96,043 ======== OPERATING SEGMENT ASSETS SEPTEMBER 30, 1999 ------------------------------------------------------------------------------ (IN THOUSANDS) SPECIALTY INSURANCE LIFE INSURANCE PRODUCTS -------------------------------------------- -------------------------- DENTAL AND INDIVIDUAL CONSUMER FINANCIAL LIFE WEST COAST ACQUISITIONS BENEFITS INSTITUTIONS ------------- ------------ ------------ ----------- ------------ Investments and other assets $1,180,493 $1,292,180 $1,618,478 $277,537 $732,272 Deferred policy acquisition costs and goodwill 352,654 183,164 240,037 233,726 53,324 ----------- ----------- ----------- -------- --------- Total assets $1,533,147 $1,475,344 $1,858,515 $511,263 $785,596 ========== ========== ========== ======== ======== RETIREMENT SAVINGS AND INVESTMENT PRODUCTS ------------------------------ STABLE CORPORATE VALUE INVESTMENT AND TOTAL PRODUCTS PRODUCTS OTHER CONSOLIDATED ------------- ----------- ---------- ------------- Investments and other assets $2,781,357 $2,838,258 $615,729 $11,336,304 Deferred policy acquisition costs and goodwill 1,240 106,557 117 1,170,819 ------------ ----------- ---------- ------------ Total assets $2,782,597 $2,944,815 $615,846 $12,507,123 ========== ========== ======== =========== 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 September 30, 1999 and for the nine 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 $534.9 million and $49.1 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 September 30, 1999 and December 31, 1998, prepared on the basis of reporting investments at amortized cost rather than at market values, are as follows:
SEPTEMBER 30, 1999 DECEMBER 31, 1998 ------------------ ----------------- (IN THOUSANDS) Total investments $ 8,749,231 $ 8,501,646 Deferred policy acquisition costs 953,916 857,948 All other assets 2,933,728 2,545,197 ------------ ------------ $12,636,875 $11,904,791 =========== =========== Deferred income taxes $ 23,372 $ 12,798 All other liabilities 11,445,130 10,757,856 ----------- ----------- 11,468,502 10,770,654 Guaranteed preferred beneficial interests in Company's sub- ordinated debentures 190,000 245,000 Share-owners' equity 978,373 889,137 ------------- ------------- $12,636,875 $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 swaps, 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 nine months of 1999 or the full year of 1998. At September 30, 1999, options with a notional amount of $400 million were in a $1.1 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 (prior to their redemption), 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 September 30, 1999, interest rate swap contracts, swaptions, caps and floors with a notional amount of $1,138 million were in a $1.0 million net unrealized loss position. During the nine months ended September 30, 1999, a $6.4 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 nine months ended September 30 is summarized as follows:
RECONCILIATION OF NET INCOME AND AVERAGE SHARES OUTSTANDING SEPTEMBER 30 ------------------------------- 1999 1998 ---- ---- Net income $110,401 $96,043 Dividends on FELINE PRIDES (1) (1) --------- -------- Adjusted net income $110,401 $96,043 ======== ======= Average shares issued and outstanding 64,475,225 61,919,841 Issuable under various deferred compensation plans 1,103,740 943,682 ---------- ----------- Average shares outstanding - basic 65,578,965 62,863,523 Stock appreciation rights 188,465 164,105 Issuable under various other stock-based compensation plans 381,318 411,566 FELINE PRIDES stock purchase contracts (1) (1) ----------- ----------- Average shares outstanding - diluted 66,148,748 63,439,194 ========== ==========
(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 nine months ended September 30, 1999 and 1998:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ------------------------------------------------------- (IN THOUSANDS) 1999 1998 1999 1998 ---- ---- ---- ---- Net income $37,333 $33,508 $110,401 $ 96,043 Increase (decrease) in net unrealized gains on investments (net of income tax: three months:1999-$2,800; 1998-$23,220 nine months:1999-$(76,228); 1998-$24,526) 5,198 43,123 (141,567) 45,549 Reclassification adjustment for amounts included in net income (net of income tax: three months: 1999-$1,394; 1998-$(144) nine months: 1999-$1,169; 1998-$(856)) 2,590 (267) 2,171 (1,589) ----- ----- -------- -------- Comprehensive income (loss) $45,121 $76,364 $(28,995) $140,003 ====== ===== ======== ========
NOTE K - ACQUISITIONS In September 1999, the Company acquired a block of credit life and disability policies which it had ceded to NationsCredit Insurance Corporation. 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. 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 nine months ended September 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 nine months ended September 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.
NINE MONTHS ENDED SEPTEMBER 30, 1998 ----------------------- (IN THOUSANDS) (UNAUDITED) Total revenues $ 1,092,935 Net income $ 93,877 Net income per share-basic $ 1.44 Net income per share-diluted $ 1.42
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. NOTE N - SUBSEQUENT EVENTS On October 20, 1999, the Company announced that it has agreed to acquire the Lyndon Insurance Group ("Lyndon") from the Frontier Insurance Group, Inc. Headquartered in St. Louis, Lyndon manufactures and markets a variety of specialty insurance products, including credit life and disability insurance, and vehicle and marine service agreements. Lyndon distributes products on a national basis through financial institutions and automobile dealers. The transaction is subject to regulatory approval and certain customary closing conditions. On November 1, 1999, the Company announced that it has made an equity investment in Matrix Direct, a privately-owned firm located in San Diego. Matrix Direct is a leading direct marketer of life insurance products and offers a full complement of direct marketing services, including market research, media buying, fulfillment, a nationally-licensed sales group and new business processing. 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 herein 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 NINE MONTHS --------------------------------- ENDED AMOUNT PERCENTAGE SEPTEMBER 30 (IN THOUSANDS) INCREASE ------------- --------------- ------------ 1998 $471,752 29.7 % 1999 584,958 24.0
Premiums and policy fees increased $113.2 million or 24.0% in the first nine months of 1999 as compared to the first nine months of 1998. Premiums and policy fees in the Individual Life Division decreased $23.4 million in the first nine months of 1999 as compared to the same period in 1998 due to increased usage of reinsurance. Premiums and policy fees from the West Coast Division increased $0.5 million in the first nine months of 1999 as compared to the first nine months of 1998. The coinsurance of a block of policies from Lincoln National Corporation ("Lincoln National") in October 1998 resulted in a $23.3 million increase in premiums and policy fees in the Acquisitions Division, whereas decreases in older acquired blocks resulted in a $5.0 million decrease in premiums and policy fees. The September 1998 acquisition of United Dental Care, Inc. ("United Dental Care") resulted in a $82.7 million increase in premiums and policy fees in the Dental Division for the first nine months of 1999 as compared to the same period in 1998. Premiums and policy fees related to the Dental Division's other businesses increased $37.4 million in the first nine months of 1999 as compared to the same period in 1998. Overall premiums and policy fees from the Financial Institutions Division decreased $6.2 million in the first nine months of 1999 as compared to the first nine months of 1998 of which $8.9 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 $2.7 million in the first nine months of 1999 as compared to the first nine months of 1998. The increase in premiums and policy fees from the Investment Products Division was $3.8 million. NET INVESTMENT INCOME The following table sets forth for the periods shown the amount of net investment income and the percentage change from the prior period:
NET INVESTMENT INCOME NINE MONTHS --------------------------------- ENDED AMOUNT PERCENTAGE SEPTEMBER 30 (IN THOUSANDS) INCREASE ------------- --------------- ------------ 1998 $475,192 11.6 % 1999 503,570 6.0
Net investment income in the first nine months of 1999 was $28.4 million or 6.0% higher than the corresponding period of the preceding year primarily due to increases in the average amount of invested assets. 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. 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 (losses) for the periods shown: NINE MONTHS REALIZED INVESTMENT ENDED GAINS (LOSSES) SEPTEMBER 30 (IN THOUSANDS) ----------------- --------------------- 1998 $2,445 1999 (3,340) Realized investment losses were $3.3 million for the first nine months of 1999 compared to gains of $2.4 million for the corresponding period of 1998. OTHER INCOME The following table sets forth other income for the periods shown: NINE MONTHS ENDED OTHER INCOME SEPTEMBER 30 (IN THOUSANDS) ----------------- --------------- 1998 $48,577 1999 67,056 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 nine months of 1999 was $18.5 million higher than the corresponding period of 1998. Revenues from the Company's broker-dealer subsidiary and automobile warranty business increased $7.8 million and $7.6 million, respectively, in the first nine months of 1999 as compared to the same period in 1998. Other income from all other sources increased $3.1 million in the first nine months of 1999 as compared with the first nine 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 NINE MONTHS ENDED SEPTEMBER 30 (IN THOUSANDS) 1998 1999 ---- ---- Operating income (loss) (1)(2) Life Insurance Individual Life $ 20,341 $ 24,637 West Coast 15,673 19,434 Acquisitions 36,990 51,872 Specialty Insurance Products Dental and Consumer Benefits 12,763 28,783 Financial Institutions 14,311 16,598 Retirement Savings and Investment Products Stable Value Products 23,786 21,080 Investment Products 8,975 9,310 Corporate and other (2) 12,841 7,973 --------- --------- Total operating income 145,680 179,687 -------- -------- Realized Investment Gains (Losses) Stable Value Products (895) (82) Investment Products 678 892 Unallocated Realized Investment Gains (Losses) 2,662 (4,150) Related Amortization of Deferred Policy Acquisition Costs Investment products (367) (892) --------- ---------- Total net 2,078 (4,232) -------- --------- Income (loss) before income tax (2) Life Insurance Individual Life 20,341 24,637 West Coast 15,673 19,434 Acquisitions 36,990 51,872 Specialty Insurance Products Dental and Consumer Benefits 12,763 28,783 Financial Institutions 14,311 16,598 Retirement Savings and Investment Products Stable Value Products 22,891 20,998 Investment Products 9,286 9,310 Corporate and other (2) 12,841 7,973 Unallocated realized investment gains (losses) 2,662 (4,150) ---------- --------- Total income before income tax $147,758 $175,455 ======== ======== (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 $12,722 and $13,959 in the first nine months of 1999 and 1998, respectively. 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 $24.6 million in the first nine months of 1999 compared to $20.3 million in the same period of 1998, an increase of 21%. The Division's mortality experience was $3.8 million more favorable in the first nine months of 1999 as compared to the same period of 1998. The Division's 1999 results include a $4.1 million loss relating to a venture to sell term and term-like products through direct response and other expenses to support future growth. West Coast had pretax operating income of $19.4 million for the first nine months of 1999 compared to $15.7 million for the same period last year. This increase reflects the Division's growth through sales. Pretax operating income from the Acquisitions Division was $51.9 million in the first nine months of 1999 as compared to $37.0 million in the same period of 1998. The Division's mortality experience was approximately $6.2 million better than expected in the first nine months of 1999 as compared to being approximately $2.1 million worse than expected in the first nine 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 $7.0 million in the first nine months of 1999. The Dental Division's pretax operating income was $28.8 million in the first nine months of 1999 compared to $12.8 million in the first nine months of 1998. The recent acquisition of United Dental Care contributed earnings of $13.9 million in 1999. The pretax operating earnings of the Division's other businesses increased $2.1 million in the first nine months of 1999 as compared to the same period last year. Pretax operating income of the Financial Institutions Division was $16.6 million in the first nine months of 1999 as compared to $14.3 million last year. In September 1999, the Company reacquired a block of credit life and disability policies which it had ceded to NationsCredit Insurance Corporation. This transaction resulted in $1.0 million of earnings in the third quarter of 1999. In addition, the Division's other lines of business improved in the first nine months of 1999 as compared to the same period of 1998. The Stable Value Products Division had pretax operating income of $21.1 million in the first nine months of 1999 as compared to $23.8 million in the corresponding period of 1998. This decrease was primarily due to lower interest rate spreads. Realized investment losses associated with this Division in the first nine months of 1999 were $0.1 million as compared to losses of $0.9 million in the same period last year. As a result, total pretax earnings were $21.0 million in the first nine months of 1999 compared to $22.9 million for the same period last year. Investment Products Division pretax operating income was $9.3 million in the first nine months of 1999 compared to $9.0 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 nine months of 1999 as compared to approximately $0.3 million of realized gains in the same period of 1998. Total pretax earnings were $9.3 million in the first nine months of 1999 as compared to $9.3 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 $4.9 million in the first nine months of 1999 as compared to the first nine 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: NINE MONTHS ENDED ESTIMATED EFFECTIVE SEPTEMBER 30 INCOME TAX RATES - ----------------- ----------------------- 1998 35% 1999 36 The effective income tax rate for the full year of 1998 was approximately 35%. 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 BEFORE EXTRAORDINARY LOSS NINE MONTHS ---------------------------------------------------------------------------------- ENDED TOTAL PER SHARE- PERCENTAGE PER SHARE- PERCENTAGE SEPTEMBER 30 (IN THOUSANDS) BASIC INCREASE DILUTED INCREASE ------------ ------------- --------------- ------------- ------------ ------------ 1998 $ 96,043 $1.53 15.0% $1.51 14.4% 1999 112,164 1.71 11.8 1.70 12.6
Compared to the same period in 1998, net income per share-diluted in the first nine months of 1999 increased 12.6%, reflecting improved operating earnings in the Individual Life, West Coast, Acquisitions, Dental, Financial Institutions, and Investment Products Divisions, which were partially offset by lower operating earnings in the Stable Value Products Division and the Corporate and Other segment and realized investment losses (net of related amortization of deferred policy acquisition costs). 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 September 30, 1999, the fixed maturity investments (bonds and redeemable preferred stocks) had a market value of $6,265.5 million, which is 2.1% below amortized cost (less allowances for uncollectible amounts on investments) of $6,401.6 million. The Company had $1,894.8 million in mortgage loans at September 30, 1999. While the Company's mortgage loans do not have quoted market values, at September 30, 1999, the Company estimates the market value of its mortgage loans to be $1,926.8 million (using discounted cash flows from the next call date) which is 1.7% 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 September 30, 1999, approximately $538.7 million of the Company's mortgage loans have this participation feature. At September 30, 1999, delinquent mortgage loans and foreclosed real estate were 0.2% of assets. Bonds rated less than investment grade were 1.9% 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 $21.1 million at September 30, 1999. Policy loans at September 30, 1999, were $231.8 million, a decrease of $0.8 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 September 30, 1999, the Company had outstanding mortgage loan commitments of $682.4 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 September 30, 1999, the Company had policy liabilities and accruals of $4.9 billion. The Company's life insurance products have a weighted average minimum credited interest rate of approximately 4.3%. At September 30, 1999, the Company had $2.7 billion of stable value contract account balances and $1.6 billion of annuity account balances. DERIVATIVE FINANCIAL INSTRUMENTS The Company does not currently use derivative financial instruments for trading purposes. Combinations of swaps, 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 September 30, 1999, options with a notional amount of $400 million were in a $1.1 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 September 30, 1999, interest rate swap contracts, swaptions, caps and floors with a notional amount of $1,138 million were in an $1.0 million net unrealized loss position. During the nine months ended September 30, 1999, a $6.4 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 has $0.1 billion of contracts which may be terminated by the contract holder upon seven or thirty days notice. 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 September 30, 1999, to fund mortgage loans and to purchase fixed maturity and other long-term investments in the amount of $754.0 million. The Company's subsidiaries held $190.0 million in cash and short-term investments at September 30, 1999. Protective Life Corporation had an additional $4.9 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 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 September 30, 1999, Protective Life Corporation had $59.0 million outstanding under its $70.0 million revolving line of credit and an additional $57.6 million of bank borrowings at a weighted average interest rate of 5.7%. Included in these bank borrowings is a $55.0 million term loan, the proceeds of which were used to redeem the MIPS. The remaining increase in borrowing by Protective Life Corporation since December 31, 1998, was used for general corporate purposes. 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 and term-like insurance products. It is likely that many states will adopt Triple X effective January 1, 2000. Triple X potentially increases the amount of regulatory capital employed in the sale of these products. Insurers may react to Triple X by changing product features and/or premium rates, or by maintaining the status quo. Therefore, the competitive environment after January 1 is unclear. 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. The Company cannot predict what effect Triple X may have on its life insurance sales. 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 may consider 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 has approved legislation that would permit commercial banks, insurance companies and investment banks to combine, provided certain requirements are satisfied. While the Company cannot predict the impact of this legislation, it could cause the Company to experience increased competition as larger more efficient organizations emerge from such combinations. 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 (where the Company maintains its headquarters), juries have substantial discretion in awarding punitive and non-economis compensatory damages which creates the potential for unpredictable material adverse judgments in any given lawsuit. The Company, like other insurers, in the ordinary course of business, is involved in such litigation or alternatively in arbitration. Although the outcome of any such litigation or arbitration cannot be predicted 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. Earlier this year, an unrelated insurer was placed under insurance department supervision due to its inability to redeem approximately $6.8 billion of contracts under which contract holders could terminate the contracts upon seven or thirty days notice. The Company cannot predict what effect this unrelated insurer's difficulties will have on certain markets in which the Company participates. 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 its insurance administration systems and general administration systems. 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. 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 Company's mission critical systems. Integrated tests involve multiple system testing and are used to verify the Year 2000 readiness of interfaces and connectivity across multiple systems. The Company used its mainframe computer to simulate a Year 2000 production environment and to facilitate integrated testing. Integrated tests were completed during August 1999. Additional testing will be conducted whenever changing circumstances warrant additional testing. Significant business partners and suppliers that provide products or services critical to Company operations are being reviewed for year 2000 readiness. To date, no significant 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 August 31, 1999, costs that have been specifically identified as relating to the Year 2000 problem total $4.9 million, with an additional $0.3 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 has been prepared and approved by senior management. 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 October 26, 1999, reporting under Item 5 and Item 7 the Company's 1999 third 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: NOVEMBER 12, 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 October 26, 1999, except for Note N as to which the date is November 1, 1999, on our review of interim consolidated financial information of Protective Life Corporation and subsidiaries for the period ended September 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 November 12, 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 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 6,265,531 0 0 29,707 1,894,874 16,201 8,611,014 90,745 802,808 962,381 12,507,123 4,403,003 522,061 0 122,720 236,349 0 0 34,667 859,367 12,507,123 584,958 503,570 (3,340) 67,056 643,681 82,315 238,071 188,177 67,744 112,164 0 (1,763) 0 110,401 1.68 1.67 0 0 0 0 0 0 0 Net of minority interest in income of consolidated subsidiaries of $8,269.
EX-99 4 Exhibit 99 to Form 10-Q of Protective Life Corporation for the nine months ended September 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. WE OPERATE IN A MATURE, HIGHLY COMPETITIVE INDUSTRY, WHICH COULD LIMIT OUR ABILITY TO GAIN OR MAINTAIN OUR POSITION IN THE INDUSTRY. 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 has approved legislation that would permit commercial banks, insurance companies and investment banks to combine, provided certain requirements are satisfied. 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 financial strength and claims-paying-ability ratings from rating agencies. The Company competes against other insurance companies and financial institutions in the origination of commercial mortgage loans. A RATINGS DOWNGRADE COULD ADVERSELY AFFECT OUR ABILITY TO COMPETE. Ratings are an important factor in the Company's competitive position. 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 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. OUR POLICY CLAIMS FLUCTUATE FROM YEAR TO YEAR. The Company's results may fluctuate from year to year on account of fluctuations in policy claims received by the Company. WE COULD BE FORCED TO SELL ILLIQUID INVESTMENTS AT A LOSS TO COVER POLICYHOLDER WITHDRAWALS. Many of the products offered by the Company's life insurance subsidiaries allow policyholders and contract holders 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 COULD NEGATIVELY AFFECT OUR SPREAD INCOME. 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. INSURANCE COMPANIES ARE HIGHLY REGULATED. 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 share owners. The Company cannot predict the form of any regulatory initiatives. The Company's insurance subsidiaries act as fiduciaries and are subject to regulation by the United States Department of Labor when providing a variety of products and services to employee benefit plans governed by ERISA. Severe penalties are imposed by ERISA on fiduciaries that breach their duties to the plans under ERISA's prohibited transaction provisions. Certain policies, contracts and annuities offered by the Company's insurance subsidiaries are subject to regulation under the federal securities laws administered by the Securities and Exchange Commission. The federal securities laws contain regulatory restrictions and criminal, administrative and private remedial provisions. A TAX LAW CHANGE COULD ADVERSELY AFFECT OUR ABILITY TO COMPETE WITH NON-INSURANCE PRODUCTS. Under the Internal Revenue Code of 1986, as amended, 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 Internal Revenue 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 future tax initiatives may be proposed which could affect the Company. INDUSTRYWIDE LITIGATION CONCERNING SALES PRACTICES, AGENT MISCONDUCT, FAILURE TO SUPERVISE AGENTS, AND OTHER MATTERS COULD RESULT IN SUBSTANTIAL JUDGEMENTS AGAINST US. 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 (where the Company maintains its headquarters), juries have substantial discretion in awarding punitive and non-economic compensatory damages, which creates the potential for unpredictable material adverse judgments in any given lawsuit. The Company, like other insurers, in the ordinary course of business, is involved in such litigation or alternatively in arbitration. The outcome of any such litigation or arbitration cannot be predicted with certainty. In addition, in some class action and other lawsuits involving insurers' sales practices, insurers have made material settlement payments. OUR INVESTMENTS ARE SUBJECT TO RISKS. The Company's invested assets (including 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. OUR ACQUISITION STRATEGY INVOLVES RISKS. 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. WE ARE DEPENDENT ON 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 COMPLIANCE ISSUES MAY ADVERSELY AFFECT US. 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. Because 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. OUR REINSURANCE PROGRAM INVOLVES RISKS. The Company's insurance subsidiaries cede insurance to other insurance companies through reinsurance. 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. -----END PRIVACY-ENHANCED MESSAGE-----