-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, fcCnHVDDw7EfJ9CDbI+ATIQlCnLJTub/4VUrqHl/gggywAq+Qs70hL9hJS9Vf8RH fPIyvEx2dg4yM6JP1j2PCw== 0000912057-94-003846.txt : 19941117 0000912057-94-003846.hdr.sgml : 19941117 ACCESSION NUMBER: 0000912057-94-003846 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19940930 FILED AS OF DATE: 19941114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROTECTIVE LIFE CORP CENTRAL INDEX KEY: 0000355429 STANDARD INDUSTRIAL CLASSIFICATION: 6311 IRS NUMBER: 952492236 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12332 FILM NUMBER: 94559379 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 10-Q - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- 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, 1994 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ Commission File Number 0-9924 PROTECTIVE LIFE CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 95-2492236 (State of incorporation) (IRS Employer Identification Number) 2801 HIGHWAY 280 SOUTH BIRMINGHAM, ALABAMA 35223 (Address of principal executive offices) (205) 879-9230 (Registrant's telephone number) --------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Number of shares of Common Stock, $.50 par value, outstanding as of November 4, 1994: 13,713,259 shares. PROTECTIVE LIFE CORPORATION INDEX
PAGE NUMBER ----------- PART I. FINANCIAL INFORMATION: Item 1. Financial Statements: Report of Independent Accountants ............................... 2 Consolidated Condensed Statements of Income for the Three and Nine Months ended September 30, 1994 and 1993 (unaudited) .. 3 Consolidated Condensed Balance Sheets as of September 30, 1994 (unaudited) and December 31, 1993 ......................... 4 Consolidated Condensed Statements of Cash Flows for the Nine Months ended September 30, 1994 and 1993 (unaudited) ........... 5 Notes to Consolidated Condensed Financial Statements (unaudited) .................................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............................... 11 Part II. OTHER INFORMATION: Item 6. Exhibits and Reports on Form 8-K .......................... 21 Signature ........................................................... 22
REPORT OF INDEPENDENT ACCOUNTANTS To the Directors and Stockholders Protective Life Corporation Birmingham, Alabama We have reviewed the accompanying consolidated condensed balance sheet of Protective Life Corporation and subsidiaries as of September 30, 1994, and the related consolidated condensed statements of income and cash flows for the three-month and nine- month periods ended September 30, 1994 and 1993. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the consolidated condensed financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet as of December 31, 1993, and the related consolidated statements of income, stockholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated February 14, 1994, we expressed an unqualified opinion which contains an explanatory paragraph regarding the changes in accounting for certain investments in debt and equity securities in 1993 and postretirement benefits other than pensions in 1992 on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated condensed balance sheet as of December 31, 1993, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. COOPERS & LYBRAND L.L.P. Birmingham, Alabama October 25, 1994 except for Note H, as to which the date is November 7, 1994 2 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 ------------------------ ------------------------ 1994 1993 1994 1993 ---- ---- ---- ---- REVENUES Premiums and policy fees (net of reinsurance ceded: three months: 1994 - $50,714; 1993 - $33,045 $ 101,876 $ 94,421 $ 289,362 $273,609 nine months: 1994 - $121,462; 1993 - $93,927) Net investment income 105,762 95,697 304,647 262,073 Realized investment gains (losses) 3,122 (39) 4,855 763 Other income 2,185 6,607 13,394 16,929 ----------- ---------- ------------ ----------- 212,945 196,686 612,258 553,374 ----------- ---------- ------------ ----------- BENEFITS AND EXPENSES Benefits and settlement expenses (net of reinsurance ceded: three months: 1994 - $31,118; 1993 - $18,321 134,208 126,679 376,536 351,306 nine months: 1994 - $80,541; 1993 - $57,558) Amortization of deferred policy acquisition costs 20,493 19,030 60,218 52,318 Other operating expenses (net of reinsurance ceded: three months: 1994 - $3,793; 1993 - $3,368 29,610 30,945 98,038 92,318 nine months: 1994 - $9,842; 1993 - $8,900) ----------- ----------- ------------ ----------- 184,311 176,654 534,792 495,942 ----------- ----------- ------------ ----------- INCOME BEFORE INCOME TAX AND MINORITY INTEREST 28,634 20,032 77,466 57,432 Income tax expense 9,163 7,671 24,789 19,639 ----------- ----------- ------------ ----------- INCOME BEFORE MINORITY INTEREST 19,471 12,361 52,677 37,793 Minority interest in net income of consolidated subsidiaries 804 0 992 19 ----------- ----------- ------------ ----------- NET INCOME $ 18,667 $ 12,361 $ 51,685 $ 37,774 ----------- ----------- ------------ ----------- ----------- ----------- ------------ ----------- NET INCOME PER SHARE $ 1.36 $ 0.90 $ 3.77 $ 2.76 ----------- ----------- ------------ ----------- ----------- ----------- ------------ ----------- DIVIDENDS PAID PER SHARE $ 0.28 $ 0.26 $ 0.82 $ 0.75 ----------- ----------- ------------ ----------- ----------- ----------- ------------ ----------- Average shares outstanding 13,701,083 13,690,119 13,694,114 13,689,961
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 3 PROTECTIVE LIFE CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS (DOLLARS IN THOUSANDS)
SEPTEMBER 30 DECEMBER 31 1994 1993 ------------ ----------- ASSETS (UNAUDITED) Investments: Fixed maturities $3,395,374 $3,051,292 Equity securities 45,197 40,596 Mortgage loans on real estate 1,393,667 1,407,744 Investment real estate, net 29,541 22,061 Policy loans 139,462 141,135 Other long-term investments 25,699 20,191 Short-term investments 135,345 83,692 ---------- ---------- Total investments 5,164,285 4,766,711 Cash 2,519 27,119 Accrued investment income 53,938 51,337 Accounts and premiums receivable, net 21,344 26,315 Reinsurance receivables 91,273 102,559 Deferred policy acquisition costs 374,612 299,584 Property and equipment, net 35,123 35,664 Other assets 14,940 3,316 Assets held in separate accounts 88,533 3,400 ---------- ---------- TOTAL ASSETS $5,846,567 $5,316,005 ---------- ---------- ---------- ---------- LIABILITIES Policy liabilities and accruals $1,620,586 $1,469,630 Guaranteed investment contract deposits 2,251,587 2,015,075 Annuity deposits 1,175,551 1,005,742 Other policyholders' funds 179,107 141,975 Other liabilities 109,909 96,682 Accrued income taxes 2,609 6,381 Deferred income taxes (10,487) 69,269 Debt 102,046 147,118 Liabilities related to separate accounts 88,533 3,400 Minority interest in consolidated subsidiaries 55,000 0 ---------- ---------- TOTAL LIABILITIES 5,574,441 4,955,272 ---------- ---------- COMMITMENTS AND CONTINGENT LIABILITIES - NOTE C STOCKHOLDERS' EQUITY Preferred Stock, $1 par value Shares authorized: 3,850,000; Issued: none Junior Participating Cumulative Preferred Stock, $1 par value Shares authorized: 150,000; Issued: none Common Stock, $0.50 par value Shares authorized: 80,000,000 Issued: 1994 and 1993 - 15,668,231 7,834 7,834 Additional paid-in capital 70,925 70,469 Net unrealized gains (losses) on investments (net of income tax: 1994 - $(48,694); 1993 - $19,774) (90,431) 39,284 Retained earnings 307,814 267,361 Treasury stock (1994 - 1,974,117 shares; 1993 - 1,974,987 shares) (18,424) (18,359) Unallocated stock in Employee Stock Ownership Plan (1994 - 422,073 shares; 1993 - 442,000 shares) (5,592) (5,856) ---------- ---------- TOTAL STOCKHOLDERS' EQUITY 272,126 360,733 ---------- ---------- $5,846,567 $5,316,005 ---------- ---------- ---------- ----------
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 4 PROTECTIVE LIFE CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30 ------------------------- 1994 1993 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 51,685 $ 37,774 Adjustments to reconcile net income to net cash provided by operating activities: Net change in deferred policy acquisition costs (67,797) (19,456) Depreciation expense 4,388 3,122 Deferred income taxes (79,756) (1,816) Accrued income taxes (3,772) 2,266 Interest credited to universal life and investment products 183,642 164,095 Policy fees assessed on universal life and investment products (58,887) (44,328) Change in accrued investment income and other receivables 13,656 (99,142) Change in policy liabilities and other policyholders' funds of traditional life and health products 84,215 134,751 Change in other liabilities 12,777 12,767 Other (net) (9,588) 8,000 ---------- ---------- Net cash provided by operating activities 130,563 198,033 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Cost of investments acquired Investments available for sale (1,227,707) Other (112,964) (1,568,906) Maturities and principal reductions of investments Investments available for sale 317,959 Other 129,296 837,201 Sale of investments Investments available for sale 349,944 Other 16,183 167,583 Acquisitions and bulk reinsurance assumptions 39,328 17,968 Purchase of property and equipment (4,380) (3,711) Sale of property and equipment 1,832 1,471 ---------- ---------- Net cash used in investing activities (490,509) (548,394) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from borrowings under line of credit arrangements and long-term debt 460,186 548,351 Principal payments on line of credit arrangements and long-term debt (505,258) (482,123) Proceeds from issuance of Monthly Income Preferred Securities 55,000 Dividends to stockholders (11,232) (10,267) Purchase of treasury stock (190) Change in universal life, annuity, and guaranteed investment contract product deposits 336,840 326,021 ---------- ---------- Net cash provided by financing activities 335,346 381,982 ---------- ---------- INCREASE (DECREASE) IN CASH (24,600) 31,621 CASH AT BEGINNING OF PERIOD 27,119 14,959 ---------- ---------- CASH AT END OF PERIOD $ 2,519 $ 46,580 ---------- ----------- ---------- ----------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period: Interest on debt $ (4,176) $ (4,217) Income taxes $ (37,937) $ (19,841) SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Change in minority interest in consolidated subsidiary $ (1,311) Reissuance of treasury stock to ESOP $ 3 $ 3 Unallocated stock in ESOP $ 264 $ 344 Reissuance of treasury stock $ 578 $ 135 Acquisitions and bulk reinsurance assumptions Assets acquired $ 41,818 $ 426,992 Liabilities assumed (49,049) (429,580) ---------- ---------- Net $ (7,231) $ (2,588) ---------- ---------- ---------- ----------
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 5 PROTECTIVE LIFE CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) NOTE A - BASIS OF PRESENTATION The accompanying unaudited consolidated condensed financial statements of Protective Life Corporation (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the disclosures required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. Operating results for the nine month period ended September 30, 1994 are not necessarily indicative of the results that may be expected for the year ending December 31, 1994. 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, 1993. NOTE B - MONTHLY INCOME PREFERRED SECURITIES On June 10, 1994, a special purpose finance subsidiary of the Company, PLC Capital L.L.C. ("PLC Capital"), issued $55 million of 9% Cumulative Monthly Income Preferred Securities, Series A ("MIPS"), guaranteed by the Company. PLC Capital was formed solely to issue MIPS and other securities and lend the proceeds thereof to the Company in exchange for subordinated debentures of the Company. The Company has the right under the subordinated debentures to extend interest payment periods up to 60 months, and, as a consequence, monthly dividends on the MIPS 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 during any such extended interest payment period. The MIPS are redeemable by PLC Capital at any time on or after June 30, 1999. The MIPS and dividends thereon are reported in the accompanying financial statements as "minority interest in consolidated subsidiaries." NOTE C - COMMITMENTS AND CONTINGENT LIABILITIES At September 30, 1994, the Company's life insurance subsidiaries were committed to fund approximately $333.7 million of long-term investments. Also, the Company has issued a guarantee in connection with the sale of certain tax exempt mortgage loans which may be put to the Company in the event of default. At September 30, 1994, the loans totaled $17.1 million. At September 30, 1994, the Company was contingently liable as a guarantor of $8.0 million in mortgage debt in the name of a joint venture in which the Company is a partner. Should the joint venture become unable to meet its obligation on this debt, the Company would assume title to the real estate development along with the debt. 6 The Company is contingently liable to obtain a $20 million letter of credit under indemnity agreements with its directors. Such agreements provide insurance protection in excess of the directors' and officers' liability insurance in force at the time up to $20 million. Should certain events occur constituting a change in control of the Company, the Company must obtain the letter of credit upon which directors may draw for defense or settlement of any claim relating to performance of their duties as directors. The Company has similar agreements with certain of its officers providing up to $10 million in indemnification which are not secured by the obligation to obtain a letter of credit. Under insurance guaranty fund laws, in most states, insurance companies doing business therein can be assessed up to prescribed limits for policyholder losses incurred by insolvent companies. The Company does not believe such assessments will be materially different from amounts already provided for in the financial statements. Most of these laws do provide, however, that an assessment may be excused or deferred if it would threaten an insurer's own financial strength. The Company and its subsidiaries, like other life and health insurers, from time to time are involved in litigation. To date, no such lawsuit has resulted in the award of any significant amount of damages against the Company. There are currently several lawsuits pending against the Company in Alabama, one of which is a class action concerning the sale of credit insurance. Although the outcome of any litigation cannot be predicted with certainty, the Company believes that such litigation will not have a material adverse effect on the financial position of the Company. 7 NOTE D - BUSINESS SEGMENTS The Company operates predominantly in the life and accident and health insurance industry. The following table sets forth total revenues, income (loss) before income tax, and identifiable assets of the Company's business segments.
NINE MONTHS ENDED SEPTEMBER 30 ------------------------------------ 1994 1993 ---------------- ---------------- AMOUNT PERCENT AMOUNT PERCENT -------- ------- -------- ------- (DOLLARS IN THOUSANDS) TOTAL REVENUES: Agency $ 90,949 14.9% $ 81,481 14.7% Group 108,407 17.7 107,425 19.4 Financial Institutions 81,249 13.3 68,804 12.4 Investment Products 64,413 10.5 58,646 10.6 Guaranteed Investment Contracts 138,972 22.7 119,396 21.6 Acquisitions 114,123 18.6 86,105 15.6 Corporate and Other 13,671 2.2 28,715 5.2 Unallocated Realized Investment Gains (Losses) 474 0.1 2,802 0.5 -------- ----- -------- ----- $612,258 100.0% $553,374 100.0% -------- ----- -------- ----- -------- ----- -------- ----- INCOME (LOSS) BEFORE INCOME TAX AND MINORITY INTEREST: Agency $ 12,590 16.3% $ 13,921 24.2% Group 7,045 9.1 8,623 15.0 Financial Institutions 6,825 8.8 6,061 10.6 Investment Products 3,186 4.1 2,465 4.3 Guaranteed Investment Contracts 25,276 32.6 13,931 24.3 Acquisitions 28,605 36.9 19,013 33.1 Corporate and Other (6,535) (8.4) (9,384) (16.4) Unallocated Realized Investment Gains (Losses) 474 0.6 2,802 4.9 -------- ----- -------- ----- $ 77,466 100.0% $ 57,432 100.0% -------- ----- -------- ----- -------- ----- -------- ----- SEPTEMBER 30, 1994 DECEMBER 31, 1993 ------------------ ----------------- AMOUNT PERCENT AMOUNT PERCENT --------- ------- --------- ------- (DOLLARS IN THOUSANDS) IDENTIFIABLE ASSETS: Agency $ 683,013 11.7% $ 642,325 12.1% Group 212,070 3.6 208,968 3.9 Financial Institutions 207,511 3.5 192,486 3.6 Investment Products 1,122,218 19.2 879,365 16.6 Guaranteed Investment Contracts 2,187,962 37.4 2,041,564 38.4 Acquisitions 1,131,722 19.4 1,145,357 21.5 Corporate and Other 302,071 5.2 205,940 3.9 ---------- ----- ---------- ----- $5,846,567 100.0% $5,316,005 100.0% ---------- ----- ---------- ----- ---------- ----- ---------- -----
8 NOTE E - STATUTORY REPORTING PRACTICES Financial statements prepared in conformity with generally accepted accounting principles ("GAAP") differ in some respects from the statutory accounting practices prescribed or permitted by insurance regulatory authorities. At September 30, 1994 and for the nine months then ended, the Company's life insurance subsidiaries had stockholder's equity and net income prepared in conformity with statutory reporting practices of $311.3 million and $32.6 million, respectively. NOTE F - RECENTLY ADOPTED ACCOUNTING STANDARDS At December 31, 1993, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." For purposes of adopting SFAS No. 115 the Company has classified all of its investments in fixed maturities, equity securities, and short- term investments as "available for sale." As prescribed by SFAS No. 115, these investments are recorded at their market values with the resulting net unrealized gain or loss, net of income tax, recorded as an component of stockholders' equity. The effect of adopting SFAS No. 115 at December 31, 1993 was to increase fixed maturities by $65.6 million, decrease deferred policy acquisition costs by $12.4 million, increase the liability for deferred income taxes by $18.6 million, and increase stockholders' equity by $34.6 million. The effect of having adopted SFAS No. 115 at September 30, 1994 (compared to financial statements prepared under previous accounting standards) was to decrease fixed maturities by $165.8 million, increase deferred policy acquisition costs by $26.3 million, decrease the liability for deferred income taxes by $48.8 million, and decrease stockholders' equity by $90.7 million. NOTE G - CONSOLIDATED PRO FORMA RESULTS On July 30, 1993, the Company's principal subsidiary, Protective Life Insurance Company ("Protective Life"), acquired Wisconsin National Life Insurance Company ("Wisconsin National"). Summarized below are the consolidated results of operations for the nine months ended September 30, 1993, on an unaudited pro forma basis, as if the Wisconsin National acquisition had occurred as of January 1, 1993. The pro forma information is based on the Company's historical consolidated results of operations for the nine months ended September 30, 1993 and on data provided by Wisconsin National, using financial statement classifications consistent with those used by the Company after giving effect to certain pro forma adjustments. The pro forma financial information does not purport to be indicative of 9 results of operations that would have occurred had the transactions occurred on the basis assumed above nor are they indicative of the future operations of the combined enterprises.
NINE MONTHS ENDED SEPTEMBER 30, 1993 ------------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) Total revenues $585,133 Net income $ 39,652 Net income per share $ 2.90
NOTE H - SUBSEQUENT EVENTS On October 3, 1994, Protective Life acquired, via a 100% coinsurance transaction, a block of individual life insurance policies. The statutory purchase price was approximately $41.5 million. On November 7, 1994, the Company's Board of Directors authorized a program for the repurchase of up to 300,000 shares of Company Common Stock. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Protective Life Corporation provides financial services through the production, distribution, and administration of insurance and investment products. Founded in 1907, Protective Life Insurance Company ("Protective Life") is the Company's principal operating subsidiary. Unless the context otherwise requires, the "Company" refers to the consolidated group of Protective Life Corporation and its subsidiaries. RESULTS OF OPERATIONS PREMIUMS AND POLICY FEES The following table sets forth for the periods shown the amount of premiums and policy fees and the percentage change from the prior period:
PREMIUMS AND POLICY FEES NINE MONTHS ---------------------------- ENDED AMOUNT PERCENTAGE SEPTEMBER 30 (IN THOUSANDS) INCREASE ------------ -------------- ---------- 1993 $273,609 14.8% 1994 289,362 5.8
Premiums and policy fees increased $15.8 million or 5.8% in the first nine months of 1994 over the first nine months of 1993. Increases in premiums and policy fees from the Agency and Financial Institutions Divisions represent increases of $7.2 million and $12.4 million, respectively. The 1993 acquisition of Wisconsin National Life Insurance Company ("Wisconsin National") resulted in an $8.6 million increase in premiums and policy fees in 1994. The reinsurance in 1993 of a block of universal life policies resulted in a $3.4 million increase in premiums and policy fees in 1994. The reinsurance of a block of payroll deduction policies effective April 2, 1994 resulted in a $6.0 million increase. Decreases in older acquired blocks of policies represented a $2.8 million decrease in premiums and policy fees. The 1993 sale of the Company's 80% ownership interest in Southeast Health Plan of Alabama, Inc. ("SEHP"), a Birmingham- based health maintenance organization decreased 1994 premiums and policy fees $19.3 million. 11 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 ------------ -------------- ---------- 1993 $262,073 26.7% 1994 304,647 16.2
Net investment income in the first nine months of 1994 was $42.5 million or 16.2% higher, than the corresponding period of the preceding year primarily due to increases in the average amount of invested assets. Invested assets have increased primarily due to receiving annuity and guaranteed investment contract ("GIC") deposits and to acquisitions. Annuity and GIC deposits are not considered revenues in accordance with generally accepted accounting principles. These deposits are included in the liability section of the balance sheet. The Wisconsin National acquisition and the reinsurance of a block of universal life policies and a block of payroll deduction policies resulted in an increase in net investment income of $16.0 million in the first nine months of 1994. REALIZED INVESTMENT GAINS The Company generally purchases its investments with the intent to hold to maturity by purchasing investments that match future cash-flow needs. However, the Company may sell any of its investments to maintain proper matching of assets and liabilities. Accordingly, the Company has classified its fixed maturities as "available for sale." The sales of investments that have occurred have largely resulted from portfolio management decisions to maintain proper matching of assets and liabilities. The following table sets forth realized investment gains for the periods shown:
NINE MONTHS REALIZED ENDED INVESTMENT GAINS SEPTEMBER 30 (IN THOUSANDS) ------------ ---------------- 1993 $ 763 1994 4,855
Realized investment gains for the first nine months of 1994 were $4.1 million higher than the corresponding period of 1993. Realized investment gains in the first nine months of 1993 were reduced by an $8.7 million increase in the Company's allowance for uncollectible amounts on investments (primarily related to mortgage loans) which was recorded as a realized investment loss. In 1994, realized investment gains on the sale of equity securities were partially offset by realized investment losses incurred from sales of fixed maturity investments that occurred to maintain proper matching of assets and liabilities. 12 Recently, rising interest rates have caused market values to fall below amortized cost for many of the Company's fixed maturity investments. Therefore, some realized investment losses may be incurred upon future sales of investments to maintain proper matching of assets and liabilities. The Company does not anticipate such realized investment losses will be material. OTHER INCOME The following table sets forth other income for the periods shown:
NINE MONTHS ENDED OTHER INCOME SEPTEMBER 30 (IN THOUSANDS) ------------ -------------- 1993 $16,929 1994 13,394
Other income consists primarily of revenues of the Company's broker-dealer subsidiary, fees from administrative-services-only types of group accident and health insurance contracts, and revenues of the Company's wholly-owned insurance marketing organizations and other small noninsurance subsidiaries. Other income in the first nine months of 1994 was $3.5 million lower than the corresponding period of 1993. Other income in the first nine months of 1993 included $5.0 million attributable to SEHP as well as a $2.7 million gain on the sale of SEHP. Other income in the first nine months of 1994 included a $4.2 million final payment relating to the sale of SEHP. INCOME BEFORE INCOME TAX AND MINORITY INTEREST The following table sets forth income or loss before income tax and minority interest by business segment for the periods shown:
INCOME (LOSS) BEFORE INCOME TAX AND MINORITY INTEREST NINE MONTHS ENDED SEPTEMBER 30 ------------------------------- (IN THOUSANDS) BUSINESS SEGMENT 1993 1994 ---------------- ------- ------- Agency $13,921 $12,590 Group 8,623 7,045 Financial Institutions 6,061 6,825 Investment Products 2,465 3,186 Guaranteed Investment Contracts 13,931 25,276 Acquisitions 19,013 28,605 Corporate and Other (9,384) (6,535) Unallocated Realized Investment Gains (Losses) 2,802 474 ------- ------- $57,432 $77,466 ------- ------- ------- ------- Percentage Increase 29.8% 34.9%
13 Agency pretax earnings decreased $1.3 million in the first nine months of 1994 as compared to the first nine months of 1993 primarily due to $1.8 million of expenses to develop new marketing ventures. Group pretax earnings were $1.6 million lower in the first nine months of 1994 as compared to the first nine months of 1993 due to start up expenses of approximately $2.1 million related to the establishment of a special marketing unit to sell dental plans through mail and telephone solicitations. Lower traditional group life and health earnings were offset by improved earnings from dental products. Pretax earnings of the Financial Institutions Division were $0.8 million higher in the first nine months of 1994 as compared to the same period in 1993 due to the growth in premiums and policy fees. Investment Products Division pretax earnings were $0.7 million higher in the first nine months of 1994 compared to the same period of 1993. The Division's earnings have increased due to the growth in annuity deposits, though the increase was partially offset by realized investment losses from the sale of investments to maintain proper matching of assets and liabilities, and increased expenses of approximately $1.7 million related to the development and introduction of a variable annuity. Variable annuity deposits are reported in the accompanying financial statements as "liabilities related to separate accounts." The Guaranteed Investment Contract ("GIC") Division had pretax earnings of $25.3 million in the first nine months of 1994 and $13.9 million in the corresponding period of 1993. Realized investment gains associated with this Division were $7.6 million higher in the first nine months of 1994 as compared to the same period last year. GIC earnings have also increased due to improved investment results and to the growth in GIC deposits placed with the Company. At September 30, 1994, GIC deposits totaled $2.3 billion compared to $2.0 billion one year earlier. Pretax earnings from the Acquisitions Division increased $9.6 million in the first nine months of 1994 as compared to the same period of 1993. Earnings from the Acquisitions Division are normally expected to decline over time (due to the lapsing of policies resulting from deaths of insureds or terminations of coverage) unless new acquisitions are made. As previously discussed, the Company completed its acquisition of Wisconsin National and acquired by reinsurance a block of universal life policies during the 1993 third quarter. These two acquisitions represent all of the increase. In the ordinary course of business, the Acquisitions Division regularly considers acquisitions of smaller insurance companies or blocks of policies. On April 2, 1994 the Division acquired by reinsurance a small block of payroll deduction policies. On October 3, 1994 the Division acquired, through a coinsurance transaction, a block of 130,000 individual life insurance policies from Reliance Standard Life Insurance Company. The statutory purchase price paid was approximately $41.5 million. The block of policies currently generates approximately $25 million in annual premiums and involves $110 million in reserves. The Corporate and Other segment consists of several small insurance lines of business, net investment income and expenses not identified with the preceding operating divisions (including interest on substantially all debt), and the operations of several small noninsurance 14 subsidiaries. Pretax earnings for this segment improved $2.8 million in the first nine months of 1994 as compared to the first nine months of 1993 due to a decrease in expenses. Reflected in the decrease in expenses are $1.5 million of dividends on the Company's Monthly Income Preferred Securities (the proceeds of which were used to repay debt) which are reported as minority interest in net income of consolidated subsidiaries rather than expenses of the Corporate and Other segment. Unallocated realized investment gains (losses) decreased due to realized investment losses incurred in the first nine months of 1994 from sales of investments that occurred to maintain proper matching of assets and liabilities. INCOME TAXES The following table sets forth the effective income tax rates for the periods shown:
NINE MONTHS ENDED ESTIMATED EFFECTIVE SEPTEMBER 30 INCOME TAX RATES ------------ ------------------- 1993 32% 1994 32
In August, 1993, the corporate income tax rate was increased from 34% to 35% which resulted in an increase in income tax expense of $1.3 million or $0.09 per share due to a recalculation of the Company's deferred income tax liability. The effective income tax rate for 1993, excluding the effect of the tax increase, was 32%. Management's estimate of the effective income tax rate for 1994 is 32%. NET INCOME The following table sets forth net income and the net income per share for the periods shown:
NET INCOME NINE MONTHS -------------------------------------- ENDED TOTAL PERCENTAGE SEPTEMBER 30 (IN THOUSANDS) PER SHARE INCREASE ------------ -------------- --------- ---------- 1993 $37,774 $2.76 24.7% 1994 51,685 3.77 36.8
Compared to the same period in 1993, net income per share in the first nine months of 1994 increased 36.8%, reflecting improved earnings in the GIC, Acquisitions, Financial Institutions and Investment Products Divisions and the Corporate and Other segment which were partially offset by lower earnings in the Agency and Group Divisions. 15 RECENTLY ISSUED ACCOUNTING STANDARDS The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 115 at December 31, 1993 which requires the Company to carry its investment in fixed maturities and certain other securities at market value instead of amortized cost. Under SFAS No. 115, unrealized gains and losses, net of income tax, on such investments are reported as a component of stockholders' equity. The market values of fixed maturities increase or decrease as interest rates fall or rise. Therefore, although the adoption of SFAS No. 115 will not affect the Company's operations, its reported stockholders' equity may fluctuate significantly as interest rates change. During the first nine months of 1994, interest rates rose over two percentage points. Even though the Company believes its asset/liability matching practices and certain product features provide significant protection for the Company against the effects of changes in interest rates, the new accounting rule required reporting a $125.3 million decrease in stockholders' equity at September 30, 1994 as compared to December 31, 1993. In May 1993, the Financial Accounting Standards Board ("FASB") issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." In October 1994, the FASB amended SFAS No. 114 with the issuance of SFAS No. 118, "Accounting by Creditors for Impairment of Loan - Income Recognition and Disclosures." The Company anticipates that the impact of adopting SFAS Nos. 114 and 118 on its financial condition will be immaterial. In October 1994, the FASB issued SFAS No. 119, "Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments." The Company anticipates that the impact of adopting SFAS No. 119 on its financial condition and presentation will be immaterial. The American Institute of Certified Public Accountants has issued Statement of Position 93-6, "Employers' Accounting For Employee Stock Ownership Plans" ("ESOP"). Under certain "grandfathering" provisions in the Statement, employers may elect not to apply the new accounting rules to shares acquired by ESOPs before December 31, 1992. The Company does not plan to apply the new rules to its existing ESOP. LIQUIDITY AND CAPITAL RESOURCES The Company's operations usually produce a positive cash flow. This cash flow is used to fund an investment portfolio to finance future benefit payments including those arising from various types of deposit contracts. Since future benefit payments largely represent long-term obligations reserved using certain assumed interest rates, the Company's investments are predominantly in medium and long-term, fixed-rate investments such as bonds and mortgage loans which provide a sufficient return to cover these obligations. Many of the Company's products contain surrender charges and other features which reward persistency and penalize the early withdrawal of funds. With respect to such products, surrender charges are generally sufficient to cover the Company's unamortized deferred policy acquisition costs with respect to the policy being surrendered. GICs and certain annuity contracts have market-value adjustments which protect the Company against investment losses 16 if interest rates are higher at the time of surrender as compared to interest rates at the time of issue. The Company has adopted Statement of Financial Accounting Standards No. 115, "Accounting For Certain Investments In Debt And Equity Securities." Accordingly, the Company's investments in debt and equity securities are reported in the financial statements at market value, and investments in mortgage loans are reported at amortized cost. At September 30, 1994, the fixed maturity investments (bonds, bank loan participations, and redeemable preferred stocks) had a market value of $3,395.4 million, which is 4.2% below amortized cost (less allowances for uncollectible amounts on investments) of $3,537.3 million. The Company had $1,393.7 million in mortgage loans at September 30, 1994. While the Company's mortgage loans do not have quoted market values, at September 30, 1994, the Company estimates the market value of its mortgage loans to be $1,425.9 million (using discounted cash flows from the next call date) which is 2.3% in excess of amortized book value. Most of the Company's mortgage loans have significant prepayment penalties. These assets are invested for terms approximately corresponding to anticipated future benefit payments. Thus, market value fluctuations should not adversely affect liquidity. At September 30, 1994, delinquent mortgage loans and foreclosed real estate were 0.5% of assets. Bonds rated less than investment grade were 1.2% of assets. Additionally, the Company had bank loan participations that were less than investment grade representing 2.9% of assets. The Company does not expect these investments to adversely affect its liquidity or ability to hold its other investments to maturity. The Company's allowance for uncollectible amounts on investments was $35.9 million at September 30, 1994. Policy loans at September 30, 1994 were $139.5 million, a decrease of $1.6 million from December 31, 1993. Policy loan rates are generally in the 4.5% to 8.0% range. Such rates at least equal the assumed interest rates used for future policy benefits. The Company believes its asset/liability matching practices and certain product features provide significant protection for the Company against the effects of changes in interest rates. However, approximately one-fourth of the Company's liabilities relate to products (primarily whole life insurance) the profitability of which may be affected by changes in interest rates. The effect of such changes in any one year is not expected to be material. Additionally, the Company believes its asset/liability matching practices provide sufficient liquidity to enable it to fulfill its obligation to pay benefits under its various insurance and deposit contracts. The Company's asset/liability matching practices involve the monitoring of asset and liability durations for various product lines; cash flow testing under various interest rate scenarios; and the continuous rebalancing of assets and liabilities with respect to yield, risk, and cash flow characteristics. Rising interest rates during the first nine months of 1994 caused the duration of the Company's assets to increase somewhat above the duration of its liabilities. During the first nine months of 1994, interest rates rose over two percentage points. As a result, the estimated modified duration of the Company's corporate bonds and collateralized mortgage obligations increased from approximately 3.0 years to 3.6 years while the duration of its mortgages and liabilities increased only slightly. The Company responded to the duration mismatch by 17 adjusting the composition of its assets to bring the durations of assets and liabilities back into balance. A combination of futures contracts and options on treasury notes are currently being used as hedges for asset/liability management of certain investments, primarily mortgage loans on real estate, and liabilities arising from interest-sensitive products such as GICs and annuities. Realized investment gains and losses of such contracts are deferred and amortized over the life of the hedged asset. The Company also uses interest rate swap contracts to convert certain investments from a variable to a fixed rate of interest and from a fixed to a variable rate of interest. In anticipation of receiving GIC and annuity deposits, the life insurance subsidiaries were committed at September 30, 1994 to fund mortgage loans and to purchase fixed maturity and other long-term investments in the amount of $333.7 million. The Company's subsidiaries held $136.7 million in cash and short-term investments at September 30, 1994. Protective Life Corporation had an additional $1.2 million in cash and short-term investments available for general corporate purposes. While the Company generally anticipates that the cash flows of its subsidiaries will be sufficient to meet their investment commitments and operating cash needs, the Company recognizes that investment commitments scheduled to be funded may from time to time exceed the funds then available. Therefore, the Company has arranged sources of credit for its insurance subsidiaries to utilize to fund investments in such circumstances. The Company expects that the rate received on its investments will equal or exceed its borrowing rate. Additionally, the Company may from time to time sell short-duration GICs to complement its cash management practices. On June 10, 1994, a special purpose finance subsidiary of the Company, PLC Capital L.L.C. ("PLC Capital"), issued $55 million of 9% Cumulative Monthly Income Preferred Securities, Series A ("MIPS"), guaranteed by the Company. PLC Capital was formed solely to issue MIPS and other securities and lend the proceeds thereof to the Company in exchange for subordinated debentures of the Company. The Company has the right under the subordinated debentures to extend interest payment periods up to 60 months, and, as a consequence, monthly dividends on the MIPS 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 during any such extended interest payment period. The MIPS are redeemable by PLC Capital at any time on or after June 30, 1999. The MIPS and dividends thereon are reported in the accompanying financial statements as "minority interest in consolidated subsidiaries." In related transactions, the Company entered into interest-rate swap agreements with two financial institutions which effectively converted the MIPS from a fixed dividend rate to the floating 30 day London Interbank Offered Rate ("LIBOR") plus 60.5 basis points, approximately 5.7% at September 30, 1994. Net proceeds of approximately $52.3 million were used to repay a term note and other bank borrowings. On July 1, 1994, the Company issued $75 million of 7.95% Senior Notes due July 1, 2004. The notes are not redeemable by the Company prior to maturity. Net proceeds of $74.4 million were used to repay bank borrowings; and on July 5, 1994, the Company reduced its revolving line of credit to $53 million. In related transactions, the Company has entered into 18 interest-rate swap agreements to swap $40 million of the notes from a fixed rate of interest to the floating 30 day LIBOR plus 34.5 basis points. At September 30, 1994, Protective Life Corporation had borrowed $27 million of its $53 million revolving line of credit on short-term notes bearing interest rates averaging 5.4%. On November 7, 1994, the Company's Board of Directors authorized a program for the repurchase of up to 300,000 shares of Company Common Stock. Protective Life Corporation's cash flow is dependent on cash dividends from its subsidiaries, payments on surplus notes, revenues from investment, data processing, legal, and management services rendered to the subsidiaries, and investment income. At December 31, 1993, approximately $172 million of consolidated stockholders' equity represented net assets of the Company's insurance subsidiaries that cannot be transferred to the Company in the form of dividends, loans, or advances. In addition, the states in which the Company's insurance subsidiaries are domiciled impose certain restrictions on the insurance subsidiaries' ability to pay dividends to Protective Life Corporation. Also, distributions, including cash dividends to Protective Life Corporation from its life insurance subsidiaries, in excess of approximately $184 million, would be subject to federal income tax at rates then effective. The Company does not anticipate involuntarily making distributions that would be subject to income tax. For the foregoing reasons and due to the expected growth of the Company's insurance sales, the Company will retain substantial portions of the earnings of its life insurance subsidiaries in those companies primarily to support their future growth. Because Protective Life Corporation's cash disbursements have from time to time exceeded its cash receipts, such shortfalls have been funded through various external financings. Therefore, Protective Life Corporation may from time to time require additional external financing. To give the Company flexibility in connection with future acquisition opportunities, the Company recently registered debt securities, preferred and common stock of Protective Life Corporation, and additional preferred securities of PLC Capital L.L.C., under the Securities Act of 1933 on a delayed (or "shelf") basis. A life insurance company's statutory capital is computed according to rules prescribed by the National Association of Insurance Commissioners ("NAIC"), as modified by the insurance company's state of domicile. Statutory accounting rules are different from generally accepted accounting principles and are intended to reflect a more conservative view by, for example, requiring immediate expensing of policy acquisition costs. The achievement of long-term growth will require growth in the statutory capital of the Company's insurance subsidiaries. The subsidiaries may secure additional statutory capital through various sources, such as internally generated statutory earnings or equity contributions by the Company from funds generated through debt or equity offerings. The NAIC's risk-based capital requirements require insurance companies to calculate and report information under a risk-based capital formula. These requirements are intended to allow insurance regulators to identify inadequately capitalized insurance companies based upon the types and mixtures of risks inherent in the insurer's operations. The formula includes components for asset risk, liability risk, interest rate exposure, and other factors. Based upon 19 the September 30, 1994 statutory financial reports of the Company's insurance subsidiaries, the Company's insurance subsidiaries are adequately capitalized under the formula. Under insurance guaranty fund laws, in most states, insurance companies doing business in a participating state can be assessed up to prescribed limits for policyholder losses incurred by insolvent companies. The Company does not believe that any such assessments will be materially different from amounts already provided for in the financial statements. A number of civil jury verdicts have been returned against life and health insurers in the state of Alabama and other jurisdictions in which the Company does business involving the insurers' sales practices, alleged agent misconduct, failure to properly supervise agents, and other matters. Some of the lawsuits have resulted in the award of substantial judgments against the insurer, including material amounts of punitive damages. In Alabama and some other states, juries have substantial discretion in awarding punitive damages in these circumstances. The Company and its subsidiaries, like other life and health insurers, from time to time are involved in such litigation. To date, no such lawsuit has resulted in the award of any significant amount of damages against the Company. There are currently several lawsuits pending against the Company in Alabama, one of which is a class action concerning the sale of credit insurance. Although the outcome of any litigation cannot be predicted with certainty, the Company believes that such litigation will not have a material adverse effect on the financial position of the Company. The Company is not aware of any material pending or threatened regulatory action with respect to the Company or any of its subsidiaries. 20 Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a). Exhibit 15 - Letter re: unaudited interim financial statements (b). Exhibit 27 - Financial data schedule (c). A report on Form 8-K was filed July 27, 1994, concerning the Company's 1994 second quarter earnings press release. A report on Form 8-K was filed July 1, 1994, concerning the filing of certain exhibits to the Registration Statement on Form S-3 of the Company and PLC Capital L.L.C., with regard to the Company's 7.95% Senior Notes due July 1, 2004. 21 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 11, 1994 /s/ Jerry W. DeFoor --------------------------- Jerry W. DeFoor Vice President and Controller, and Chief Accounting Officer (Duly authorized officer) 22 EX-15 2 EXHIBIT 15 Exhibit 15 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Protective Life Corporation We are aware that our report dated October 25, 1994, except for Note H, as to which the date is November 7, 1994, on our review of interim consolidated financial information of Protective Life Corporation and subsidiaries for the period ended September 30, 1994, and included in the Company's quarterly report on Form 10-Q for the quarter then ended, is incorporated by reference in the Company's registration statements on Form S-8 and Form S-3. Pursuant to Rule 436(c) under the Securities Act of 1933, this report should not be considered a part of the registration statements prepared or certified by us within the meaning of Sections 7 and 11 of that Act. COOPERS & LYBRAND L.L.P. Birmingham, Alabama October 25, 1994 EX-27 3 EXHIBIT 27
7 This schedule contains summary financial information extracted from the condensed consolidated statement of income condensed consolidated balance sheet on pages 3 and 4 of the Company's Form 10-Q for the quarterly period ended September 30, 1994, and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS DEC-31-1994 JAN-01-1994 SEP-30-1994 3,395,374 0 0 45,197 1,393,667 29,541 5,164,285 2,519 91,273 374,612 5,846,567 1,520,348 100,238 0 179,107 102,046 7,834 0 0 264,292 5,846,567 289,362 304,647 4,855 13,394 376,536 60,218 98,038 77,466 24,789 51,685 0 0 0 51,685 3.77 3.77 0 0 0 0 0 0 0 Net of minority interest in net income of consolidated subsidiaries of $992.
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