-----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, O2dQRu/GAZf3R5eyjr+jmsm0zYNxOGMiyGx3eL5viTqiWvEJTAAu9N0eKjBiq/Pz XcMg/MTQubu0UB+f+o6xkg== 0000310826-97-000014.txt : 19971114 0000310826-97-000014.hdr.sgml : 19971114 ACCESSION NUMBER: 0000310826-97-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971112 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROTECTIVE LIFE INSURANCE CO CENTRAL INDEX KEY: 0000310826 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 630169720 STATE OF INCORPORATION: TN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 033-31940 FILM NUMBER: 97714755 BUSINESS ADDRESS: STREET 1: 2801 HIGHWAY 280 SOUTH 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, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Numbers 33-31940; 33-39345; 33-57052; 333-02249 PROTECTIVE LIFE INSURANCE COMPANY (Exact name of registrant as specified in its charter) TENNESSEE 63-0169720 (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,$1.00 par value, outstanding as of November 7, 1997: 5,000,000 shares. THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(A) AND (B) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION H(2). PROTECTIVE LIFE INSURANCE COMPANY 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, 1997 and 1996 (unaudited).............. Consolidated Condensed Balance Sheets as of September 30, 1997 (unaudited) and December 31, 1996................................. Consolidated Condensed Statements of Cash Flows for the Nine Months ended September 30, 1997 and 1996 (unaudited)......... Notes to Consolidated Condensed Financial Statements (unaudited).... Item 2. Management's Narrative Analysis of the Results of Operations... PART II. OTHER INFORMATION: Item 6. Exhibits and Reports on Form 8-K................................. Signature................................................................... REPORT OF INDEPENDENT ACCOUNTANTS To the Directors and Stockholder Protective Life Insurance Company Birmingham, Alabama We have reviewed the accompanying consolidated condensed balance sheet of Protective Life Insurance Company and subsidiaries as of September 30, 1997, and the related consolidated condensed statements of income for the three-month and nine-month periods ended September 30, 1997 and 1996, and consolidated condensed statements of cash flows for the nine-month periods ended September 30, 1997 and 1996. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the consolidated condensed financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet as of December 31, 1996, and the related consolidated statements of income, stockholder's equity, and cash flows for the year then ended (not presented herein); and in our report dated February 11, 1997, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated condensed balance sheet as of December 31, 1996, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. COOPERS & LYBRAND L.L.P. Birmingham, Alabama October 23, 1997 2 PROTECTIVE LIFE INSURANCE COMPANY CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Dollars in thousands) (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 -------------------------- ---------------------- 1997 1996 1997 1996 ---- ---- ---- ----- REVENUES Premiums and policy fees (net of reinsurance ceded: three months: 1997 - $95,507; 1996 - $81,453 nine months: 1997 - $221,292; 1996 - $247,988) $104,833 $110,310 $333,703 $343,111 Net investment income 149,452 124,516 405,245 369,280 Realized investment gains 61 861 1,781 5,882 Other income 893 902 2,381 4,100 ---------- ----------- --------- ---------- 255,239 236,589 743,110 722,373 -------- --------- -------- -------- BENEFITS AND EXPENSES Benefits and settlement expenses (net of reinsurance ceded: three months: 1997 - $51,059; 1996 - $64,420 nine months: 1997 - $93,780; 1996 - $182,201) 157,407 157,931 479,560 466,692 Amortization of deferred policy acquisition costs 28,488 18,822 67,517 70,162 Other operating expenses (net of reinsurance ceded three months: 1997 - $26,459; 1996 - $24,368 nine months: 1997 - $63,086; 1996 - $67,183) 26,225 32,031 82,692 95,746 --------- --------- ---------- --------- 212,120 208,784 629,769 632,600 -------- --------- --------- --------- INCOME BEFORE INCOME TAX 43,119 27,805 113,341 89,773 Income tax expense 14,433 9,494 38,888 30,647 --------- ---------- --------- --------- NET INCOME $ 28,686 $ 18,311 $ 74,453 $ 59,126 ========= ========= ========= =========
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 3
PROTECTIVE LIFE INSURANCE COMPANY CONSOLIDATED CONDENSED BALANCE SHEETS (DOLLARS IN THOUSANDS) SEPTEMBER 30 DECEMBER 31 1997 1996 --------------- ------------- (Unaudited) ASSETS Investments: Fixed maturities $ 6,131,512 $4,662,997 Equity securities 18,620 35,250 Mortgage loans on real estate 1,262,509 1,503,781 Investment in real estate, net 14,637 14,172 Policy loans 194,190 166,704 Other long-term investments 58,217 29,193 Short-term investments 177,346 101,215 ------------- ----------- Total investments 7,857,031 6,513,312 Cash 0 114,384 Accrued investment income 90,558 70,541 Accounts and premiums receivable, net 38,877 43,469 Reinsurance receivables 473,521 332,614 Deferred policy acquisition costs 630,191 488,201 Property and equipment, net 36,875 35,489 Other assets 22,111 14,636 Assets held in separate accounts 880,083 550,697 ------------- ----------- $10,029,247 $8,163,343 =========== ========== LIABILITIES Policy liabilities and accruals $ 3,580,404 $2,706,002 Guaranteed investment contract deposits 2,784,252 2,474,728 Annuity deposits 1,481,726 1,331,067 Other policyholders' funds 170,051 142,221 Other liabilities 164,811 117,847 Accrued income taxes 24,168 1,854 Deferred income taxes 38,622 37,722 Indebtedness to related parties 23,268 25,014 Liabilities related to separate accounts 880,083 550,697 ------------- ----------- 9,147,385 7,387,152 ------------ ---------- COMMITMENTS AND CONTINGENT LIABILITIES - NOTE B STOCKHOLDER'S EQUITY Preferred Stock, $1.00 par value, shares authorized and issued: 2,000, liquidation preference $2,000 2 2 Common Stock, $1 par value Shares authorized and issued: 5,000,000 5,000 5,000 Additional paid-in capital 237,992 237,992 Net unrealized gains on investments (net of income tax: 1997 -$22,139; 1996 - $3,601) 37,754 6,688 Retained earnings 606,491 532,088 Note receivable from PLC Employee Stock Ownership Plan (5,377) (5,579) ------------- ------------ 881,862 776,191 ------------ ----------- $10,029,247 $8,163,343 =========== ==========
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 4
PROTECTIVE LIFE INSURANCE COMPANY CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited) NINE MONTHS ENDED SEPTEMBER 30 1997 1996 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income $74,453 $59,126 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of deferred policy acquisition costs 67,517 70,162 Capitalization of deferred policy acquisition costs (88,403) (70,146) Depreciation expense 1,714 3,997 Deferred income tax (17,639) 211 Accrued income tax 17,669 3,568 Interest credited to universal life and investment products 357,880 206,763 Policy fees assessed on universal life and investment products (97,491) (84,362) Change in accrued investment income and other receivables (33,948) (84,380) Change in policy liabilities and other policyholders' funds of traditional life and health products (5,602) 53,332 Change in other liabilities (15,877) 2,842 Other (net) (5,063) (1,776) -------------- ------------- Net cash provided by operating activities 255,210 159,337 ------------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES Maturities and principal reductions of investments Investments available for sale 4,613,642 457,488 Other 225,427 94,816 Sale of investments Investments available for sale 1,060,668 750,557 Other 689,043 561,440 Cost of investments acquired Investments available for sale (6,476,664) (2,049,715) Other (582,300) (335,397) Acquisitions and bulk reinsurance assumptions (169,124) 172,726 Purchase of property and equipment (3,285) (5,222) Sale of property and equipment 2,681 143 --------------- -------------- Net cash used in investing activities (639,912) (353,164) ------------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES Capital contribution from PLC 1,988 78,699 Proceeds from borrowings under line of credit arrangements and debt 1,134,538 742,750 Principal payments on line of credit arrangements and debt (1,134,538) (742,750) Principal payment on surplus note to PLC (4,893) (10,000) Dividends to PLC (50) (50) Investment product deposits and change in universal life deposits 771,804 842,765 Investment product withdrawals (498,531) (711,826) ------------- ------------- Net cash provided by financing activities 270,318 199,588 ------------- ------------- INCREASE (DECREASE) IN CASH (114,384) 5,761 CASH AT BEGINNING OF PERIOD 114,384 6,198 ------------- -------------- CASH AT END OF PERIOD $ 0 $ 11,959 ================ ============= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period: Interest on notes and mortgages payable $ (3,634) $ (3,721) Income taxes $ (34,992) $ (26,809) SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Reduction of principal on note from ESOP $ 202 $ 186 Acquisitions and bulk reinsurance assumptions Assets acquired $ 1,114,832 $ 200,737 Liabilities assumed (902,267) (253,480) ------------- ------------ Net $ 212,565 $ (52,743) ============= ============
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 5 PROTECTIVE LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) NOTE A - BASIS OF PRESENTATION The accompanying unaudited consolidated condensed financial statements of Protective Life Insurance Company ("Protective Life") 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, 1997, are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. The year-end consolidated condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. For further information, refer to the consolidated financial statements and notes thereto included in Protective Life's annual report on Form 10-K for the year ended December 31, 1996. Protective Life is a wholly-owned subsidiary of Protective Life Corporation ("PLC"). NOTE B - COMMITMENTS AND CONTINGENT LIABILITIES 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. Protective Life does not believe such assessments will be materially different from amounts already provided for in the financial statements. Most of these laws do provide, however, that an assessment may be excused or deferred if it would threaten an insurer's own financial strength. A number of civil jury verdicts have been returned against life and health insurers in the jurisdictions in which Protective Life 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 insurers that are disproportionate to the actual damages, including material amounts of punitive damages. In some states (including Alabama), juries have substantial discretion in awarding punitive damages which creates the potential for unpredictable material adverse judgments in any given punitive damages suit. Protective Life and its subsidiaries, like other life and health insurers, in the ordinary course of business, are involved in such litigation, including purported class action litigation. The outcome of any such litigation cannot be predicted with certainty. In addition, in some lawsuits involving insurers' sales practices, insurers have made material settlement payments to end litigation. Although the outcome of any litigation cannot be predicted with certainty, Protective Life believes that at the present time there are no pending or threatened lawsuits that are reasonably 6 likely to have a material adverse effect on the financial position, results of operations, or liquidity of Protective Life. NOTE C - STATUTORY REPORTING PRACTICES Financial statements prepared in conformity with generally accepted accounting principles (i.e., GAAP) differ in some respects from the statutory accounting practices prescribed or permitted by insurance regulatory authorities. At September 30, 1997, and for the nine months then ended, Protective Life and its life insurance subsidiaries had consolidated stockholder's equity and net income prepared in conformity with statutory reporting practices of $417.2 million and $84.9 million, respectively. NOTE D - INVESTMENTS At December 31, 1993, Protective Life 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 Protective Life has classified all of its investments in fixed maturities, equity securities, and short-term investments as "available for sale." As prescribed in SFAS No. 115, these investments are recorded at their market values with the resulting net unrealized gain or loss, net of income tax and a related adjustment to deferred policy acquisition costs, recorded as a component of stockholder's equity. Protective Life's balance sheets at September 30, 1997 and December 31, 1996, prepared on the basis of reporting investments at amortized cost rather than at market values, are as follows:
SEPTEMBER 30, 1997 DECEMBER 31, 1996 ------------------ ----------------- (IN THOUSANDS) Total investments $7,780,616 $6,495,259 Deferred policy acquisition costs 646,713 495,965 All other assets 1,542,025 1,161,830 ---------- ---------- $9,969,354 $8,153,054 ========== ========== Deferred income taxes $ 16,483 $ 34,121 All other liabilities 9,108,763 7,349,430 ---------- ---------- 9,125,246 7,383,551 Stockholder's equity 844,108 769,503 ----------- ----------- $9,969,354 $8,153,054 ========== ==========
NOTE E - ACCOUNTING POLICIES FOR DERIVATIVE FINANCIAL INSTRUMENTS Protective Life does not use derivative financial instruments for trading purposes. Combinations of futures contracts and options on treasury notes are currently being used as hedges for asset/liability management of certain investments, primarily mortgage loans on real estate, mortgage-backed securities, and liabilities arising from interest-sensitive products such as guaranteed investment contracts and annuities. Realized investment gains and losses on such contracts are deferred and amortized over the life of the hedged asset. At September 30, 1997, 7 open option contracts with a notional amount of $1.2 billion were in a $1.1 million unrealized loss position. Additionally, Protective Life uses interest rate swap contracts to convert certain investments from a variable to a fixed rate of interest. At September 30, 1997, related open interest rate swap contracts with a notional amount of $135.3 million were in a $0.6 million unrealized loss position. NOTE F - RECENTLY ADOPTED ACCOUNTING STANDARDS In June 1996 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This statement is effective for transactions entered into after January 1, 1997. NOTE G - 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 stockholder's equity. 8 ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS Protective Life Insurance Company ("Protective Life") is a wholly-owned and the principal operating subsidiary of Protective Life Corporation ("PLC"), an insurance holding company whose common stock is traded on the New York Stock Exchange. Founded in 1907, Protective Life provides financial services through the production, distribution, and administration of insurance and investment products. In accordance with General Instruction H(2)(a), Protective Life includes the following analysis with the reduced disclosure format. Protective Life has six operating divisions: Acquisitions, Dental and Consumer Benefits ("Dental"), Financial Institutions, Guaranteed Investment Contracts ("GIC"), Individual Life, and Investment Products. Protective Life also has an additional business segment which is described herein as Corporate and Other. The Dental Division (formerly known as the Group Division) recently exited from the traditional group major medical business, fulfilling the Division's strategy to focus primarily on dental and related products. Accordingly, the Division was renamed the Dental and Consumer Benefits Division. REVENUES The following table sets forth revenues by source for the period shown, and the percentage change from the prior period:
NINE MONTHS PERCENTAGE ENDED INCREASE/ SEPTEMBER 30 (DECREASE) (IN THOUSANDS) 1997 1996 ---- ---- Premiums and policy fees $333,703 $343,111 (2.7)% Net investment income 405,245 369,280 9.7 Realized investment gains 1,781 5,882 (69.7) Other income 2,381 4,100 (41.9) ---------- ---------- $743,110 $722,373
Premiums and policy fees decreased $9.4 million or 2.7% in the first nine months of 1997 over the first nine months of 1996. The coinsurance by the Acquisitions Division of a block of policies and the acquisition of a small life insurance company in the fourth quarter of 1996 resulted in a $6.1 million increase in premiums and policy fees. Decreases in older acquired blocks resulted in a $6.0 million decrease in premiums and policy fees. The Dental Division's exit from the group major medical business resulted in a $22.4 million decrease in premiums and policy fees. Premiums and policy fees related to the Dental Division's other businesses increased $19.5 9 million in the first nine months of 1997 as compared to the same period in 1996. Premiums and policy fees from the Financial Institutions Division decreased $27.1 million in the first nine months of 1997 as compared to the first nine months of 1996. Decreases of $12.8 million resulted from a reinsurance arrangement begun in 1995 whereby most of the Division's new credit insurance sales are being ceded to a reinsurer. Decreases of $14.3 million relate to the normal decrease in premiums on a closed block of credit insurance policies reinsured in 1996. The Individual Life Division's premiums and policy fees increased $16.0 million, including $6.4 million from the acquisition of West Coast Life Insurance Company ("West Coast") in the second quarter of 1997. The increase in premiums and policy fees from the Investment Products Division was $2.7 million. Net investment income in the first nine months of 1997 increased by $36.0 million over the corresponding period of the preceding year, primarily due to increases in the average amount of invested assets and an increase in participating mortgage loan income. Invested assets have increased primarily due to receiving annuity deposits and due to acquisitions. The coinsurance of a block of policies and the acquisition of a small life insurance company in the fourth quarter of 1996 and the acquisition of West Coast in the second quarter of 1997 resulted in an increase in net investment income of $24.9 million in the first nine months of 1997 as compared to the same period in 1996. Protective Life generally purchases its investments with the intent to hold to maturity by purchasing investments that match future cash-flow needs. However, Protective Life may sell any of its investments to maintain approximate matching of assets and liabilities. Accordingly, Protective Life has classified its fixed maturities and certain other securities as "available for sale." The sales of investments that have occurred have resulted principally from portfolio management decisions to maintain approximate matching of assets and liabilities. Realized investment gains for the first nine months of 1997 were $1.8 million as compared to $5.9 million in the corresponding period of 1996. In the 1996 first quarter, Protective Life sold $554 million of its commercial mortgage loans in a securitization transaction, resulting in a $6.1 million realized investment gain. Other income consists primarily of fees from administrative-services-only types of group accident and health insurance contracts, and from rental of space in its administrative building to PLC and affiliates. 10 INCOME BEFORE INCOME TAX The following table sets forth income or loss before income tax by business segment for the periods shown:
INCOME (LOSS) BEFORE INCOME TAX NINE MONTHS ENDED SEPTEMBER 30 (IN THOUSANDS) BUSINESS SEGMENT 1997 1996 ---------------- ---- ---- Acquisitions $ 45,821 $38,888 Dental and Consumer Benefits 10,106 (166) Financial Institutions 8,673 6,794 Guaranteed Investment Contracts 20,082 22,309 Individual Life 15,554 11,943 Investment Products 6,486 8,654 Corporate and Other 3,474 (4,439) Unallocated Realized Investment Gains (Losses) 3,145 5,790 ---------- -------- $113,341 $89,773 ======== =======
Pretax earnings from the Acquisitions Division increased $6.9 million in the first nine months of 1997 as compared to the same period of 1996. Earnings from the Acquisitions Division are expected to decline over time (due to the lapsing of policies resulting from deaths of insureds or terminations of coverage) unless new acquisitions are made. The Division's most recent acquisitions resulted in a $3.3 million increase in pretax earnings. In addition, the Division's mortality experience was approximately $7.2 million more favorable in the first nine months of 1997 as compared to the same period last year. Dental Division pretax earnings were $3.5 million higher in the first nine months of 1997 as compared to the first nine months of 1996 excluding a $6.8 million refund of premiums and related expenses in the 1996 third quarter. $1.8 million of the increase was a one-time release of reserves associated with exiting the group major medical business. Lower cancer earnings partially offset improved traditional group life and health results. Dental earnings were $4.3 million, an increase of $0.6 million, before expenses of $1.8 million to develop a new discounted fee-for-service program. Pretax earnings of the Financial Institutions Division were $1.9 million higher in the first nine months of 1997 as compared to the same period in 1996. Included in the Division's 1997 results are earnings from the coinsurance of a block of policies in the second quarter of 1996. The GIC Division had pretax operating earnings of $21.9 million in the first nine months of 1997 and $30.1 million in the corresponding period of 1996. In December, 1996, the Company sold a major portion of its bank loan participations in a securitization transaction which has subsequently reduced the Division's earnings. The decrease was partially offset by a related improvement in earnings in the Corporate and Other segment. In addition, the Division has shortened the duration of its invested assets which also reduced earnings. Realized investment losses associated with this Division in the first nine months of 1997 were $1.8 million as compared 11 to $7.8 million in the same period last year. As a result, total pretax earnings were $20.1 million in the first nine months of 1997 compared to $22.3 million for the same period last year. The Individual Life Division's results include West Coast which Protective Life acquired on June 3. The Division's pretax operating earnings of $15.6 million in the first nine months of 1997 were $4.8 million above the same period of 1996. West Coast represents $3.0 million of the increase. Mortality returned to normal levels in the 1997 third quarter after experiencing record high mortality in the previous quarter which reduced earnings approximately $4.3 million. Realized investment gains, net of related amortization of deferred policy acquisition costs, associated with this Division were $1.1 million in 1996. As a result, total pretax earnings were $15.6 million in the first nine months of 1997 as compared to $11.9 million in the first nine months of 1996. Investment Products Division pretax operating earnings in the first nine months of 1997 of $6.3 million were even with the same period of 1996. The Division's 1996 results included a one-time $0.9 million addition to earnings. Realized investment gains associated with the Division, net of related amortization of deferred policy acquisition costs, were $0.2 million as compared to $2.4 million last year, resulting in total pretax earnings of $6.5 million in the first nine months of 1997 as compared to $8.7 million in the same period of 1996. The Corporate and Other segment consists of several small insurance lines of business, net investment income and other operating expenses not identified with the preceding operating divisions (including interest on substantially all debt), and the operations of a small noninsurance subsidiary. Pretax income for this segment was $3.5 million in the first nine months of 1997 compared to a loss of $4.4 million in the first nine months of 1996. In the 1997 third quarter the segment had $3.0 million of income from Protective Life's participation commercial mortgage loan program. The remaining increase in earnings relates primarily to increased net investment income on capital and income from a securitization transaction. INCOME TAXES The following table sets forth the effective tax rates for the periods shown: NINE MONTHS ENDED ESTIMATED EFFECTIVE SEPTEMBER 30 INCOME TAX RATES 1996 34.1% 1997 34.3 The effective income tax rate for the full year of 1996 was 34.1%. Management's estimate of the effective income tax rate for 1997 is 34%. 12 NET INCOME The following table sets forth net income for the periods shown, and the percentage change from the prior period:
NET INCOME NINE MONTHS PERCENTAGE ENDED TOTAL INCREASE/ SEPTEMBER 30 (IN THOUSANDS) (DECREASE) 1996 $59,126 1.4% 1997 74,453 25.9
Compared to the same period in 1996, net income in the first nine months of 1997 increased $15.3 million, reflecting improved operating earnings in the Acquisitions, Dental, Financial Institutions, Individual Life, and Investment Products Divisions and the Corporate and Other segment, which were offset by lower operating earnings in the Guaranteed Investment Contracts Division and lower realized investment gains (net of related amortization of deferred policy acquisition costs). RECENTLY ISSUED ACCOUNTING STANDARDS In June 1997 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". Protective Life anticipates that the impact of adopting these accounting standards will be immaterial to its financial condition. 13 Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a)Exhibit 27 - Financial data schedule Exhibit 99 - Safe Harbor for Forward-Looking Statements 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 INSURANCE COMPANY Date: November 12, 1997 /S/ JERRY W. DEFOOR ------------------- Jerry W. DeFoor Vice President and Controller, and Chief Accounting Officer (Duly authorized officer) 14 EX-27 2
7 This schedule contains summary financial information extracted from the consolidated financial statements of Protective Life Insurance Company and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 6,131,512 0 0 18,620 1,262,509 14,637 7,857,031 0 473,521 630,191 10,029,247 3,327,212 253,192 0 170,051 23,268 2 0 5,000 876,860 10,029,247 333,703 405,245 1,781 2,381 479,560 67,517 82,692 113,341 38,888 74,453 0 0 0 74,453 0 0 0 0 0 0 0 0 0 Protective Life Insurance Company is a wholly-owned subsidiary of Protective Life Corporation (NYSE: PL) and is not required to present EPS information.
EX-99 3 Exhibit 99 to Form 10-Q of Protective Life Insurance Company for the nine months Ended September 30, 1997 Safe Harbor for Forward-Looking Statements The Private Securities Litigation Reform Act of 1995 (the "Act") encourages companies to make "forward-looking statements" by creating a safe harbor to protect the companies from securities law liability in connection with forward-looking statements. Forward-looking statements can be identified by use of words such as "expect," "estimate," "project," "budget," "forecast," "anticipated," "plan," and similar expressions. Protective Life Insurance Company ("Protective Life") 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. Protective Life 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 Protective Life are discussed more fully below. MATURE INDUSTRY; COMPETITION. Life and health insurance is a mature industry. In recent years, the industry has experienced virtually no growth in life insurance sales, though the aging population has increased the demand for retirement savings products. Life and health insurance is a highly competitive industry and Protective Life's Divisions encounter significant competition in all their respective lines of business from other insurance companies, many of which have greater financial resources than Protective Life, as well as competition from other providers of financial services. Management believes that Protective Life's ability to compete is dependent upon, among other things, its ability to attract and retain distribution channels to market its insurance and investment products, its ability to develop competitive and profitable products, its ability to maintain low unit costs, and its maintenance of strong claims-paying and financial strength ratings from rating agencies. Protective Life competes against other insurance companies and financial institutions in the origination of commercial mortgage loans. RATINGS. Ratings are an important factor in the competitive position of life insurance companies. Ratings organizations periodically review the financial performance and condition of insurers, including Protective Life's insurance subsidiaries. A downgrade in the ratings of Protective Life's insurance subsidiaries could adversely affect its ability to sell its products and its ability to compete for attractive acquisition opportunities. Rating organizations assign ratings based upon several factors. While most of the considered factors related to the rated company, some of the factors relate to general economic conditions and circumstances outside the rated company's control. Rating downgrades have exceeded upgrades for the past several years, and public pronouncements by the rating agencies indicate that this trend is expected to continue for the near future. POLICY CLAIMS FLUCTUATIONS. Protective Life's results may fluctuate from year to year on account of fluctuations in policy claims received by Protective Life. LIQUIDITY AND INVESTMENT PORTFOLIO. Many of the products offered by Protective Life's insurance subsidiaries allow policyholders and contractholders to withdraw their funds under defined circumstances. Protective Life'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. Asset/liability management programs and procedures are used to monitor the relative duration of Protective Life's assets and liabilities. While Protective Life's 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 Protective Life's insurance subsidiaries to dispose of illiquid assets on unfavorable terms, which could have a material adverse effect on Protective Life. INTEREST RATE FLUCTUATIONS. Significant changes in interest rates expose life insurance companies to the risk of not earning anticipated spreads between the interest rate earned on investments and the interest rate credited to its life insurance and investment products. Both rising and declining interest rates can negatively affect Protective Life's spread income. For example, certain of Protective Life's insurance and investment products guarantee a minimum credited interest rate. While Protective Life 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 Protective Life's insurance and investment products. INVESTMENT RISKS. Protective Life's invested assets are subject to inherent risks of defaults and changes in market values. The value of Protective Life's commercial mortgage portfolio depends in part on the financial condition of the tenants occupying the properties on which Protective Life has made loans. Factors that may affect the overall default rate on, and market value of, Protective Life's invested assets include the level of interest rates, performance of the financial markets, and general economic conditions, as well as particular circumstances affecting the businesses of individual borrowers and tenants. CONTINUING SUCCESS OF ACQUISITION STRATEGY. Protective Life has actively pursued a strategy of acquiring blocks of insurance policies. This acquisition strategy has increased Protective Life's earnings in part by allowing Protective Life to position itself to realize certain operating efficiencies associated with economies of scale. There can be no assurance, however, that suitable acquisitions, presenting opportunities for continued growth and operating efficiencies, will continue to be available to Protective Life, or that Protective Life will realize the anticipated financial results from its acquisitions. REGULATION AND TAXATION. Protective Life's insurance subsidiaries are subject to government regulation in each of the states in which they conduct business. Such regulation is vested in state agencies having broad administrative power dealing with all aspects of the insurance business including premium rates, benefits, marketing practices, advertising, policy forms, underwriting standards, and capital adequacy, and is concerned primarily with the protection of policyholders rather than stockholders. Protective Life cannot predict the form of any future regulatory initiatives. Under the Internal Revenue Code of 1986, as amended (the Code), income tax payable by policyholders on investment earnings is deferred during the accumulation period of certain life insurance and annuity products. This favorable tax treatment may give certain of Protective Life's products a competitive advantage over other non-insurance products. To the extent that the Code is revised to reduce the tax-deferred status of life insurance and annuity products, or to increase the tax-deferred status of competing products, all life insurance companies, including Protective Life's subsidiaries, would be adversely affected. Protective Life cannot predict what future initiatives the President or Congress may propose which may affect the life and health insurance industry and Protective Life. LITIGATION. A number of civil verdicts have been returned against life and health insurers in the jurisdictions in which Protective Life does business involving the insurers' sales practices, alleged agent misconduct, failure to properly supervise agents, and other matters. Increasingly these lawsuits have resulted in the award of substantial judgments against the insurer that are disproportionate to the actual damages, including material amounts of punitive damages. In some states (including Alabama), juries have substantial discretion in awarding punitive damages which creates the potential for unpredictable material adverse judgments in any given punitive damages suit. Protective Life and its subsidiaries, like other life and health insurers, in the ordinary course of business, are involved in such litigation. The outcome of any such litigation cannot be predicted with certainty. In addition, in some lawsuits involving insurers' sales practices, insurers have made material settlement payments to end litigation. RELIANCE UPON THE PERFORMANCE OF OTHERS. Protective Life has entered into various ventures involving other parties. Examples include, but are not limited to: many of Protective Life's products are sold through independent distribution channels; the Investment Products Division's variable annuity deposits are invested in funds managed by unaffiliated investment managers; a portion of the sales in the Financial Institutions, Dental and Consumer Benefits, and Individual Life Divisions comes from arrangements with unrelated marketing organizations; and Protective Life has entered the Hong Kong insurance market in a joint venture with the Lippo Group. Therefore, Protective Life's results may be affected by the performance of others. REINSURANCE. As is customary in the insurance industry, Protective Life's insurance subsidiaries cede insurance to other insurance companies. However, the ceding insurance company remains liable with respect to ceded insurance should any reinsurer fail to meet the obligations assumed by it. Additionally, Protective Life assumes policies of other insurers. Any regulatory or other adverse development affecting the ceding insurer could also have an adverse effect on Protective Life. 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, Protective Life 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-----