-----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, IGdh/BbmKGdYTpYMbYlvEy+e7g0t8TlQZ0JE+4PFVy8e4jqPITvWoMlm+8ryMrMu GgRpmT1hMx7v/E5xcld6Fw== 0000310826-98-000013.txt : 19980518 0000310826-98-000013.hdr.sgml : 19980518 ACCESSION NUMBER: 0000310826-98-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 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: 98623238 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 MARCH 31, 1998 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 May 8, 1998: 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 Months ended March 31, 1998 and 1997 (unaudited)....................... Consolidated Condensed Balance Sheets as of March 31, 1998 (unaudited) and December 31, 1997............................... Consolidated Condensed Statements of Cash Flows for the Three Months ended March 31, 1998 and 1997 (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 March 31, 1998, and the related consolidated condensed statements of income and consolidated condensed statements of cash flows for the three-month periods ended March 31, 1998 and 1997. 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, 1997, 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, 1998, 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, 1997, 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 April 23, 1998 2 PROTECTIVE LIFE INSURANCE COMPANY CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Dollars in thousands) (Unaudited)
THREE MONTHS ENDED MARCH 31 1998 1997 ---- ----- REVENUES Premiums and policy fees (net of reinsurance ceded: 1998 - $99,628; 1997 - $54,509) $136,867 $120,377 Net investment income 149,241 123,596 Realized investment gains (losses) 11 (418) Other income 3,840 807 --------- ---------- 289,959 244,362 --------- ---------- BENEFITS AND EXPENSES Benefits and settlement expenses (net of reinsurance ceded: 1998 - $57,363; 1997 - $33,536) 180,390 157,702 Amortization of deferred policy acquisition costs 24,827 20,827 Other operating expenses (net of reinsurance ceded: 1998 - $31,709; 1997 - $14,254) 42,755 32,081 -------- --------- 247,972 210,610 -------- -------- INCOME BEFORE INCOME TAX 41,987 33,752 Income tax expense 15,244 11,571 -------- --------- NET INCOME $ 26,743 $ 22,181 ======== ========
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 3
PROTECTIVE LIFE INSURANCE COMPANY CONSOLIDATED CONDENSED BALANCE SHEETS (DOLLARS IN THOUSANDS) MARCH 31 DECEMBER 31 1998 1997 --------------------- ------------- (Unaudited) ASSETS Investments: Fixed maturities $ 6,271,780 $ 6,348,252 Equity securities 13,130 15,006 Mortgage loans on real estate 1,368,566 1,313,478 Investment in real estate, net 13,185 13,469 Policy loans 192,961 194,109 Other long-term investments 55,146 54,704 Short-term investments 139,713 54,337 ----------- -------------- Total investments 8,054,481 7,993,355 Cash 39,197 Accrued investment income 92,870 94,095 Accounts and premiums receivable, net 43,378 42,255 Reinsurance receivables 584,220 591,457 Deferred policy acquisition costs 652,709 632,605 Property and equipment, net 36,106 36,407 Other assets 26,040 14,445 Assets held in separate accounts 1,123,756 931,465 ------------ ------------- $10,613,560 $10,375,281 ============ ============= LIABILITIES Policy liabilities and accruals $ 3,817,247 $ 3,720,990 Guaranteed investment contract deposits 2,677,543 2,684,676 Annuity deposits 1,502,662 1,511,553 Other policyholders' funds 166,121 183,324 Other liabilities 199,290 246,081 Accrued income taxes 12,809 941 Deferred income taxes 46,560 49,417 Indebtedness to related parties 21,772 28,055 Liabilities related to separate accounts 1,123,756 931,465 ----------- ------------ 9,567,760 9,356,502 ----------- ----------- 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 327,992 327,992 Note receivable from PLC Employee Stock Ownership Plan (5,199) (5,378) Retained earnings 656,178 629,436 Accumulated other comprehensive income Net unrealized gains on investments (net of income tax: 1998 -$33,317; 1997 - $33,238) 61,827 61,727 ------------- ------------- 1,045,800 1,018,779 ------------- ------------- $10,613,560 $10,375,281 ============= =============
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 4
PROTECTIVE LIFE INSURANCE COMPANY CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited) THREE MONTHS ENDED MARCH 31 1998 1997 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 26,743 $ 22,181 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of deferred policy acquisition costs 24,827 20,827 Capitalization of deferred policy acquisition costs (43,930) (25,231) Depreciation expense 1,917 1,402 Deferred income tax (4,247) (488) Accrued income tax 11,868 10,293 Interest credited to universal life and investment products 84,729 41,239 Policy fees assessed on universal life and investment products (34,045) 31,163 Change in accrued investment income and other receivables 7,339 3,597 Change in policy liabilities and other policyholders' funds of traditional life and health products 114,125 93,341 Change in other liabilities (46,790) (13,065) Other (net) (20,811) 660 ------------- -------------- Net cash provided by operating activities 121,725 185,919 ------------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES Maturities and principal reductions of investments Investments available for sale 1,742,067 774,451 Other 76,911 28,655 Sale of investments Investments available for sale 145,772 550,101 Other 234,634 2,766 Cost of investments acquired Investments available for sale (1,974,390) (1,454,639) Other (281,863) (89,573) Purchase of property and equipment (2,684) (1,764) Sale of property and equipment 4 9 --------------------------------- Net cash used in investing activities (59,549) (189,994) -------------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from borrowings under line of credit arrangements and debt 304,500 504,100 Principal payments on line of credit arrangements and debt (304,500) (504,100) Principal payment on surplus note to PLC 0 (4,943) Investment product deposits and change in universal life deposits 330,148 174,968 Investment product withdrawals (431,521) (244,533) ------------- ------------- Net cash used in financing activities (101,373) (74,508) ------------- -------------- INCREASE (DECREASE) IN CASH (39,197) (78,583) CASH AT BEGINNING OF PERIOD 39,197 114,384 -------------- ------------- CASH AT END OF PERIOD $ 0 $ 35,801 ================ ============= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period: Interest on notes and mortgages payable $ 856 $ 1,151 Income taxes $ 9,995 $ 1,858 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Reduction of principal on note from ESOP $ 179 $ 202
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 three month period ended March 31, 1998, are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. 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, 1997. 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 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 addition, in some class action and other lawsuits involving insurers' sales practices, insurers have made material settlement payments. In some states (including Alabama), juries have substantial discretion in awarding punitive damages which creates the potential for unpredictable material adverse judgments in any given punitive damages suit. Protective Life and its subsidiaries, like other insurers, in the ordinary course of business, are involved in such litigation. Although the outcome of any such litigation cannot be predicted with certainty, Protective Life believes that at the present time there are no pending or threatened lawsuits that are reasonably likely to have a material adverse effect on the financial position, results of operations, or liquidity of Protective Life. 6 NOTE C - OPERATING SEGMENTS The following table sets forth operating segment income and assets for the periods shown. Adjustments represent the inclusion of unallocated realized investment gains (losses) and the recognition of income tax expense. There are no asset adjustments.
OPERATING SEGMENT INCOME FOR THE THREE MONTHS ENDING MARCH 31, 1998 SPECIALTY INSURANCE LIFE INSURANCE PRODUCTS DENTAL AND INDIVIDUAL CONSUMER FINANCIAL ACQUISITIONS LIFE WEST COAST BENEFITS INSTITUTIONS Premiums and policy fees $24,244 $34,025 $ 7,220 $39,112 $28,112 Net investment income 26,732 14,020 15,012 3,857 6,244 Realized investment gains (losses) Other income (3) 599 2,790 ----------- --------- ---------- --------- -------- Total revenues 50,976 48,042 22,232 43,568 37,146 -------- ------- ------- ------- ------- Benefits and settlement expenses 29,105 27,197 15,395 28,318 15,167 Amortization of deferred policy acquisition costs 4,541 7,172 (12) 2,970 5,649 Other operating expenses 5,458 7,566 2,391 10,205 12,271 --------- ------- ------- ------- ------- Total benefits and expenses 39,104 41,935 17,774 41,493 33,087 -------- ------- ------- ------- ------- Income before tax 11,872 6,107 4,458 2,075 4,059 RETIREMENT SAVINGS AND INVESTMENT PRODUCTS GUARANTEED CORPORATE INVESTMENT INVESTMENT AND TOTAL CONTRACTS PRODUCTS OTHER ADJUSTMENTS CONSOLIDATED Premiums and policy fees $ 4,062 $ 92 $136,867 Net investment income $53,435 26,218 3,723 149,241 Realized investment gains (losses) (433) (87) $ 531 11 Other income (63) 517 3,840 ----------- --------- ------- ---------- --------- Total revenues 53,002 30,130 4,332 531 289,959 ------- ------- ------ -------- -------- Benefits and settlement expenses 44,656 20,269 283 180,390 Amortization of deferred policy acquisition costs 174 4,330 3 24,827 Other operating expenses 185 3,641 1,038 42,755 -------- ------- ------ ---------- -------- Total benefits and expenses 45,015 28,240 1,324 247,972 ------- ------- ------ ---------- -------- Income before tax 7,987 1,890 3,008 41,987 Income tax expense 15,244 15,244 -------- Net income $ 26,743 ========
7
OPERATING SEGMENT INCOME FOR THE THREE MONTHS ENDING MARCH 31, 1997 SPECIALTY INSURANCE LIFE INSURANCE PRODUCTS DENTAL AND INDIVIDUAL CONSUMER FINANCIAL ACQUISITIONS LIFE WEST COAST BENEFITS INSTITUTIONS Premiums and policy fees $26,579 $32,333 N/A $47,128 $11,861 Net investment income 27,531 12,904 4,020 2,962 Realized investment gains (losses) Other income 2 407 13 ---------- --------- -------- --------- Total revenues 54,110 45,239 51,555 14,836 ------- ------- ------- ------- Benefits and settlement expenses 28,451 25,759 35,061 5,060 Amortization of deferred policy acquisition costs 4,573 7,442 1,560 3,707 Other operating expense 5,931 5,764 12,455 3,237 ------- ------- ------- ------- Total benefits and expenses 38,955 38,965 49,076 12,004 ------- ------- ------- ------- Income before income tax 15,155 6,274 2,479 2,832 RETIREMENT SAVINGS AND INVESTMENT PRODUCTS GUARANTEED CORPORATE INVESTMENT INVESTMENT AND TOTAL CONTRACTS PRODUCTS OTHER ADJUSTMENTS CONSOLIDATED Premiums and policy fees $ 2,424 $ 52 $120,377 Net investment income $51,609 25,838 (1,268) 123,596 Realized investment gains (losses) (724) 145 $ 161 (418) Other (88) 473 807 ----------- --------- -------- ---------- ---------- Total revenues 50,885 28,319 (743) 161 244,362 -------- ------- ------- -------- -------- Benefits and settlement expenses 43,497 19,787 87 157,702 Amortization of deferred policy acquisition costs 131 3,409 5 20,827 Other operating expenses 1,068 2,427 1,199 32,081 -------- -------- ------- ---------- -------- Total benefits and expenses 44,696 25,623 1,291 210,610 ------- ------- ------- ---------- -------- Income before tax 6,189 2,696 (2,034) 33,752 Income tax expense 11,571 11,571 -------- Net income $ 22,181 ========
8
OPERATING SEGMENT ASSETS MARCH 31, 1998 SPECIALTY INSURANCE LIFE INSURANCE PRODUCTS DENTAL AND INDIVIDUAL CONSUMER FINANCIAL ACQUISITIONS LIFE WEST COAST BENEFITS INSTITUTIONS Investments and other assets $1,363,992 $ 983,167 $ 919,246 $209,125 $529,817 Deferred policy acquisition costs 134,169 263,291 116,947 23,971 53,934 ----------- ----------- ----------- --------- --------- Total assets $1,498,161 $1,246,458 $1,036,193 $233,096 $583,751 ========== ========== ========== ======== ======== RETIREMENT SAVINGS AND INVESTMENT PRODUCTS GUARANTEED CORPORATE INVESTMENT INVESTMENT AND TOTAL CONTRACTS PRODUCTS OTHER CONSOLIDATED Investments and other assets $2,867,976 $2,508,166 $579,362 $ 9,960,851 Deferred policy acquisition costs 1,708 58,683 6 652,709 ------------- ------------ ------------ ------------- Total assets $2,869,684 $2,566,849 $579,368 $10,613,560 ========== ========== ======== =========== OPERATING SEGMENT ASSETS DECEMBER 31, 1997 SPECIALTY INSURANCE LIFE INSURANCE PRODUCTS DENTAL AND INDIVIDUAL CONSUMER FINANCIAL ACQUISITIONS LIFE WEST COAST BENEFITS INSTITUTIONS Investments and other assets $1,401,294 $ 960,316 $ 910,030 $208,071 $536,058 Deferred policy acquisition costs 138,052 252,321 108,126 22,459 52,836 ----------- ----------- ----------- --------- --------- Total assets $1,539,346 $1,212,637 $1,018,156 $230,530 $588,894 ========== ========== ========== ======== ======== RETIREMENT SAVINGS AND INVESTMENT PRODUCTS GUARANTEED CORPORATE INVESTMENT INVESTMENT AND TOTAL CONTRACTS PRODUCTS OTHER CONSOLIDATED Investments and other assets $2,887,732 $2,313,279 $525,896 $ 9,742,676 Deferred policy acquisition costs 1,785 56,074 952 632,605 ------------- ------------ ---------- ------------- Total assets $2,889,517 $2,369,353 $526,848 $10,375,281 ========== ========== ======== ===========
9 NOTE D - 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 March 31, 1998, and for the three 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 $590.5 million and $24.9 million, respectively. NOTE E - INVESTMENTS As prescribed by Statement of Financial Accounting Standards ("SFAS") No. 115, certain investments are recorded at their market values with the resulting net unrealized gains and losses reduced by a related adjustment to deferred policy acquisition costs, net of income tax, recorded as a component of stockholder's equity. The market values of fixed maturities increase or decrease as interest rates fall or rise. Therefore, although the adoption of SFAS No. 115 does not affect Protective Life's operations, its reported stockholder's equity will fluctuate significantly as interest rates change. Protective Life's balance sheets at March 31, 1998 and December 31, 1997, prepared on the basis of reporting investments at amortized cost rather than at market values, are as follows:
MARCH 31, 1998 DECEMBER 31, 1997 -------------- ---------------- (IN THOUSANDS) Total investments $ 7,938,832 $ 7,876,952 Deferred policy acquisition costs 673,214 654,043 All other assets 1,906,370 1,749,321 ------------ ------------ $10,518,416 $10,280,316 =========== =========== Deferred income taxes $ 13,243 $ 16,179 All other liabilities 9,521,200 9,307,085 ------------ ------------ 9,534,443 9,323,264 Stockholder's equity 983,973 957,052 ------------- ------------- $10,518,416 $10,280,316 =========== ===========
NOTE F - 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 individual annuities. Realized investment gains and losses on such contracts are deferred and amortized over the life of the hedged asset. At March 31, 1998, open option and open futures contracts with a notional amount of $1.2 billion were in a $0.6 million unrealized gain position. Additionally, Protective Life uses interest rate swap contracts 10 to convert certain investments from a variable to a fixed rate of interest. At March 31, 1998, related open interest rate swap contracts with a notional amount of $75.3 million were in a $0.1 million unrealized gain position. NOTE G - COMPREHENSIVE INCOME The following table sets forth Protective Life's comprehensive income for the three months ended March 31, 1998 and 1997:
THREE MONTHS ENDED 1998 1997 ---- ---- Net income $26,743 $ 22,181 Increase (decrease) in net unrealized gains on investments (net of income tax: 1998 - $83; 1997 - $(21,168)) 107 (39,312) Reclassification adjustment for amounts included in net income (net of income tax: 1998 - $(4); 1997 - $146) (7) 272 ---------- ---------- Comprehensive income (loss) $26,843 $(16,859) ======= ========
NOTE H - 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. 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 seven operating divisions: Acquisitions, Individual Life, West Coast, Dental and Consumer Benefits ("Dental"), Financial Institutions, Guaranteed Investment Contracts ("GIC"), and Investment Products. Protective Life also has an additional business segment which is described herein as Corporate and Other. 11 This report includes "forward-looking statements" which express expectations of future events and/or results. All statements based on future expectations rather than on historical facts are forward-looking statements that involve a number of risks and uncertainties, and Protective Life cannot give assurance that such statements will prove to be correct. Please refer to Exhibit 99 for more information about factors which could affect future results. REVENUES The following table sets forth revenues by source for the period shown, and the percentage change from the prior period:
THREE MONTHS PERCENTAGE ENDED INCREASE MARCH 31 (IN THOUSANDS) 1998 1997 ---- ---- Premiums and policy fees $136,867 $120,377 13.7 % Net investment income 149,241 123,596 20.7 Realized investment gains (losses) 11 (418) -- Other income 3,840 807 375.8 ---------- ----------- $289,959 $244,362 ========== ===========
Premiums and policy fees increased $16.5 million or 13.7% in the first three months of 1998 over the first three months of 1997. Premiums and policy fees from the Acquisitions Division decreased $2.3 million. The Individual Life Division's premiums and policy fees increased $1.7 million. The acquisition of West Coast Life Insurance Company ("West Coast") in the second quarter of 1997 increased premiums and policy fees $7.2 million. The Dental Division's exit from the group major medical business resulted in a $11.7 million decrease in premiums and policy fees. Premiums and policy fees related to the Dental Division's other businesses increased $3.7 million in the first three months of 1998 as compared to the same period in 1997. Premiums and policy fees from the Financial Institutions Division increased $16.3 million in the first three months of 1998 as compared to the first three months of 1997. The acquisition of the Western Diversified Group ("Western Diversified") and the coinsurance of an unrelated closed block of credit insurance policies in late 1997 increased premiums and policy fees $19.0 million. Decreases of $2.7 million relate to the normal decrease in premiums on a closed block of credit insurance policies reinsured in 1996. The increase in premiums and policy fees from the Investment Products Division was $1.6 million. Net investment income in the first three months of 1998 increased by $25.6 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 acquisitions and due to receiving annuity deposits. The acquisition of West Coast, Western Diversified, and a block of credit policies in 1997 resulted in an increase in net investment income of $18.7 million in the first three months of 1998 as compared to the same period in 1997. 12 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 three months of 1998 were less than $0.1 million as compared to realized investment losses of $0.4 million in the corresponding period of 1997. 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. 13 INCOME BEFORE INCOME TAX The following table sets forth income or loss before income tax by business segment for the periods shown:
OPERATING INCOME (LOSS) AND INCOME (LOSS) BEFORE INCOME TAX THREE MONTHS ENDED MARCH 31 (in thousands) 1997 1998 ---- ---- Operating Income (Loss)1 Life Insurance Acquisitions $15,155 $11,872 Individual Life 6,274 6,107 West Coast 4,458 Specialty Insurance Products Dental and Consumer Benefits 2,832 2,075 Financial Institutions 2,479 4,059 Retirement Savings and Investment Products Guaranteed Investment Contracts 6,913 8,420 Investment Products 2,644 1,934 Corporate and Other (2,034) 3,008 --------- --------- Total operating income 34,263 41,933 -------- -------- Realized Investment Gains (Losses) Guaranteed Investment Contracts (724) (433) Investment Products 145 (87) Unallocated Realized Investment Gains (Losses) 161 531 Related Amortization of Deferred Policy Acquisition Costs Investment Products (93) 43 ---------- ---------- Total net (511) 54 --------- ---------- Income (Loss) Before Income Tax Life Insurance Acquisitions 15,155 11,872 Individual Life 6,274 6,107 West Coast 4,458 Specialty Insurance Products Dental and Consumer Benefits 2,832 2,075 Financial Institutions 2,479 4,059 Retirement Savings and Investment Products Guaranteed Investment Contracts 6,189 7,987 Investment Products 2,696 1,890 Corporate and Other (2,034) 3,008 Unallocated Realized Investment Gains (Losses) 161 531 --------- --------- Total income before tax $33,752 $41,987 ======= =======
1 Income before tax excluding realized investment gains and losses and related amortization of deferred acquisition costs. 14 Pretax earnings from the Acquisitions Division decreased $3.4 million in the first three months of 1998 as compared to the same period of 1997. 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. In addition, the Division's mortality experience was approximately $2.6 million worse than expected in the first three months of 1998 as compared to being approximately $2.0 million better than expected in the 1997 first quarter. The Individual Life Division's pretax earnings of $6.1 million in the first three months of 1998 were $0.2 million below the same period of 1997. The Division's mortality experience was approximately $1.8 million worse than expected. Individual life sales measured by new premiums were $15.8 million, 68% above the first quarter of 1997. Headquartered in San Francisco, West Coast was acquired by the Company on June 3, 1997. West Coast had pretax earnings of $4.5 million for the first three months of 1998. Sales measured by new premiums were $11.6 million, 91% above the first quarter of 1997. Dental Division pretax earnings were $0.8 million lower in the first three months of 1998 as compared to the first three months of 1997 primarily due to higher dental claims in the first quarter of 1998 as compared to the first quarter of 1997. Pretax earnings of the Financial Institutions Division were $1.6 million higher in the first three months of 1998 as compared to the same period in 1997. At the end of the third quarter of 1997, the Division acquired the Western Diversified Group and coinsured an unrelated block of policies. These acquisitions increased earnings $1.3 million. The GIC Division had pretax operating earnings of $8.4 million in the first three months of 1998 and $6.9 million in the corresponding period of 1997. The increase largely reflects an improvement in operating spreads and an increase in the amount of GIC and related annuity deposits. Realized investment losses associated with this Division in the first three months of 1998 were $0.4 million as compared to $0.7 million in the same period last year. As a result, total pretax earnings were $8.0 million in the first three months of 1998 compared to $6.2 million for the same period last year. Investment Products Division pretax operating earnings in the first three months of 1998 of $1.9 million were $0.7 million below the same period of 1997. Realized investment gains associated with the Division, net of related amortization of deferred policy acquisition costs, were less than $0.1 million in the first three months of 1998 and 1997, resulting in total pretax earnings of $1.9 million in the first three months of 1998 as compared to $2.7 million in the same period of 1997. 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 $3.0 million in the first three months of 1998 compared to a loss of $2.0 million in the first three months of 1997. The increase in earnings relates primarily to increased net investment income on capital and income from a securitization transaction. 15 INCOME TAXES The following table sets forth the effective tax rates for the periods shown: THREE MONTHS ENDED ESTIMATED EFFECTIVE MARCH 31 INCOME TAX RATES 1997 34.3 % 1998 36.3 The effective income tax rate for the full year of 1997 was 34.9%. Management's estimate of the effective income tax rate for 1998 is between 35% and 36%. NET INCOME The following table sets forth net income for the periods shown, and the percentage change from the prior period: NET INCOME THREE MONTHS ENDED TOTAL PERCENTAGE MARCH 31 (IN THOUSANDS) INCREASE 1997 $22,181 17.0 % 1998 26,743 20.6 Compared to the same period in 1997, net income in the first three months of 1998 increased $4.6 million, reflecting improved operating earnings in the Financial Institutions, West Coast, and Guaranteed Investment Contracts Divisions and the Corporate and Other segment, and higher realized investment gains (net of related amortization of deferred policy acquisition costs) which were partially offset by lower operating earnings in the Acquisitions, Individual Life, Dental and Investment Products Divisions. RECENTLY ISSUED ACCOUNTING STANDARDS The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 132, "Employers' Disclosures About Pension and Other Postretirement Benefits." This statement revises the footnote disclosures about pension and other postretirement benefit plans and its adoption will have no effect on Protective Life's financial condition. 16 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: May 15, 1998 /S/ JERRY W. DEFOOR ------------------- Jerry W. DeFoor Vice President and Controller, and Chief Accounting Officer (Duly authorized officer) 17 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 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 6,271,780 0 0 13,130 1,368,566 13,185 8,054,481 0 584,220 652,709 10,613,560 3,428,924 388,323 0 166,121 0 0 2 5,000 1,040,798 10,613,560 136,867 149,241 11 3,840 180,390 24,827 42,755 41,987 15,244 26,743 0 0 0 26,743 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 three months ended March 31, 1998 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. Insurance is a highly competitive industry and Protective Life encounters significant competition in all 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. The life and health insurance industry is consolidating, with larger, more efficient organizations emerging from consolidation. Also, mutual insurance companies are converting to stock ownership which will give them greater access to capital markets. 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. Rating 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 life insurance subsidiaries could adversely affect its ability to sell its products and its ability to compete for attractive acquisition opportunities. Rating organizations assign ratings based upon several factors. While most of the considered factors relate to the rated company, some of the factors relate to general economic conditions and circumstances outside the rated company's control. For the past several years rating downgrades in the industry have exceeded upgrades. POLICY CLAIMS FLUCTUATIONS. 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. Formal 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. Sudden and/or significant changes in interest rates expose insurance companies to the risk of not earning anticipated spreads between the interest rate earned on investments and the credited rates paid on outstanding policies. Both rising and declining interest rates can negatively affect 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. 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, marketing practices, advertising, policy forms, 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. Congress is currently reviewing certain proposals contained in President Clinton's Fiscal Year 1999 Budget which, if enacted, would adversely impact the tax treatment of variable annuity and certain other life 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 with respect to their ability to sell such products, and, depending on grandfathering provisions, the surrenders of existing annuity contracts and life insurance policies. Protective Life cannot predict what future initiatives the President or Congress may propose which may affect Protective Life. LITIGATION. A number of civil jury verdicts have been returned against 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 insurers, in the ordinary course of business, are involved in such litigation. The outcome of any such litigation cannot be predicted with certainty. In addition, in some class action and other lawsuits involving insurers' sales practices, insurers have made material settlement payments. INVESTMENT RISKS. Protective Life's invested assets are subject to customary 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 which Protective Life has financed. Factors that may affect the overall default rate on, and market value of, Protective Life's invested assets include interest rate levels, financial market performance, and general economic conditions, as well as particular circumstances affecting the businesses of individual borrowers and tenants. CONTINUING SUCCESS OF ACQUISITION STRATEGY. 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. 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 Individual Life, Dental, and Financial Institutions Divisions comes from arrangements with unrelated marketing organizations; and Protective Life has entered the Hong Kong insurance market in a joint venture. Therefore Protective Life's results may be affected by the performance of others. YEAR 2000. Older computer hardware and software often denote the year using two digits rather than four; for example, the year 1997 often is denoted by such hardware and software as "97." It is probable that such hardware and software will malfunction when calculations involving the year 2000 are attempted because the hardware and/or software will interpret "00" as representing the year 1900 rather that the year 2000. This "Year 2000" issue potentially affects all individuals and companies (including Protective Life and its suppliers, customers, and business partners) who rely on computers or devices containing computer chips. Protective Life has developed and is implementing a Year 2000 transition plan intended to identify and modify or replace primary hardware and/or software systems on which it relies that have a Year 2000 issue. Protective Life is also developing and implementing a plan to identify and modify or replace secondary hardware and/or software systems on which it relies that have a Year 2000 issue. Substantial resources are being devoted to this effort; however, the costs to develop and implement these plans are not expected to be material. Protective Life is also confirming that its service providers are implementing plans to identify and modify or replace their systems that have a Year 2000 issue. Protective Life currently anticipates that its systems will be able to process transactions dated beyond 1999 on or before December 31, 1999. There can be no assurances, however, that Protective Life's efforts will be successful, that interactions with other service providers with Year 2000 issues will not impair Protective Life's operations, or that the Year 2000 issue will not otherwise adversely affect the Company. 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-----