-----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, AIOLv8vfXlNdeLdSe4oK7AEUSYdqDDuIZaja//zq0Kyh39Tx1XXzfGBQGTbP7Te0 ZUAtf6wx+lf2v+LJXvzC0A== 0000310826-98-000041.txt : 19981116 0000310826-98-000041.hdr.sgml : 19981116 ACCESSION NUMBER: 0000310826-98-000041 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 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: 98747196 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, 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 November 6, 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 and Nine Months ended September 30, 1998 and 1997 (unaudited)................ Consolidated Condensed Balance Sheets as of September 30, 1998 (unaudited) and December 31, 1997................................... Consolidated Condensed Statements of Cash Flows for the Nine Months ended September 30, 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 September 30, 1998, and the related consolidated condensed statements of income for the three-month and nine-month periods ended September 30, 1998 and 1997, and consolidated condensed statements of cash flows for the nine-month periods ended September 30, 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. PricewaterhouseCoopers LLP Birmingham, Alabama October 27, 1998 2 PROTECTIVE LIFE INSURANCE COMPANY CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Dollars in thousands) (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 --------------------------- ------------------- 1998 1997 1998 1997 ---- ----- ---- ---- REVENUES Premiums and policy fees (net of reinsurance ceded: three months: 1998 - $127,850; 1997 - $95,507 nine months: 1998 - $337,182; 1997 - $221,292) $141,659 $104,833 $420,914 $333,703 Net investment income 156,059 149,452 450,229 405,245 Realized investment gains (losses) 411 61 1,460 1,781 Other income 4,570 893 14,107 2,381 --------- ---------- --------- --------- 302,699 255,239 886,710 743,110 -------- -------- -------- -------- BENEFITS AND EXPENSES Benefits and settlement expenses (net of reinsurance ceded: three months: 1998 - $109,513; 1997 - $51,059 nine months: 1998 - $236,241; 1997 - $93,780) 181,298 157,407 540,887 479,560 Amortization of deferred policy acquisition costs 30,795 28,488 89,053 67,517 Other operating expenses (net of reinsurance ceded: three months: 1998 - $47,133; 1997 - $26,459 nine months: 1998 - $112,985; 1997 - $63,086) 44,058 26,225 121,653 82,692 -------- --------- -------- --------- 256,151 212,120 751,593 629,769 -------- -------- -------- -------- INCOME BEFORE INCOME TAX 46,548 43,119 135,117 113,341 Income tax expense 16,186 14,433 48,211 38,888 -------- -------- -------- -------- NET INCOME $ 30,362 $ 28,686 $ 86,906 $ 74,453 ======== ======== ======== ========
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 3
PROTECTIVE LIFE INSURANCE COMPANY CONSOLIDATED CONDENSED BALANCE SHEETS (DOLLARS IN THOUSANDS) SEPTEMBER 30 DECEMBER 31 1998 1997 ----------------- ---------------- (Unaudited) ASSETS Investments: Fixed maturities $ 6,728,732 $ 6,348,252 Equity securities 11,861 15,006 Mortgage loans on real estate 1,450,363 1,313,478 Investment in real estate, net 14,677 13,469 Policy loans 188,590 194,109 Other long-term investments 73,452 54,704 Short-term investments 97,816 54,337 ------------ -------------- Total investments 8,565,491 7,993,355 Cash 0 39,197 Accrued investment income 103,387 94,095 Accounts and premiums receivable, net 46,102 42,255 Reinsurance receivables 660,359 591,457 Deferred policy acquisition costs 691,994 632,605 Property and equipment, net 38,610 36,407 Other assets 37,091 14,445 Indebtedness of related parties 5,634 Assets held in separate accounts 1,091,017 931,465 ------------ ------------- $11,239,685 $10,375,281 LIABILITIES Policy liabilities and accruals $ 4,046,239 $ 3,720,990 Guaranteed investment contract deposits 2,642,885 2,684,676 Annuity deposits 1,525,592 1,511,553 Other policyholders' funds 188,867 183,324 Other liabilities 220,536 246,081 Accrued income taxes (17,824) 941 Deferred income taxes 69,893 49,417 Indebtedness to related parties 20,000 28,055 Notes payable 362,706 Liabilities related to separate accounts 1,091,017 931,465 ----------- ------------ 10,149,911 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 656,292 629,436 Accumulated other comprehensive income Net unrealized gains on investments (net of income tax: 1998 -$56,908; 1997 - $33,238) 105,687 61,727 ------------- ------------- 1,089,774 1,018,779 ------------- ------------- $11,239,685 $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) NINE MONTHS ENDED SEPTEMBER 30 ------------------------------ 1998 1997 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 86,906 $ 74,453 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of deferred policy acquisition costs 89,053 67,517 Capitalization of deferred policy acquisition costs (156,279) (88,403) Depreciation expense 5,635 1,740 Deferred income tax (3,029) (17,639) Accrued income tax (18,764) 17,669 Interest credited to universal life and investment products 259,672 357,880 Policy fees assessed on universal life and investment products (104,173) (97,491) Change in accrued investment income and other receivables (76,407) (33,948) Change in policy liabilities and other policyholders' funds of traditional life and health products 514,633 (5,602) Change in other liabilities (25,545) (15,877) Other (net) (25,665) (5,089) -------------- -------------- Net cash provided by operating activities 546,037 255,210 ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES Maturities and principal reductions of investments Investments available for sale 6,536,807 4,613,642 Other 149,765 225,427 Sale of investments Investments available for sale 524,624 1,060,668 Other 270,257 689,043 Cost of investments acquired Investments available for sale (7,625,131) (6,476,664) Other (433,390) (582,300) Acquisition and bulk reinsurance assumptions 0 (169,124) Purchase of property and equipment (8,751) (3,285) Sale of property and equipment 15 2,681 ---------------- ------------- Net cash used in investing activities (585,804) (639,912) ------------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES Capital contribution from PLC 1,988 Proceeds from borrowings under line of credit arrangements and debt 1,615,996 1,134,538 Principal payments on line of credit arrangements and debt (1,255,566) (1,134,538) Dividend to PLC (50) (50) Principal payment on surplus note to PLC 0 (4,893) Investment product deposits and change in universal life deposits 739,488 771,804 Investment product withdrawals (1,099,298) (498,531) ------------ ------------- Net cash provided by financing activities 570 270,318 --------------- ------------- INCREASE (DECREASE) IN CASH (39,197) (114,384) CASH AT BEGINNING OF PERIOD 39,197 114,384 -------------- ------------- CASH AT END OF PERIOD $ 0 $ 0 ================================ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period: Interest on notes and mortgages payable $ 6,273 $ 3,634 Income taxes $ 57,229 $ 34,992 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Reduction of principal on note from ESOP $ 202 Acquisitions and bulk reinsurance assumptions Assets acquired $1,114,832 Liabilities assumed (902,267) ------------ Net $ 212,565 ============
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, 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 NINE MONTHS ENDED SEPTEMBER 30, 1998 (IN THOUSANDS) --------------------------------------------------------------------------- SPECIALTY INSURANCE LIFE INSURANCE PRODUCTS ----------------------------------------- ------------------------ DENTAL AND INDIVIDUAL CONSUMER FINANCIAL ACQUISITIONS LIFE WEST COAST BENEFITS INSTITUTIONS ------------- ------------ ------------ ----------- ------------ Premiums and policy fees $ 70,784 $ 97,825 $19,250 $132,344 $ 86,731 Net investment income 79,860 40,307 46,837 11,794 16,970 Realized investment gains (losses) Other income 1,600 102 2,464 7,323 --------- ---------- ---------- --------- --------- Total revenues 152,244 138,234 66,087 146,602 111,024 -------- -------- ------- -------- -------- Benefits and settlement expenses 84,171 80,768 42,944 95,946 39,806 Amortization of deferred policy acquisition costs 13,594 24,376 3,866 7,731 25,182 Other operating expenses 16,281 11,614 3,604 36,388 32,450 --------- -------- -------- -------- -------- Total benefits and expenses 114,046 116,758 50,414 140,065 97,438 -------- -------- ------- -------- -------- Income before income tax 38,198 21,476 15,673 6,537 13,586 RETIREMENT SAVINGS AND INVESTMENT PRODUCTS GUARANTEED CORPORATE INVESTMENT INVESTMENT AND TOTAL CONTRACTS PRODUCTS OTHER ADJUSTMENTS CONSOLIDATED --------- ------- -------- ----------- ------------ Premiums and policy fees $13,827 $ 153 $420,914 Net investment income $160,735 79,471 14,255 450,229 Realized investment gains (losses) (895) 678 $ 1,677 1,460 Other income 1,093 1,525 14,107 ---------- -------- ------- ---------- --------- Total revenues 159,840 95,069 15,933 1,677 886,710 -------- -------- ------- ------- -------- Benefits and settlement expenses 134,531 62,283 438 540,887 Amortization of deferred acquisition costs 554 13,752 (2) 89,053 Other operating expenses 1,864 11,598 7,854 121,653 --------- ------- ------- --------- Total benefits and expenses 136,949 87,633 8,290 751,593 -------- ------- ------- --------- Income before income tax 22,891 7,436 7,643 135,117 Income tax expense 48,211 48,211 --------- Net income $ 86,906
7
OPERATING SEGMENT INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 -------------------------------------------------------------------------- (IN THOUSANDS) SPECIALTY INSURANCE LIFE INSURANCE PRODUCTS ---------------------------------------- -------------------------- DENTAL AND INDIVIDUAL CONSUMER FINANCIAL ACQUISITIONS LIFE WEST COAST BENEFITS INSTITUTIONS ------------ ----------- ---------- ---------- ------------ Premiums and policy fees $ 78,186 $ 95,724 $ 8,677 $111,510 $30,855 Net investment income 83,086 37,678 18,122 15,188 9,199 Realized investment gains (losses) Other income 10 48 1,072 25 ----------- ---------- ---------- --------- --------- Total revenues 161,282 133,450 26,799 127,770 40,079 -------- -------- ------- -------- ------- Benefits and settlement expenses 87,303 88,905 14,179 83,367 11,972 Amortization of deferred policy acquisition costs 13,017 19,900 4,586 7,700 11,113 Other operating expense 16,231 11,981 3,941 26,597 8,321 --------- -------- ------- -------- -------- Total benefits and expenses 116,551 120,786 22,706 117,664 31,406 -------- -------- ------- -------- ------- Income before income tax 44,731 12,664 4,093 10,106 8,673 RETIREMENT SAVINGS AND INVESTMENT PRODUCTS GUARANTEED CORPORATE INVESTMENT INVESTMENT AND TOTAL CONTRACTS PRODUCTS OTHER ADJUSTMENTS CONSOLIDATED --------- --------- --------- ----------- ------------- Premiums and policy fees $ 8,562 $ 189 $333,703 Net investment income $157,716 77,902 6,354 405,245 Realized investment gains (losses) (1,840) 589 $ 3,032 1,781 Other income (194) 1,420 2,381 ------------ -------- ------ ---------- --------- Total revenues 155,876 86,859 7,963 3,032 743,110 -------- ------- ------ ------- -------- Benefits and settlement expenses 132,334 61,179 321 479,560 Amortization of deferred policy acquisition costs 436 10,766 (1) 67,517 Other operating expenses 3,024 8,428 4,169 82,692 --------- -------- ------ --------- Total benefits and expenses 135,794 80,373 4,489 629,769 -------- ------- ------ -------- Income before income tax 20,082 6,486 3,474 113,341 Income tax expense 38,888 38,888 --------- Net income $ 74,453 ========
8
OPERATING SEGMENT ASSETS SEPTEMBER 30, 1998 ----------------------------------------------------------------------------- (IN THOUSANDS) SPECIALTY INSURANCE LIFE INSURANCE PRODUCTS ------------------------------------------- -------------------------- DENTAL AND INDIVIDUAL CONSUMER FINANCIAL ACQUISITIONS LIFE WEST COAST BENEFITS INSTITUTIONS ------------ ---------- ---------- -------- ----------- Investments and other assets $1,256,251 $1,051,847 $1,049,169 $203,129 $647,008 Deferred policy acquisition costs 124,012 284,585 138,801 25,123 56,766 ----------- ----------- ----------- --------- --------- Total assets $1,380,263 $1,336,432 $1,187,970 $228,252 $703,774 ========== ========== ========== ======== ======== RETIREMENT SAVINGS AND INVESTMENT PRODUCTS GUARANTEED CORPORATE INVESTMENT INVESTMENT AND TOTAL CONTRACTS PRODUCTS OTHER CONSOLIDATED --------- -------------- ------------- -------------- Investments and other assets $2,856,619 $2,553,265 $930,403 $10,547,691 Deferred policy acquisition costs 1,490 61,205 12 691,994 ------------ ------------ ----------- ------------- Total assets $2,858,109 $2,614,470 $930,415 $11,239,685 ========== ========== ======== =========== OPERATING SEGMENT ASSETS DECEMBER 31, 1997 (IN THOUSANDS) 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 September 30, 1998, 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 $575.2 million and $76.4 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 September 30, 1998 and December 31, 1997, prepared on the basis of reporting investments at amortized cost rather than at market values, are as follows:
SEPTEMBER 30, 1998 DECEMBER 31, 1997 ------------------ ----------------- (IN THOUSANDS) Total investments $ 8,373,553 $ 7,876,952 Deferred policy acquisition costs 721,337 654,043 All other assets 1,982,200 1,749,321 ------------ ------------ $11,077,090 $10,280,316 =========== =========== Deferred income taxes $ 12,985 $ 16,179 All other liabilities 10,080,018 9,307,085 ----------- ------------ 10,093,003 9,323,264 Stockholder's equity 984,087 957,052 ------------- ------------- $11,077,090 $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 September 30, 1998, open option and open futures contracts with a notional amount of $1,300.0 million were in a $1.7 million net unrealized gain position. Additionally, Protective Life uses interest rate swap 10 contracts to convert certain investments from a variable to a fixed rate of interest. At September 30, 1998, related open interest rate swap contracts with a notional amount of $55.3 million were in a $0.3 million net unrealized loss position. NOTE G - COMPREHENSIVE INCOME The following table sets forth Protective Life's comprehensive income for the nine months ended September 30, 1998 and 1997:
NINE MONTHS ENDED SEPTEMBER 30 (IN THOUSANDS) -------------------------------- 1998 1997 ---- ---- Net income $ 86,906 $ 74,453 Increase (decrease) in net unrealized gains on investments (net of income tax: 1998 - $24,181; 1997 - $17,351) 44,909 32,224 Reclassification adjustment for amounts included in net income (net of income tax: 1998 - $(511); 1997 - $(623)) (949) (1,158) ---------- ---------- Comprehensive income $130,866 $105,519 ======== ========
NOTE H - ACQUISITION On October 14, 1998, Protective Life completed its acquisition of approximately 260,000 individual life insurance policies from Lincoln National Corporation. The policies represent the payroll deduction business originally marketed and underwritten by Aetna. NOTE I - 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. 11 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. This report includes "forward-looking statements" which express Protective Life's current expectations of future events and/or results. The words "believe", "expect", "anticipate" and similar expressions identify forward-looking statements which are based on future expectations rather than on historical facts and are therefore subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed. 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:
NINE MONTHS PERCENTAGE ENDED INCREASE/ SEPTEMBER 3 (DECREASE) ----------------------------- ---------- (IN THOUSANDS) 1998 1997 ---- ---- Premiums and policy fees $420,914 $333,703 26.1 % Net investment income 450,229 405,245 11.1 Realized investment gains 1,460 1,781 (18.0) Other income 14,107 2,381 492.5 --------- ---------- $886,710 $743,110 ======== ========
Premiums and policy fees increased $87.2 million or 26.1% in the first nine months of 1998 over the first nine months of 1997. Premiums and policy fees from the Acquisitions Division decreased $7.4 million. The Individual Life Division's premiums and policy fees increased $2.1 million. The acquisition of West Coast Life Insurance Company ("West Coast") in the second 12 quarter of 1997 increased premiums and policy fees $10.6 million in the first nine months of 1998 as compared to the first nine months of 1997. The Dental Division's exit from the group major medical business resulted in a $10.3 million decrease in premiums and policy fees. Premiums and policy fees related to the Dental Division's other businesses increased $31.1 million in the first nine months of 1998 as compared to the same period in 1997. Premiums and policy fees from the Financial Institutions Division increased $55.9 million in the first nine months of 1998 as compared to the first nine months of 1997. For this Division, 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 $55.3 million. The increase in premiums and policy fees from the Investment Products Division was $5.3 million. Net investment income in the first nine months of 1998 increased by $44.9 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 $38.5 million in the first nine months of 1998 as compared to the same period in 1997. 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 1998 were $1.4 million as compared to $1.8 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. The acquisition of Western Diversified in late 1997 resulted in a $7.2 million increase in other income in the first nine months of 1998 as compared to the same period last year. Other income from all other sources increased $4.5 million in the first nine months of 1998 as compared with the first nine months of 1997. 13 INCOME BEFORE INCOME TAX The following table sets forth operating income or loss and income or loss before income tax by business segment for the periods shown:
OPERATING INCOME (LOSS) AND INCOME (LOSS) BEFORE INCOME TAX NINE MONTHS ENDED SEPTEMBER 30 (IN THOUSANDS) 1998 1997 ---- ---- Operating Income (Loss)1 Life Insurance Acquisitions $ 38,198 $ 44,731 Individual Life 21,476 12,664 West Coast 15,673 4,093 Specialty Insurance Products Dental and Consumer Benefits 6,537 10,106 Financial Institutions 13,586 8,673 Retirement Savings and Investment Products Guaranteed Investment Contracts 23,786 21,922 Investment Products 7,125 6,328 Corporate and Other 7,643 3,474 --------- ---------- Total operating income 134,024 111,991 -------- -------- Realized Investment Gains (Losses) Guaranteed Investment Contracts (895) (1,840) Investment Products 678 589 Unallocated Realized Investment Gains (Losses) 1,677 3,032 Related Amortization of Deferred Policy Acquisition Costs Investment Products (367) (431) ---------- ---------- Total net 1,093 1,350 --------- --------- Income (Loss) Before Income Tax Life Insurance Acquisitions 38,198 44,731 Individual Life 21,476 12,664 West Coast 15,673 4,093 Specialty Insurance Products Dental and Consumer Benefits 6,537 10,106 Financial Institutions 13,586 8,673 Retirement Savings and Investment Products Guaranteed Investment Contracts 22,891 20,082 Investment Products 7,436 6,486 Corporate and Other 7,643 3,474 Unallocated Realized Investment Gains (Losses) 1,677 3,032 ---------- ---------- Total income before tax $135,117 $113,341 ======== ========
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 $6.5 million in the first nine months of 1998 as compared to the same period of 1997. In addition, the Division's mortality experience was approximately $2.1 million worse than expected in the first nine months of 1998 as compared to being approximately $4.9 million better than expected in the first nine months 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. On October 14, 1998, Protective Life acquired approximately 260,000 policies from Lincoln National Corporation. The policies represent the payroll deduction business originally marketed and underwritten by Aetna. The transaction represents approximately $330 million of life insurance reserves and approximately $65 million of annual premium. The transaction should contribute to earnings beginning in the second quarter next year. The Individual Life Division's pretax earnings of $21.5 million in the first nine months of 1998 were $8.8 million above the same period of 1997. In the second quarter of 1997, the Division experienced record high mortality. Mortality experience was at expected levels in the second and third quarters of 1998 after having been above expected levels in the first quarter of 1998. West Coast had pretax earnings of $15.7 million for the first nine months of 1998 compared to $4.1 million for the period ended September 30, 1997. The Division was acquired by the Company in June 1997. Dental Division pretax earnings were $3.6 million lower in the first nine months of 1998 as compared to the first nine months of 1997. Last year's results include approximately $4.0 million of earnings from the group major medical business which the Division exited last year. Pretax earnings of the Financial Institutions Division were $4.9 million higher in the first nine 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 $5.4 million in the first nine months of 1998 as compared to the same period last year. The GIC Division had pretax operating earnings of $23.8 million in the first nine months of 1998 and $21.9 million in the corresponding period of 1997. Realized investment losses associated with this Division in the first nine months of 1998 were less than $0.9 million as compared to $1.8 million in the same period last year. As a result, total pretax earnings were $22.9 million in the first nine months of 1998 compared to $20.1 million for the same period last year. Investment Products Division pretax operating earnings in the first nine months of 1998 of $7.1 million were $0.8 million above the same period of 1997. Realized investment gains associated with the Division, net of related amortization of deferred policy acquisition costs, were $0.3 million in the first nine months of 1998 compared to $0.2 million in the first nine months of 1997, resulting in total pretax earnings of $7.4 million in the first nine months of 1998 as compared to $6.5 million in the same period of 1997. 15 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 $7.6 million in the first nine months of 1998 compared to $3.5 million in the first nine months of 1997. The 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 ------------ -------------------- 1997 34.3% 1998 35.7 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 approximately 36%. 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 ENDED TOTAL PERCENTAGE SEPTEMBER 30 (IN THOUSANDS) INCREASE ------------ -------------- ----------- 1997 $74,453 25.9 % 1998 86,906 16.7 Compared to the same period in 1997, net income in the first nine months of 1998 increased $12.5 million, reflecting improved operating earnings in the Individual Life, West Coast, Financial Institutions, Guaranteed Investment Contracts, and Investment Products Divisions and the Corporate and Other segment, which were partially offset by lower operating earnings in the Acquisitions and Dental Divisions and lower realized investment gains (net of related amortization of deferred policy acquisition costs). RECENTLY ISSUED ACCOUNTING STANDARDS The Financial Accounting Standards Board ("FASB") has issued Statement of Financial Accounting Standards ("SFAS") No. 132, "Employers' Disclosures About Pension and Other Postretirement Benefits" which revises the footnote disclosures about pension and other postretirement benefit plans. The FASB has also issued SFAS No. 133, "Accounting for 16 Derivative Instruments and Hedging Activities" and SFAS No. 134, "Accounting for MortgageBacked Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise." The adoption of these accounting standards is not expected to have a material effect on Protective Life's financial condition. YEAR 2000 DISCLOSURE Computer hardware and software often denote the year using two digits rather than four; for example, the year 1998 often is denoted by such hardware and software as "98." It is probable that such hardware and software will malfunction when calculations involving the year 2000 are attempted because the hardware and/or software will interpret "00" as representing the year 1900 rather than the year 2000. This "Year 2000" issue potentially affects all individuals and companies (including Protective Life, its customers, business partners, suppliers, banks, custodians and administrators). The problem is most prevalent in older mainframe systems, but personal computers and equipment containing computer chips could also be affected. Protective Life shares computer hardware and software with its parent, Protective Life Corporation ("PLC"), and other affiliates of PLC. PLC began work on the Year 2000 problem in 1995 and has developed and implemented a Year 2000 transition plan intended to identify and modify or replace important hardware and/or software systems on which it relies that have Year 2000 issues or to develop appropriate contingency measures. PLC is also confirming that its service providers are implementing plans to identify and modify or replace their systems that have a Year 2000 issue. Substantial resources are being devoted to this effort; however, PLC cannot specifically identify all of the costs to develop and implement these plans. Since 1995, the costs that have been identified as relating to addressing the year 2000 problem total less than $5 million The majority of the modifications necessary for PLC's mainframe systems to be able to process transactions dated beyond 1999 have been completed and the remainder are targeted for completion by December 31, 1998. PLC's other systems are currently being addressed with most targeted completion dates being prior to June 30, 1999. PLC is developing detailed contingency plans for a large percentage of its remaining Year 2000 issues. PLC is also using research, direct inquiry, and/or testing to attempt to determine the Year 2000 readiness of critical vendors and business partners. During 1999, PLC will future date test its systems in a production environment, and finalize its contingency plans. PLC currently anticipates that its remaining systems with Year 2000 issues will be addressed and appropriate action taken before December 31, 1999. Due to the fact that PLC does not control all of the factors that could impact its Year 2000 readiness, there can be no assurances that PLC's efforts will be successful, that interactions with other service providers with Year 2000 issues will not impair PLC's operations, or that the Year 2000 issue will not otherwise adversely affect PLC. Should some of PLC's systems not be available due to Year 2000 problems, in a reasonably likely worst case scenario, PLC may experience significant delays in its ability to perform certain functions, but does not expect an inability to perform critical functions or to otherwise conduct business. 17 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 13, 1998 /S/ JERRY W. DEFOOR -------------------- Jerry W. DeFoor Vice President and Controller, and Chief Accounting Officer (Duly authorized officer) 18 EX-27 2
7 This schedule contains summary financial information extracted from the consolidated financial statements of the Protective Life Insurance Company and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 6,728,732 0 0 11,861 1,450,363 14,677 8,565,491 0 660,359 691,994 11,239,685 3,655,862 401,817 0 188,867 0 2 0 5,000 1,084,772 11,239,685 420,914 450,229 1,460 14,107 540,887 89,053 121,653 135,117 48,211 86,906 0 0 0 86,906 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, 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 many aspects of the insurance business, which may include premium rates, marketing practices, advertising, policy forms, and capital adequacy, and is concerned primarily with the protection of policyholders rather than stockholders. 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 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. Computer hardware and software often denote the year using two digits rather than four; for example, the year 1998 often is denoted by such hardware and software as "98." 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, its customers, business partners, suppliers, banks, custodians and administrators). The problem is most prevalent in older mainframe systems, but personal computers and equipment containing computer chips could also be affected. Protective Life shares computer hardware and software with its parent, Protective Life Corporation ("PLC"), and other affiliates of PLC. PLC began work on the Year 2000 problem in 1995 and has developed and implemented a Year 2000 transition plan intended to identify and modify or replace important hardware and/or software systems on which it relies that have Year 2000 issues or to develop appropriate contingency measures. PLC is also confirming that its service providers are implementing plans to identify and modify or replace their systems that have a Year 2000 issue. PLC currently anticipates that its systems with Year 2000 issues will have been addressed and appropriate action taken before December 31, 1999. Due to the fact that PLC does not control all of the factors that could impact its Year 2000 readiness, there can be no assurances that PLC's efforts will be successful, that interactions with other service providers with Year 2000 issues will not impair PLC's operations, or that the Year 2000 issue will not otherwise adversely affect PLC. Should some of PLC's systems not be available due to Year 2000 problems, in a reasonably likely worst case scenario, PLC may experience significant delays in its ability to perform certain functions, but does not expect an inability to perform critical functions or to otherwise conduct business. However, other worst case scenarios, depending upon their duration, could have a material adverse effect on PLC and Protective Life and their operations. 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. The cost of reinsurance is, in some cases, reflected in the premium rates charged by Protective Life. Under certain reinsurance agreements, the reinsurer may increase the rate it charges Protective Life for the reinsurance, though Protective Life does not anticipate increases to occur. Therefore, if the cost of reinsurance were to increase with respect to policies where the rates have been guaranteed by Protective Life, Protective Life could be adversely affected. 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-----