-----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, EEgXvHHe2qXi5/prel1aRLKeCi4oBmWn2/1ZXDylQsmaaqtWfp9oFulGZoAPsK/u bKNuPbp5gYbbjR1WnRBWWA== 0000310826-99-000026.txt : 19990517 0000310826-99-000026.hdr.sgml : 19990517 ACCESSION NUMBER: 0000310826-99-000026 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 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: 99622607 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, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File 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 7, 1999 : 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, 1999 and 1998 (unaudited) Consolidated Condensed Balance Sheets as of March 31, 1999 (unaudited) and December 31, 1998 Consolidated Condensed Statements of Cash Flows for the Three Months ended March 31, 1999 and 1998 (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 Share Owner 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, 1999, and the related consolidated condensed statements of income and cash flows for the three-month periods ended March 31, 1999 and 1998. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the consolidated condensed 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, 1998, and the related consolidated statements of income, share-owner's equity, and cash flows for the year then ended (not presented herein); and in our report dated February 11, 1999, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated condensed balance sheet as of December 31, 1998, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. PricewaterhouseCoopers LLP Birmingham, Alabama April 23, 1999 2
PROTECTIVE LIFE INSURANCE COMPANY CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Dollars in thousands) (Unaudited) THREE MONTHS ENDED MARCH 31 ----------------------- 1999 1998 ---- ----- REVENUES Premiums and policy fees $ 269,738 $230,514 Reinsurance ceded (117,952) (93,647) --------- --------- Premiums and policy fees, net of reinsurance ceded 151,786 136,867 Net investment income 149,454 149,241 Realized investment gains 1,449 11 Other income 3,371 3,840 ---------- --------- 306,060 289,959 ---------- --------- BENEFITS AND EXPENSES Benefits and settlement expenses (net of reinsurance ceded: 1999 - $63,686; 1998 - $57,363) 185,436 180,390 Amortization of deferred policy acquisition costs 30,952 24,827 Other operating expenses (net of reinsurance ceded: 1999 - $30,404; 1998 - $31,709) 43,288 42,755 --------- --------- 259,676 247,972 INCOME BEFORE INCOME TAX 46,384 41,987 Income tax expense 16,499 15,244 --------- --------- NET INCOME $ 29,885 $ 26,743 ========= ========
See notes to consolidated condensed financial statements 3
PROTECTIVE LIFE INSURANCE COMPANY CONSOLIDATED CONDENSED BALANCE SHEETS (Dollars in thousands) MARCH 31 DECEMBER 31 1999 1998 ------------- ------------ (Unaudited) ASSETS Investments: Fixed maturities $ 6,335,576 $ 6,400,262 Equity securities 12,395 12,258 Mortgage loans on real estate 1,782,972 1,623,603 Investment in real estate, net of accumulated depreciation 15,160 14,868 Policy loans 231,976 232,670 Other long-term investments 76,088 70,078 Short-term investments 75,236 159,655 -------------- ------------ Total investments 8,529,403 8,513,394 Accrued investment income 99,041 100,395 Accounts and premiums receivable, net of allowance for uncollectible amounts 39,076 31,265 Reinsurance receivables 769,703 756,370 Deferred policy acquisition costs 867,232 841,425 Property and equipment, net 46,472 42,374 Other assets 35,699 34,632 Assets related to separate accounts Variable Annuity 1,365,035 1,285,952 Variable Universal Life 17,752 13,606 Other 3,478 3,482 -------------- -------------- $11,772,891 $11,622,895 ============== ============== LIABILITIES Policy liabilities and accruals: Future policy benefits and claims $ 4,233,530 $ 4,140,003 Unearned premiums 382,063 389,294 ------------ ------------ 4,615,593 4,529,297 Guaranteed investment contract deposits 2,729,461 2,691,697 Annuity deposits 1,529,189 1,519,820 Other policyholders' funds 214,020 219,356 Other liabilities 205,030 226,310 Accrued income taxes 4,212 (10,992) Deferred income taxes 22,588 51,735 Notes payable 2,363 2,363 Indebtedness to related parties 18,000 20,898 Liabilities related to separate accounts Variable Annuity 1,365,035 1,285,952 Variable Universal Life 17,752 13,606 Other 3,478 3,482 -------------- ------------- Total liabilities 10,726,721 10,553,524 ----------- ----------- COMMITMENTS AND CONTINGENT LIABILITIES - NOTE B SHARE-OWNER'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 (5,148) (5,199) Retained earnings 716,404 686,519 Accumulated other comprehensive income Net unrealized gains on investments (net of income tax: 1999 - $1,033; 1998 - $29,646) 1,920 55,057 -------------- ------------- Total share-owner's equity 1,046,170 1,069,371 ------------ ------------ $11,772,891 $11,622,895 ============== ============= 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 ------------------------------ 1999 1998 ------------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 29,885 $ 26,743 Adjustments to reconcile net income to net cash provided by operating activities: Realized investment gains (1,449) (11) Amortization of deferred policy acquisition costs 30,953 24,827 Capitalization of deferred policy acquisition costs (48,557) (43,930) Depreciation expense 1,739 1,917 Deferred income tax (534) (4,247) Accrued income tax 15,204 11,868 Interest credited to universal life and investment products 85,361 84,729 Policy fees assessed on universal life and investment products (36,243) (34,045) Change in accrued investment income and other receivables (24,999) 7,339 Change in policy liabilities and other policyholders' funds of traditional life and health products 36,010 114,125 Change in other liabilities (20,396) (46,790) Other (net) 2,298 (20,811) ------------- ------------ Net cash provided by operating activities 69,272 121,714 ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES Maturities and principal reductions of investments Investments available for sale 3,682,197 1,742,067 Other 59,209 76,911 Sale of investments Investments available for sale 214,724 145,772 Other 47,959 234,645 Cost of investments acquired Investments available for sale (3,947,000) (1,974,390) Other (163,781) (281,863) Purchase of property and equipment (5,543) (2,684) Sale of property and equipment 0 4 -------------- -------------- Net cash used in investing activities (112,236) (59,538) ---------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from borrowings under line of credit arrangements and debt 270,100 304,500 Principal payments on line of credit arrangements and debt (270,100) (304,500) Investment product deposits and change in universal life deposits 401,145 330,148 Investment product withdrawals (358,180) (431,521) ----------- ----------- Net cash provided by financing activities 42,965 101,373 ------------ ----------- INCREASE (DECREASE) IN CASH 0 (39,197) CASH AT BEGINNING OF PERIOD 0 39,197 -------------- ------------ CASH AT END OF PERIOD $ 0 $ 0 ============== ============== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period: Interest on debt $ 517 $ 856 Income taxes $ 0 $ 9,995 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Reduction of principal on note from ESOP $ 183 $ 179 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, 1999, are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. The year-end consolidated condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. For further information, refer to the consolidated financial statements and notes thereto included in Protective Life's annual report on Form 10-K for the year ended December 31, 1998. 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 or alternatively in arbitration. Although the outcome of any such litigation or arbitration 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 Protective Life operates seven divisions whose principal strategic focuses can be grouped into three general categories: life insurance, specialty insurance products, and retirement savings and investment products. The following table sets forth 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 Ended March 31, 1999 -------------------------------------------------------------------------- (In Thousands) Specialty Insurance Life Insurance Products ----------------------------------------- ----------------------- Dental and Individual Consumer Financial Life West Coast Acquisitions Benefits Institutions ------------- ----------- ------------- ---------- ------------ Premiums and policy fees 64,420 $18,328 $41,105 $73,718 $66,753 Reinsurance ceded (37,469) (12,788) (8,597) (17,535) (41,563) ------- ------- -------- ------- ------- Net of reinsurance ceded 26,951 5,540 32,508 56,183 25,190 Net investment income 15,553 18,042 33,316 3,593 5,795 Realized investment gains (losses) 0 0 0 0 0 Other income (1,029) (6) (9) 365 2,833 ------- --------- --------- -------- -------- Total revenues 41,475 23,576 65,815 60,141 33,818 ------- ------- ------- ------- ------- Benefits and settlement expenses 18,922 14,589 35,523 40,244 11,310 Amortization of deferred policy acquisition costs 8,826 1,405 6,094 2,538 6,515 Other operating expenses 5,082 2,000 6,426 13,986 11,023 ------- ------ ------- ------- ------- Total benefits and expenses 32,830 17,994 48,043 56,768 28,848 ------- ------- ------- -------- ------- Income before income tax 8,645 5,582 17,772 3,373 4,970 Retirement Savings and Investment Products --------------------------- Guaranteed Corporate Investment Investment and Total Contracts Products Other Adjustments Consolidated ----------- ---------- ---------- ----------- ------------ Premiums and policy fees $ 5,382 $ 32 $269,738 Reinsurance ceded (117,952) ---------- ---------- -------- Net of reinsurance ceded 5,382 32 151,786 -------- Net investment income $51,650 25,566 (4,061) 149,454 Realized investment gains (losses) 3,070 648 0 $(2,269) 1,449 Other income 0 748 469 3,371 ---------- -------- -------- ---------- --------- Total revenues 54,720 32,344 (3,560) (2,269) 306,060 ------- ------- ------- ------- -------- Benefits and settlement expenses 43,927 20,859 62 185,436 Amortization of deferred acquisition costs 192 5,379 3 30,952 Other operating expenses 741 3,159 871 43,288 -------- ------- ------- --------- Total benefits and expenses 44,860 29,397 936 259,676 ------- ------- ------- -------- Income before income tax 9,860 2,947 (4,494) 46,384 Income tax expense 16,499 16,499 --------- Net income $ 29,885 ========= 7
Operating Segment Income for the Three Months Ended March 31, 1998 ---------------------------------------------------------------------------- (In Thousands) Specialty Insurance Life Insurance Products ----------------------------------------- --------------------------- Dental and Individual Consumer Financial Life West Coast Acquisitions Benefits Institutions ------------- ----------- ------------ ---------- ------------ Premiums and policy fees $52,300 $17,686 $28,566 $64,438 $63,370 Reinsurance ceded (18,275) (10,466) (4,322) (25,326) (35,258) ------- ------- -------- ------- ------- Net of reinsurance ceded 34,025 7,220 24,244 39,112 28,112 Net investment income 14,020 15,012 26,732 3,857 6,244 Realized investment gains (losses) Other income (3) 599 2,790 ---------- ----------- ----------- --------- -------- Total revenues 48,042 22,232 50,976 43,568 37,146 ------- -------- ------- ------- ------- Benefits and settlement expenses 27,197 15,395 29,105 28,318 15,167 Amortization of deferred policy acquisition costs 7,172 (12) 4,541 2,970 5,649 Other operating expense 7,566 2,391 5,458 10,205 12,271 -------- -------- --------- ------- ------- Total benefits and expenses 41,935 17,774 39,104 41,493 33,087 ------- ------- -------- ------- ------- Income before income tax 6,107 4,458 11,872 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 $230,514 Reinsurance ceded (93,647) ---------- -------- --------- Net of reinsurance ceded 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 income tax 7,987 1,890 3,008 41,987 Income tax expense 15,244 15,244 -------- Net income $ 26,743 ========
8
Operating Segment Assets March 31, 1999 --------------------------------------------------------------------------- (In Thousands) Specialty Insurance Life Insurance Products ------------------------------------------- ------------------------- Dental and Individual Consumer Financial Life West Coast Acquisitions Benefits Institutions ----------- ---------- ------------ ---------- ------------ Investments and other assets $1,102,110 $1,162,824 $1,551,514 $205,024 $644,087 Deferred policy acquisition costs 316,898 152,029 249,252 25,286 37,612 ----------- ----------- ----------- --------- --------- Total assets $1,419,008 $1,314,853 $1,800,766 $230,310 $681,699 ========== ========== ========== ======== ======== Retirement Savings and Investment Products ---------------------------------- Guaranteed Corporate Investment Investment and Total Contracts Products Other Consolidated Investments and other assets $2,888,250 $2,848,469 $503,381 $10,905,659 Deferred policy acquisition costs 1,453 84,696 6 867,232 ------------ ------------ ------------ ------------- Total assets $2,889,703 $2,933,165 $503,387 $11,772,891 ========== ========== ======== =========== Operating Segment Assets December 31, 1998 (In Thousands) Specialty Insurance Life Insurance Products Dental and Individual Consumer Financial Life West Coast Acquisitions Benefits Institutions Investments and other assets $1,076,202 $1,149,642 $1,600,123 $197,337 $645,909 Deferred policy acquisition costs 301,941 144,455 255,347 23,836 39,212 ----------- ----------- ----------- --------- --------- Total assets $1,378,143 $1,294,097 $1,855,470 $221,173 $685,121 ========== ========== ========== ======== ======== Retirement Savings and Investment Products --------------------------------- Guaranteed Corporate Investment Investment and Total Contracts Products Other Consolidated ------------- ------------- ------------- ------------- Investments and other assets $2,869,304 $2,542,536 $700,417 $10,781,470 Deferred policy acquisition costs 1,448 75,177 9 841,425 ------------ ------------ ------------ ------------- Total assets $2,870,752 $2,617,713 $700,426 $11,622,895 ========== ========== ======== ===========
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, 1999, and for the three months then ended, Protective Life and its life insurance subsidiaries had consolidated share-owner's equity and net income prepared in conformity with statutory reporting practices of $538.9 million and $32.2 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 share-owner'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 share-owner's equity will fluctuate significantly as interest rates change. Protective Life's balance sheets at March 31, 1999 and December 31, 1998, prepared on the basis of reporting investments at amortized cost rather than at market values, are as follows:
MARCH 31, 1999 DECEMBER 31, 1998 -------------- ----------------- (IN THOUSANDS) Total investments $ 8,519,449 $ 8,412,167 Deferred policy acquisition costs 875,518 857,949 All other assets 2,376,256 2,268,076 ------------ ------------ $11,771,223 $11,538,192 =========== =========== Deferred income taxes $ 22,840 $ 22,089 All other liabilities 10,704,133 10,501,789 ----------- ----------- 10,726,973 10,523,878 Share-owner's equity 1,044,250 1,014,314 ------------ ----------- $11,771,223 $11,538,192 =========== ===========
NOTE F - ACCOUNTING POLICIES FOR DERIVATIVE FINANCIAL INSTRUMENTS Protective Life does not currently use derivative financial instruments for trading purposes. Combinations of options and futures contracts are sometimes used as hedges against changes in interest rates for certain investment, primarily outstanding mortgage loan commitments, mortgage loans, and mortgage-backed securities, and liabilities arising from interest-sensitive products. Realized investment gains and losses on such contracts are deferred and amortized over the life of the hedged asset. No realized investment gains or losses were deferred in 1999 or 1998. At March 31, 1999, open option and open futures contracts with a notional amount of $600.0 million were in a $0.5 million net unrealized loss position. Additionally, Protective Life uses interest rate 10 swap contracts, swaptions (options to enter into interest rate swap contracts), caps, and floors to convert certain investments from a variable to a fixed rate of interest and from a fixed rate of interest to a variable rate of interest. At March 31, 1999, related open interest rate swap contracts with a notional amount of $677.0 million were in a $4.9 million net unrealized gain position. NOTE G - COMPREHENSIVE INCOME (LOSS) The following table sets forth Protective Life's comprehensive income (loss) for the three months ended March 31, 1999 and 1998:
Three Months Ended March 31 ---------------------------- (In Thousands) 1999 1998 ---- ---- Net income $29,885 $26,743 Increase (decrease) in net unrealized gains on investments (net of income tax: 1999 - $(29,120); 1998 - $83) (52,195) 107 Reclassification adjustment for amounts included in net income (net of income tax: 1999 - $(507); 1998 - $(4)) (942) (7) ---------- ---------- Comprehensive income (loss) $(23,252) $26,843 ======== =======
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 share-owner's equity. 11 ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS Protective Life Insurance Company ("Protective Life") is a wholly-owned subsidiary of Protective Life Corporation ("PLC"), an insurance holding company whose common stock is traded on the New York Stock Exchange (symbol: PL). Founded in 1907, Protective Life provides financial services through the production, distribution, and administration of insurance and investment products. Unless the context otherwise requires "Protective Life" refers to the consolidated group of Protective Life Insurance Company and its subsidiaries. In accordance with General Instruction H(2)(a), Protective Life includes the following analysis with the reduced disclosure format. Protective Life operates seven divisions whose principal strategic focuses can be grouped into three general categories: life insurance, specialty insurance products, and retirement savings and investment products. The life insurance category includes the Individual Life, West Coast, and Acquisitions Divisions. The specialty insurance products category includes the Dental and Consumer Benefits ("Dental") and Financial Institutions Divisions. The retirement savings and investment products category includes the Guaranteed Investment Contracts and Investment Products Divisions. Protective Life also has an additional business segment which is described herein as Corporate and Other. This report includes "forward-looking statements" which express the expectations of future events and/or results. The words "believe", "expect", "anticipate" and similar expressions identify forward-looking statements which are based on future expectations rather than on historical facts and are therefore subject to a number of risks and uncertainties, and 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 (DECREASE) ---------------------------- ------------- (IN THOUSANDS) 1999 1998 ---- ---- Premiums and policy fees $151,786 $136,867 10.9 % Net investment income 149,454 149,241 0.1 Realized investment gains 1,449 11 --- Other income 3,371 3,840 (12.2) ---------- ---------- $306,060 $289,959 ======== ========
12 Premiums and policy fees increased $14.9 million or 10.9% in the first three months of 1999 over the first three months of 1998. Premiums and policy fees in the Individual Life and West Coast Divisions decreased $7.1 million and $1.7 million, respectively in the first three months of 1999 as compared to the same period in 1998 primarily due to an increase in the use of reinsurance by these Divisions. In the Acquisitions Division, decreases in older acquired blocks resulted in a $1.1 million decrease in premiums and policy fees. The coinsurance of a block of policies from Lincoln National Corporation ("Lincoln National") in October 1998 resulted in a $9.4 million increase in premiums and policy fees. In the Dental Division premiums and policy fees related to dental indemnity insurance increased $15.5 million in the first three months of 1999 as compared to the same period in 1998. Premiums and policy fees related to the Dental Division's other businesses increased $1.6 million in the first three months of 1999 as compared to the same period in 1998. Premiums and policy fees from the Financial Institutions Division decreased $2.9 million in the first three months of 1999 as compared to the first three months of 1998 of which $3.5 million related to the normal decrease in premiums on closed blocks of policies acquired in prior years. Premiums and policy fees related to the Financial Institutions other businesses increased $0.6 million in the first three months of 1999 as compared to the same period in 1998. The increase in premiums and policy fees from the Investment Products Division was $1.3 million. Net investment income in the first three months of 1999 increased by $0.2 million over the corresponding period of the preceding year. The average yield on investments was down slightly in the first quarter of 1999 as compared to 1998 due to having greater liquidity in the investment portfolio to fund GIC withdrawals. 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 proper 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 1999 were $1.4 million as compared to less than $0.1 million in the corresponding period of 1998. 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. Other income from all sources decreased $0.5 million in the first three months of 1999 as compared with the first three months of 1998. 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 THREE MONTHS ENDED MARCH 31 (IN THOUSANDS) 1999 1998 ---- ---- Operating Income (Loss)(1) Life Insurance Individual Life $ 8,645 $ 6,107 West Coast 5,582 4,458 Acquisitions 17,772 11,872 Specialty Insurance Products Dental and Consumer Benefits 3,373 2,075 Financial Institutions 4,970 4,059 Retirement Savings and Investment Products Guaranteed Investment Contracts 6,789 8,420 Investment Products 2,947 1,934 Corporate and Other (4,495) 3,008 -------- -------- Total operating income 45,583 41,933 -------- ------- Realized Investment Gains (Losses) Guaranteed Investment Contracts 3,070 (433) Investment Products 648 (87) Unallocated Realized Investment Gains (Losses) (2,269) 531 Related Amortization of Deferred Policy Acquisition Costs Investment Products (648) 43 --------- ---------- Total net 801 54 --------- ---------- Income (Loss) Before Income Tax Life Insurance Individual Life 8,645 6,107 West Coast 5,582 4,458 Acquisitions 17,772 11,872 Specialty Insurance Products Dental and Consumer Benefits 3,373 2,075 Financial Institutions 4,970 4,059 Retirement Savings and Investment Products Guaranteed Investment Contracts 9,859 7,987 Investment Products 2,947 1,890 Corporate and Other (4,495) 3,008 Unallocated Realized Investment Gains (Losses) (2,269) 531 -------- --------- Total income before income tax $46,384 $41,987 ======= ======= 1 Income before income tax excluding realized investment gains and losses and related amortization of deferred acquisition costs.
14 The Individual Life Division's pretax earnings of $8.6 million in the first three months of 1999 were $2.5 million above the same period of 1998. The Division's 1999 results include $1.6 million of expenses relating to a venture to sell term and term-like products through direct response print, radio, and television advertising. The Division has reinsured most of its mortality risk such that mortality fluctuations have been significantly reduced. In the first quarter last year, the Division's mortality experience was approximately $1.8 million worse than expected. West Coast had pretax earnings of $5.6 million for the first three months of 1999 compared to $4.5 million for the period ended March 31, 1998. This increase reflects the Division's growth through sales. Pretax earnings from the Acquisitions Division increased $5.9 million in the first three months of 1999 as compared to the same period of 1998. The Division's mortality experience was approximately $1.9 million better than expected in the first three months of 1999 as compared to being approximately $2.6 million worse than expected in the first three months of 1998. Earnings from the Acquisitions Division are normally expected to decline over time (due to the lapsing of policies resulting from deaths of insureds or terminations of coverage) unless new acquisitions are made. In October 1998, the Company coinsured a block of policies from Lincoln National. Earnings relating to this acquisition were $1.7 million in the first three months of 1999. The Dental Division's pretax operating earnings of $3.4 million in the first three months of 1999 were $1.3 million higher than the same period last year primarily due to more favorable claims experience in the first three months of 1999 as compared to the same period in 1998. Pretax earnings of the Financial Institutions Division were $0.9 million higher in the first three months of 1999 as compared to the same period in 1998. The increase was primarily due to improved credit disability earnings. Service contract earnings for the first quarter of 1999 were slightly lower than the same period last year. The GIC Division had pretax operating earnings of $6.8 million in the first three months of 1999 and $8.4 million in the corresponding period of 1998. Operating earnings during the first quarter of 1999 were lower than the same period in 1998 due to having greater liquidity in the asset portfolio to fund maturing contracts. Realized investment gains associated with this Division in the first three months of 1999 were $3.1 million as compared to losses of $0.4 million in the same period last year. As a result, total pretax earnings were $9.9 million in the first three months of 1999 compared to $8.0 million for the same period last year. Investment Products Division pretax operating earnings of $2.9 million were $1.0 million higher in the first three months of 1999 compared to the same period of 1998. Revenue growth has been partially offset by the rising cost of interest rate incentives. The Division had no realized investment gains (net of related amortization of deferred policy acquisition costs) in the first three months of 1999 as compared to losses of less than $0.1 million in the same period of 1998. Total pretax earnings were $2.9 million in the first three months of 1999 as compared to $1.9 million in the same period of 1998. 15 The Corporate and Other segment consists of several small insurance lines of business, net investment income on unallocated capital 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. The pretax loss for this segment was $4.5 million in the first three months of 1999 compared to income of $3.0 million in the first three months of 1998. The decrease in earnings relates primarily to the allocation of capital to the block of policies coinsured from Lincoln National and to a decrease in unallocated capital resulting from a $60 million dividend paid to PLC in the third quarter of 1998 . 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 ---------------- ------------------- 1998 36.3 % 1999 35.6 The effective income tax rate for the full year of 1998 was 35.0%. Management's estimate of the effective income tax rate for 1999 is approximately 35.6%. 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 - -------------- -------------- ---------- 1998 $26,743 20.6 % 1999 29,885 11.7 Compared to the same period in 1998, net income in the first three months of 1999 increased $3.1 million, reflecting improved operating earnings in the Individual Life, West Coast, Acquisitions, Dental, Financial Institutions, and Investment Products Divisions and higher realized investment gains (net of related amortization of deferred policy acquisition costs), which were partially offset by lower operating earnings in the Guaranteed Investment Contracts Division and the Corporate and Other segment. Recently Issued Accounting Standards The Financial Accounting Standards Board (FASB) has issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 will require Protective Life to report derivative financial instruments 16 on the balance sheet and to carry such derivatives at fair value. The fair values of derivatives increase or decrease as interest rates change. Under SFAS No. 133, changes in fair value are reported as a component of net income or as a change to share-owner's equity, depending upon the nature of the derivative. Although the adoption of SFAS No. 133 will not affect Protective Life's operations, adoption will introduce volatility into Protective Life's reported net income and share-owner's equity as interest rates change. SFAS No. 133 is effective January 1, 2000. The FASB has also issued SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise," and the American Institute of Certified Public Accountants has issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The adoption of these accounting standards in 1999 is not expected to have a material effect on 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 1999 often is denoted by such hardware and software as "99." It is probable that such hardware and software will malfunction when calculations involving the year 2000 are attempted because the hardware and/or software will interpret "00" as representing the year 1900 rather than the year 2000. This "Year 2000" issue potentially affects all individuals and companies (including 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 Corporation ("PLC"), and other affiliates of PLC. Protective Life Corporation ("PLC") began work on the Year 2000 problem in 1995. At that time, PLC identified and assessed PLC's critical mainframe systems, and prioritized the remediation efforts that were to follow. During 1998 all other hardware and software, including non-information technology (non-IT) related hardware and software, were included in the process. PLC's Year 2000 plan includes all subsidiaries. PLC estimates that Year 2000 remediation is complete for most of its insurance administration and general administration systems. Of the general administration systems that are not yet remediated, the majority are new systems that were implemented during 1998 and are scheduled to be upgraded to the current release of the system during the second quarter of 1999. All remediated systems are currently in production. Personal computer network hardware and software have been reviewed, with upgrades implemented where necessary. A review of personal computer desktop software is in progress, but not complete. All Year 2000 personal computer preparations are expected to be completed by June 30, 1999. With respect to non-IT equipment and processes, the assessment and remediation is progressing on schedule and all known issues are expected to be remediated before December 31, 1999. One insurance administration system, a personal computer database system that processes member information for one subsidiary, has been identified as mission critical and is not yet fully remediated. This effort is on schedule and targeted to be complete by June 30, 1999. 17 Future date tests are used to verify a system's ability to process transactions dated up to and beyond January 1, 2000. Future date tests are complete or in-progress for the majority of PLC's mission-critical systems. A large portion of the testing is conducted by a contract programming staff dedicated full time to Year 2000 preparations. These resources have been part of PLC's Year 2000 project since 1995. Integrated tests involve multiple system testing and are used to verify the Year 2000 readiness of interfaces and connectivity across multiple systems. PLC is using its mainframe computer to simulate a Year 2000 production environment and to facilitate integrated testing. Integrated testing will continue throughout 1999. Business partners and suppliers that provide products or services critical to PLC's operations are being reviewed and in some cases their Year 2000 preparations are being monitored by PLC. To date, no partners or suppliers have reported that they expect to be unable to continue supplying products and services after January 1, 2000. Monitoring and testing of critical partners and suppliers will continue throughout 1999. Formal contingency planning began in March 1999 and will continue throughout the year. These plans will augment PLC's existing disaster recovery plans. PLC cannot specifically identify all of the costs to develop and implement its Year 2000 plan. The cost of new systems to replace non-compliant systems have been capitalized in the ordinary course of business. Other costs have been expensed as incurred. Through February 28, 1999, costs that have been specifically identified as relating to the Year 2000 problem total $4.1 million, with an additional $1.1 million estimated to be required to support continued testing activity. PLC's Year 2000 efforts have not adversely affected its normal procurement and development of information technology. Although PLC believes that a process is in place to successfully address Year 2000 issues, 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 Protective Life's operations, or that the Year 2000 issue will not otherwise adversely affect Protective Life. Should some of PLC's systems not be available due to Year 2000 problems, in a reasonably likely worst case scenario, Protective Life may experience significant delays in its ability to perform certain functions, but does not expect to be unable to perform critical functions or to otherwise conduct business. 18 PART II 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 14, 1999 /s/ Jerry W. DeFoor ------------------- Jerry W. DeFoor Vice President and Controller, and Chief Accounting Officer (Duly authorized officer) 19 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-31-1999 JAN-01-1999 MAR-31-1999 6,335,576 0 0 12,395 1,782,972 15,160 8,529,403 0 769,703 867,232 11,772,891 4,233,530 382,063 0 214,020 2,363 0 2 5,000 1,041,168 11,772,891 151,786 149,454 1,449 3,371 185,436 30,952 43,288 46,384 16,499 29,885 0 0 0 29,885 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, 1999 Safe Harbor for Forward-Looking Statements The Private Securities Litigation Reform Act of 1995 (the "Act") encourages companies to make "forward-looking statements" by creating a safe harbor to protect the companies from securities law liability in connection with forward-looking statements. Forward-looking statements can be identified by use of words such as "expect," "estimate," "project," "budget," "forecast," "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 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 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 share-owner's. 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 or alternatively in arbitration. The outcome of any such litigation or arbitration cannot be predicted with certainty. In addition, in some class action and other lawsuits involving insurers' sales practices, insurers have made material settlement payments. INVESTMENT RISKS. Protective Life's invested assets and derivative financial instruments 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. Protective Life has also from time to time acquired other companies and continued to operate them as subsidiaries There can be no assurance, however, that suitable acquisitions, presenting opportunities for continued growth and operating efficiencies, will continue to be available to Protective Life, or that Protective Life will realize the anticipated financial results from its acquisitions. RELIANCE UPON THE PERFORMANCE OF OTHERS. Protective Life's results may be affected by the performance of others because 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. 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. The majority of the modifications necessary for PLC's mainframe systems to be able to process transactions rated beyond 1999 have been completed. PLC currently anticipates that its remaining 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 of PLC and Protective Life and their operations. REINSURANCE. Protective Life's insurance subsidiaries cede insurance to other insurance companies. However, Protective Life 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-----