TENNESSEE 63-0169720
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
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 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 5, 2000: 5,000,000 shares.
The registrant meets the conditions set forth in General Instruction H(1)(a)and (b) of Form 10-Q and
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, 2000 and 1999 (unaudited)
Consolidated Condensed Balance Sheets as of March 31, 2000
(unaudited) and December 31, 1999
Consolidated Condensed Statements of Cash Flows for the
Three Months ended March 31, 2000 and 1999 (unaudited)
Notes to Consolidated Condensed Financial Statements (unaudited)
Item 2. Management's Narrative Analysis of the Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Risk
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K
Signature
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, 2000, and the related consolidated condensed statements of income for the three-month periods ended March 31, 2000 and 1999, and consolidated condensed statements of cash flows for the three-month periods ended March 31, 2000 and 1999. 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 auditing standards generally accepted in the United States, 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 interim financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States.
We previously audited in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet as of December 31, 1999, 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 23, 2000, 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, 1999, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Birmingham, Alabama
April 26, 2000
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in thousands)
(Unaudited)
THREE MONTHS ENDED
MARCH 31
--------------------
2000 1999
---- ----
REVENUES
Premiums and policy fees $323,645 $269,738
Reinsurance ceded (145,487) (117,952)
-------- --------
Premiums and policy fees, net of reinsurance ceded 178,158 151,786
Net investment income 163,821 149,454
Realized investment gains 2,446 1,449
Other income 10,985 3,371
--------- ---------
355,410 306,060
-------- --------
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance ceded:
2000 - $96,754; 1999 - $63,686) 234,419 185,436
Amortization of deferred policy acquisition costs 37,518 30,952
Other operating expenses (net of reinsurance ceded:
2000 - $48,662; 1999 - $30,404) 44,464 43,288
-------- ---------
316,401 259,676
INCOME BEFORE INCOME TAX 39,009 46,384
Income tax expense 13,133 16,499
-------- --------
NET INCOME $ 25,876 $ 29,885
======== ========
See notes to consolidated condensed financial statements
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
MARCH 31 DECEMBER 31
2000 1999
-------------------------------
(Unaudited)
ASSETS
Investments:
Fixed maturities $ 6,774,435 $ 6,275,607
Equity securities 18,205 30,696
Mortgage loans on real estate 1,968,703 1,946,690
Investment in real estate, net of accumulated depreciation 15,643 15,582
Policy loans 230,160 232,126
Other long-term investments 82,291 68,890
Short-term investments 118,262 81,171
------------ ------------
Total investments 9,207,699 8,650,762
Cash 25,085
Accrued investment income 108,202 101,120
Accounts and premiums receivable, net of allowance for
uncollectible amounts 54,366 45,852
Reinsurance receivables 979,001 859,684
Deferred policy acquisition costs 1,107,127 1,011,524
Property and equipment, net 50,194 49,002
Other assets 62,573 27,712
Receivable from related parties 9,204 13,059
Assets related to separate accounts
Variable Annuity 1,910,097 1,778,618
Variable Universal Life 50,720 40,293
Other 3,573 3,517
-------------- --------------
$13,567,841 $12,581,143
=========== ===========
LIABILITIES
Policy liabilities and accruals $ 5,508,989 $ 5,074,085
Stable value investment contract deposits 2,907,050 2,680,009
Annuity deposits 1,694,932 1,639,231
Other policyholders' funds 116,357 116,815
Other liabilities 329,014 293,862
Accrued income taxes (23,364) (25,833)
Deferred income taxes (25,910) (32,335)
Notes payable 2,332 2,338
Indebtedness to related parties 14,000 14,000
Liabilities related to separate accounts
Variable Annuity 1,910,097 1,778,618
Variable Universal Life 50,720 40,293
Other 3,573 3,517
-------------- --------------
12,487,790 11,584,600
----------- -----------
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 386,992 327,992
Note receivable from PLC Employee Stock Ownership Plan (4,841) (5,148)
Retained earnings 840,653 814,777
Accumulated other comprehensive income
Net unrealized gains (losses) on investments
(net of income tax (benefit): 2000 - $(79,560); 1999 - $(78,658)) (147,755) (146,080)
-------------- -------------
1,080,051 996,543
------------ -------------
$13,567,841 $12,581,143
=========== ===========
See notes to consolidated condensed financial statements
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
THREE MONTHS ENDED
MARCH 31
----------------------
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 25,876 $ 29,885
Adjustments to reconcile net income to net cash provided by operating activities:
Realized investment gains (2,446) (1,449)
Amortization of deferred policy acquisition costs 37,517 30,952
Capitalization of deferred policy acquisition costs (94,812) (48,557)
Depreciation expense 1,934 1,739
Deferred income tax 7,534 (534)
Accrued income tax 2,835 15,204
Interest credited to universal life and investment products 92,818 85,361
Policy fees assessed on universal life and investment products (48,498) (36,243)
Change in accrued investment income and other receivables (11,185) (24,999)
Change in policy liabilities and other policyholders'
funds of traditional life and health products 99,007 36,010
Change in other liabilities 12,048 (20,396)
Other (net) 27,036 2,298
-------- --------
Net cash provided by operating activities 149,664 69,271
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reductions of investments
Investments available for sale 2,358,438 3,682,197
Other 14,873 59,209
Sale of investments
Investments available for sale 260,445 214,724
Other 17,096 47,959
Cost of investments acquired
Investments available for sale (2,873,722) (3,947,000)
Other (59,275) (163,781)
Acquisition and bulk reinsurance assumptions, net of cash received (150,903)
Purchase of property and equipment (1,928) (5,544)
---------- ----------
Net cash used in investing activities (434,976) (112,236)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings under line of credit arrangements and debt 959,200 270,100
Principal payments on line of credit arrangements and debt (959,200) (270,100)
Capital contribution from PLC 59,000
Investment product deposits and change in universal life deposits 564,747 401,145
Investment product withdrawals (313,350) (358,180)
----------- -----------
Net cash provided by financing activities 310,397 42,965
----------- ------------
INCREASE IN CASH 25,085 0
CASH AT BEGINNING OF PERIOD 0 0
------------ -----------
CASH AT END OF PERIOD $ 25,085 $ 0
============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period:
Interest on debt $ 1,526 $ 517
Income taxes $ 1,986 $
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Reduction of principal on note from ESOP $ 307 $ 183
Acquisitions and bulk reinsurance assumptions
Assets acquired $ 496,221
Liabilities assumed (345,318)
-------------
Net $ 150,903
=============
See notes to consolidated condensed financial statements
The accompanying unaudited consolidated condensed financial statements of Protective Life Insurance Company and subsidiaries (“Protective Life”) have been prepared in accordance with accounting principles generally accepted in the United States 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 accounting principles generally accepted in the United States 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, 2000, are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. The year-end consolidated condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. 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, 1999.
Protective Life is a wholly-owned subsidiary of Protective Life Corporation (“PLC”).
NOTE B - COMMITMENTS AND CONTINGENT LIABILITIESUnder 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 (where Protective Life maintains its headquarters), juries have substantial discretion in awarding punitive damages, which creates the potential for unpredictable material adverse judgments in any given lawsuit. Protective Life, like other insurers, in the ordinary course of business, is 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.
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.
In the 2000 first quarter, certain health insurance lines were transferred from the Dental and Consumer Benefits Division to the Corporate and Other segment in order to reflect management's current focus. Prior period results have been restated to reflect the change.
Operating Segment Income for the
Three Months Ended March 31, 2000
------------------------------------------------------------------------
(In Thousands)
Specialty Insurance
Life Insurance Products
Dental and
Individual Consumer Financial
Life West Coast Acquisitions Benefits Institutions
------------ ---------- ------------ ------------ ------------
Premiums and policy fees $81,854 $23,270 $34,790 $72,252 $87,085
Reinsurance ceded (56,081) (16,005) (7,942) (27,410) (38,049)
------- ------- -------- ------- -------
Net of reinsurance ceded 25,773 7,265 26,848 44,842 49,036
Net investment income 14,328 21,795 28,915 2,485 11,121
Realized investment gains (losses)
Other income (672) 2,947 6,766
-------- ---------- ------------ ------- ---------
Total revenues 39,429 29,060 55,763 50,274 66,923
------- ------- --------- ------- --------
Benefits and settlement expenses 23,233 20,143 33,363 33,892 31,270
Amortization of deferred policy
acquisition costs 7,216 3,102 3,930 2,712 13,290
Other operating expenses (922) (2,805) 6,706 10,520 15,507
-------- ------- -------- ------- -------
Total benefits and expenses 29,527 20,440 43,999 47,124 60,067
------- ------- ------- ------- -------
Income before income tax 9,902 8,620 11,764 3,150 6,856
Retirement Savings and
Investment Products
Stable Corporate
Value Investment and Total
Products Products Other Adjustments Consolidated
-------- ----------- ----------- ----------- ------------
Premiums and policy fees $7,291 $17,103 $323,645
Reinsurance ceded (145,487)
---------- ---------- --------
Net of reinsurance ceded 7,291 17,103 178,158
Net investment income $58,996 29,094 (2,913) 163,821
Realized investment gains (losses) (58) 429 $2,075 2,446
Other income 526 1,418 10,985
---------- -------- ------- --------- ---------
Total revenues 58,938 37,340 15,608 2,075 355,410
------- ------- ------- ------ --------
Benefits and settlement expenses 49,058 23,624 19,836 234,419
Amortization of deferred
acquisition costs 207 6,539 522 37,518
Other operating expenses 1,076 4,162 10,220 44,464
-------- ------- ------- --------
Total benefits and expenses 50,341 34,325 30,578 316,401
------- ------- ------- --------
Income (loss) before income tax 8,597 3,015 (14,970) 39,009
Income tax expense 13,133 13,133
--------
Net income $ 25,876
========
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 $55,789 $66,753
Reinsurance ceded (37,469) (12,788) (8,597) (17,535) (41,563)
------- ------- -------- ------- -------
Net of reinsurance ceded 26,951 5,540 32,508 38,254 25,190
Net investment income 15,553 18,042 33,316 2,647 5,795
Realized investment gains (losses)
Other income (1,029) (6) (9) 1,126 2,833
------- ---------- ---------- -------- --------
Total revenues 41,475 23,576 65,815 42,027 33,818
------- ------- ------- ------- -------
Benefits and settlement expenses 18,922 14,589 35,523 28,550 11,310
Amortization of deferred policy
acquisition costs 8,826 1,405 6,094 1,732 6,515
Other operating expense 5,082 2,000 6,426 8,766 11,023
------- -------- -------- ------- -------
Total benefits and expenses 32,830 17,994 48,043 39,048 28,848
------- ------- ------- ------- -------
Income before income tax 8,645 5,582 17,772 2,979 4,970
Retirement Savings and
Investment Products
Stable Corporate
Value Investment and Total
Products Products Other Adjustments Consolidated
-------- ----------- ----------- ----------- ------------
Premiums and policy fees $ 5,382 $17,961 $269,738
Reinsurance ceded (117,952)
---------- ---------- --------
Net of reinsurance ceded 5,382 17,961 151,786
Net investment income $51,650 25,566 (3,115) 149,454
Realized investment gains (losses) 3,070 648 $(2,269) 1,449
Other income 748 (292) 3,371
---------- -------- -------- ---------- ---------
Total revenues 54,720 32,344 14,554 (2,269) 306,060
------- ------- ------- ------- --------
Benefits and settlement expenses 43,927 20,859 11,756 185,436
Amortization of deferred policy
acquisition costs 192 5,379 809 30,952
Other operating expenses 741 3,159 6,091 43,288
-------- ------- ------- --------
Total benefits and expenses 44,860 29,397 18,656 259,676
------- ------- ------- --------
Income (loss) before income tax 9,860 2,947 (4,102) 46,384
Income tax expense 16,499 16,499
--------
Net income $ 29,885
========
Operating Segment Assets
March 31, 2000
-----------------------------------------------------------------------------
(In Thousands)
Specialty Insurance
Life Insurance Products
Dental and
Individual Consumer Financial
Life West Coast Acquisitions Benefits Institutions
------------ ---------- ------------ ------------ ------------
Investments and other assets $1,272,873 $1,374,304 $1,557,194 $208,704 $1,229,957
Deferred policy acquisition costs 366,412 221,477 231,973 29,083 130,203
----------- ----------- ----------- --------- -----------
Total assets $1,639,285 $1,595,781 $1,789,167 $237,787 $1,360,160
========== ========== ========== ======== ==========
Retirement Savings and
Investment Products
Stable Corporate
Value Investment and Total
Products Products Other Consolidated
-------- ----------- ----------- ------------
Investments and other assets $2,998,370 $3,569,139 $250,173 $12,460,714
Deferred policy acquisition costs 1,933 120,776 5,270 1,107,127
------------- ----------- ---------- ------------
Total assets $3,000,303 $3,689,915 $255,443 $13,567,841
========== ========== ======== ===========
Operating Segment Assets
December 31, 1999
------------------------------------------------------------------------------
(In Thousands)
Specialty Insurance
Life Insurance Products
Dental and
Individual Consumer Financial
Life West Coast Acquisitions Benefits Institutions
------------ ---------- ------------ ------------- ------------
Investments and other assets $1,205,968 $1,343,517 $1,553,954 $197,673 $727,857
Deferred policy acquisition costs 379,117 200,605 235,903 25,819 51,339
----------- ----------- ----------- --------- ---------
Total assets $1,585,085 $1,544,122 $1,789,857 $223,492 $779,196
========== ========== ========== ======== ========
Retirement Savings and
Investment Products
Stable Corporate
Value Investment and Total
Products Products Other Consolidated
-------- ----------- ------------ ------------
Investments and other assets $2,766,178 $3,355,863 $418,609 $11,569,619
Deferred policy acquisition costs 1,156 117,577 8 1,011,524
------------ ----------- ------------ ------------
Total assets $2,767,334 $3,473,440 $418,617 $12,581,143
========== ========== ======== ===========
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, 2000, 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 $582.3 million and $17.7 million, respectively.
NOTE E - INVESTMENTSAs 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 application 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, 2000 and December 31, 1999, prepared on the basis of reporting investments at amortized cost rather than at market values, are as follows:
MARCH 31 DECEMBER 31
-------- -----------
(IN THOUSANDS)
Total investments $ 9,453,458 $ 8,894,426
Deferred policy acquisition costs 1,088,683 992,518
All other assets 3,253,015 2,918,857
------------ ------------
$ 13,795,156 $ 12,805,801
=========== ===========
Deferred income taxes $ 53,650 $ 46,243
All other liabilities 12,513,700 11,616,935
----------- -----------
12,567,350 11,663,178
Share-owner's equity 1,227,806 1,142,623
------------ ------------
$ 13,795,156 $ 12,805,801
=========== ===========
NOTE F - DERIVATIVE FINANCIAL INSTRUMENTS
Protective Life has not used derivative financial instruments for trading purposes. Combinations of interest rate swap contracts, options and futures contracts are sometimes used as hedges against changes in interest rates for certain investments, 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 or liability. No realized investment gains or losses were deferred in the first three months of 2000 or the full year of 1999. At March 31, 2000, contracts with a notional amount of $1.5 billion were in a $0.1 million net unrealized gain position. During the three months ended March 31, 2000, the Company recognized $0.5 million in realized investment gains related to derivative financial instruments.
The following table sets forth Protective Life’s comprehensive income (loss) for the three months ended March 31, 2000 and 1999:
Three Months Ended
March 31
------------------
(In Thousands)
2000 1999
---- ----
Net income $25,876 $ 29,885
Increase (decrease) in net unrealized gains
on investments (net of income tax:
2000 - $(856); 1999 - $(29,120)) (1,590) (52,195)
Reclassification adjustment for amounts included
in net income (net of income tax:
2000 - $2,719; 1999 - $(507)) 5,050 (942)
------- --------
Comprehensive income (loss) $29,336 $(23,252)
======= ========
NOTE H - ACQUISITIONS
In January, 2000, Protective Life acquired the Lyndon Insurance Group (“Lyndon”). The transaction has been accounted for as a purchase, and the results of the transaction have been included in the accompanying financial statements since its effective date.
Summarized below are the consolidated results of operations for the three months ended March 31, 1999, on an unaudited pro forma basis, as if the Lyndon acquisition had occurred as of January 1, 1999. The pro forma information is based on the Protective Life’s consolidated results of operations for the three months ended March 30, 1999, and on data provided by Lyndon, after giving effect to certain pro forma adjustments. The pro forma financial information does not purport to be indicative of results of operations that would have occurred had the transaction occurred on the basis assumed above nor are they indicative of results of the future operations of the combined enterprises.
Three Months Ended
March 31, 1999
------------------
(In Thousands)
(Unaudited)
Total revenues $330,539
Net income $ 32,726
In 1999, Protective Life adopted Statements of Financial Accounting Standards ("SFAS") No. 134, “Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise,” and Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use,” and Statement of Position 97-3, “Accounting by Insurance and Other Enterprises for Insurance Related Assessments” issued by the American Institute of Certified Public Accountants. The adoption of these accounting standards did not have a material effect on Protective Life’s financial statements.
The Financial Accounting Standards Board has issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” Effective January 1, 2001, SFAS No. 133 will require Protective Life to report derivative financial instruments 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. The effects of adoption will depend upon the nature, purpose and volume of derivatives held by Protective Life at the date of adoption.
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 under the 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 Stable Value Products 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 herein for more information about factors which could affect future results.
THREE MONTHS PERCENTAGE
ENDED INCREASE/
MARCH 31 (DECREASE)
------------------------------ ------------
(IN THOUSANDS)
2000 1999
---- ----
Premiums and policy fees $178,158 $151,786 17.4%
Net investment income 163,821 149,454 9.6
Realized investment gains 2,446 1,449 68.8
Other income 10,985 3,371 225.9
--------- ----------
$355,410 $306,060
======== ========
Premiums and policy fees increased $26.4 million or 17.4% in the first three months of 2000 over the first three months of 1999. Premiums and policy fees in the Individual Life Division decreased $1.2 million in the first three months of 2000 as compared to the same period in 1999 primarily due to an increase in the use of reinsurance by this Division. Premiums and policy fees in the West Coast Division increased $1.7 million in the first three months of 2000 as compared to the same period in 1999. Premiums and policy fees in the Acquisitions Division are expected to decline with time unless new acquisitions are made. No transactions were completed in this Division in 1999 or the first quarter of 2000. As a result, decreases in older acquired blocks resulted in a $5.7 million decrease in premiums and policy fees. In the Dental Division premiums and policy fees related to dental indemnity insurance increased $9.7 million in the first three months of 2000 as compared to the same period in 1999. Premiums and policy fees related to the Dental Division’s other businesses decreased $3.1 million in the first three months of 2000 as compared to the same period in 1999. Premiums and policy fees from the Financial Institutions Division increased $23.8 million in the first three months of 2000 as compared to the first three months of 1999. On January 20, 2000, the Financial Institutions Division acquired the Lyndon Insurance Group (“Lyndon”) which resulted in a $21.1 million increase in premiums and policy fees. Premiums and policy fees related to the Financial Institutions Division’s other businesses increased $2.7 million in the first three months of 2000 as compared to the same period in 1999. The increase in premiums and policy fees from the Investment Products Division was $1.9 million. Premiums and policy fees relating to various health insurance lines in the Corporate and Other segment decreased $0.9 million.
Net investment income in the first three months of 2000 increased by $14.4 million over the corresponding period of the preceding year primarily due to an increase in the average amount of invested assets and due to acquisitions. The Lyndon acquisition resulted in a $2.3 million increase in investment income.
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 2000 were $2.4 million as compared to $1.4 million in the corresponding period of 1999.
Other income consists primarily of fees from the sale of service contracts, 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 increased $7.6 million in the first three months of 2000 as compared with the first three months of 1999. Revenues from Protective Life’s service contract business and consumer direct dental business increased $4.0 million and $1.7 million, respectively, in the first three months of 2000 as compared to the same period of 1999. Other income related to the Lyndon Group’s service contract business was $2.3 million in the first quarter of 2000.
In the 2000 first quarter, certain health insurance lines were transferred from the Dental and Consumer Benefits Division to the Corporate and Other segment. Prior period results have been restated to reflect the change.
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)
2000 1999
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Operating Income (Loss)1
Life Insurance
Individual Life $ 9,902 $ 8,645
West Coast 8,620 5,582
Acquisitions 11,764 17,772
Specialty Insurance Products
Dental and Consumer Benefits 3,150 3,373
Financial Institutions 6,856 4,970
Retirement Savings and Investment Products
Stable Value Products 8,655 6,789
Investment Products 3,015 2,947
Corporate and Other (14,970) (4,495)
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Total operating income 36,992 45,583
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Realized Investment Gains (Losses)
Stable Value Products (58) 3,070
Investment Products 429 648
Unallocated Realized Investment Gains (Losses) 2,075 (2,269)
Related Amortization of Deferred Policy Acquisition Costs
Investment Products (429) (648)
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Total net 2,017 801
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Income (Loss) Before Income Tax
Life Insurance
Individual Life 9,902 8,645
West Coast 8,620 5,582
Acquisitions 11,764 17,772
Specialty Insurance Products
Dental and Consumer Benefits 3,150 3,373
Financial Institutions 6,856 4,970
Retirement Savings and Investment Products
Stable Value Products 8,597 9,859
Investment Products 3,015 2,947
Corporate and Other (14,970) (4,495)
Unallocated Realized Investment Gains (Losses) 2,075 (2,269)
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Total income before income tax $39,009 $46,384
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1 Income before income tax excluding realized investment gains and losses and related
amortization of deferred acquisition costs.
The Individual Life Division’s pretax operating income was $9.9 million in the first three months of 2000 compared to $8.6 million in the same period of 1999. The Division’s mortality experience was $2.2 million more favorable in the first three months of 2000 as compared to the same period of 1999.
West Coast had pretax operating income of $8.6 million for the first three months of 2000 compared to $5.6 million for the same period last year. This increase reflects the Division’s growth through sales.
Pretax operating income from the Acquisitions Division was $11.8 million in the first three months of 2000 as compared to $17.8 million in the same period of 1999. The Division’s mortality experience was at expected levels in the first three months of 2000 as compared to being approximately $1.9 million better than expected in the first three months of 1999. Additionally, in the fourth quarter of 1999, adjustments were made to the Division’s investment protfolio which had the effect of transferring approximately $3.0 million of investment income to the Corporate and Other segment. 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.
The Dental Division’s pretax operating income was $3.2 million in the first three months of 2000 compared to $3.4 million in the same period last year. The decrease was primarily due to unfavorable claims experience in the first three months of 2000 as compared to the same period in 1999.
Pretax operating income of the Financial Institutions Division was $6.9 million in the first three months of 2000 as compared to $5.0 million in the same period of 1999. Included in the Division’s results were $4.0 million of earnings from the Lyndon acquisition. Earnings of the Division’s other business decreased due to higher than expected claims in most lines.
The Stable Value Products Division had pretax operating income of $8.7 million in the first three months of 2000 and $6.8 million in the corresponding period of 1999. This increase was primarily due to higher interest rate spreads and higher account balances. Realized investment losses associated with this Division in the first three months of 2000 were $0.1 million as compared to gains of $3.1 million in the same period last year. As a result, total pretax earnings were $8.6 million in the first three months of 2000 compared to $9.9 million for the same period last year.
The Investment Products Division pretax operating income was $3.0 million in the first three months of 2000 compared to $2.9 million in the same period of 1999. The Division had no realized investment gains (net of related amortization of deferred policy acquisition costs) in the first three months of 2000 and 1999.
The Corporate and Other segment consists primarily of net investment income on unallocated capital and other operating expenses not identified with the preceding operating divisions (including management fees paid to PLC and interest on substantially all debt), several lines of business which Protective Life is not actively marketing (mostly heath insurance) and the operations of a small noninsurance subsidiary. The pretax loss for this segment was $15.0 million in the first three months of 2000 compared to a loss of $4.5 million in the first three months of 1999. Earnings from health insurance lines decreased $4.9 million in the first three months of 2000 as compared to the same period last year. The segment also had approximately $4.1 million higher expenses in the first quarter of 2000 as compared to the same period in 1999.
The following table sets forth the effective tax rates for the periods shown:
THREE MONTHS
ENDED ESTIMATED EFFECTIVE
MARCH 31 INCOME TAX RATES
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1999 36 %
2000 34
The effective income tax rate for the full year of 1999 was 36%. Management’s estimate of the effective income tax rate for 2000 is approximately 36%.
NET INCOME
THREE MONTHS -------------------------------------
ENDED TOTAL PERCENTAGE
MARCH 31 (IN THOUSANDS) (DECREASE)
------------------ -------------- ------------
1999 $29,885 11.7 %
2000 25,876 (13.4)
Compared to the same period in 1999, net income in the first three months of 2000 decreased $4.0 million, reflecting improved operating earnings in the Individual Life, West Coast, Financial Institutions, Stable Value and Investment Products Divisions and higher realized investment gains (net of related amortization of deferred policy acquisition costs) which were offset by lower operating earnings in the Acquisitions, Dental and the Corporate and Other segment.
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. The effective adoption will depend upon the nature, purpose and volume of derivitives held by Protective Life and the date of adoption.
In 1999, Protective Life adopted SFAS No. 134, “Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise,” 48; and Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” 48; and Statement of Position 97-3, “Accounting by Insurance and other Enterprises for Insurance Related Assessments ” issued by the American Institute of Certified Public Accountants. The adoption of these accounting standards did not have a material effect on Protective Life’s financial condition.
There has been no material change from the disclosure in Protective Life’s Annual Report on Form 10-K for the year ended December 31, 1999.
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 15, 2000 /s/ Jerry W. DeFoor
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Jerry W. DeFoor
Vice President and Controller,
and Chief Accounting Officer
(Duly authorized officer)