-----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, Wj/765PNUhCZx6EuwD/7wTSYaf2/PIiD/FJPH9ZuSpyw4B/Hj5nyUIezE2H/22uU RlKiYjPGgJ0LikSjuLKroQ== 0000310826-99-000035.txt : 19991115 0000310826-99-000035.hdr.sgml : 19991115 ACCESSION NUMBER: 0000310826-99-000035 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 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: 99747747 BUSINESS ADDRESS: STREET 1: 2801 HIGHWAY 280 SOUTH CITY: BIRMINGHAM STATE: AL ZIP: 35223 BUSINESS PHONE: 2058799230 MAIL ADDRESS: STREET 1: PO BOX 2606 CITY: BIRMINGHAM STATE: AL ZIP: 35202 10-Q 1 - ------------------------------------------------------------------------------- FORM 10-Q ------------------------------------ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 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 November 5, 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 and Nine Months ended September 30, 1999 and 1998 (unaudited)................. Consolidated Condensed Balance Sheets as of September 30, 1999 (unaudited) and December 31, 1998.................................... Consolidated Condensed Statements of Cash Flows for the Nine Months ended September 30, 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 September 30, 1999, and the related consolidated condensed statements of income for the three-month and nine-month periods ended September 30, 1999 and 1998, and consolidated condensed statements of cash flows for the nine-month periods ended September 30, 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 interim financial statements referred to above for them to be in conformity with generally accepted accounting principles. We 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. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Birmingham, Alabama October 26, 1999 2 PROTECTIVE LIFE INSURANCE COMPANY CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Dollars in thousands) (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 --------------------------- ----------------------- 1999 1998 1999 1998 ---- ---- ---- ---- REVENUES Premiums and policy fees $288,535 $269,509 $840,991 $758,096 Reinsurance ceded (134,573) (127,850) (382,870) (337,182) -------- -------- -------- -------- Premiums and policy fees, net of reinsurance ceded 153,962 141,659 458,121 420,914 Net investment income 156,387 156,059 462,982 450,229 Realized investment gains (3,210) 411 454 1,460 Other income 8,631 4,570 19,846 14,107 --------- --------- -------- -------- 315,770 302,699 941,403 886,710 -------- -------- -------- -------- BENEFITS AND EXPENSES Benefits and settlement expenses (net of reinsurance ceded: three months: 1999 - $85,055; 1998 - $109,513 nine months: 1999 - $242,578; 1998 - $236,241) 196,876 181,298 573,596 540,887 Amortization of deferred policy acquisition costs 23,090 30,795 82,315 89,053 Other operating expenses (net of reinsurance ceded: three months: 1999 - $33,457; 1998 - $47,133 nine months: 1999 - $102,828; 1998 - $112,985) 53,068 44,058 139,326 121,653 --------- --------- -------- -------- 273,034 256,151 795,237 751,593 -------- -------- -------- -------- INCOME BEFORE INCOME TAX 42,736 46,548 146,166 135,117 Income tax expense 15,713 16,186 53,603 48,211 --------- -------- -------- -------- NET INCOME $ 27,023 $ 30,362 $ 92,563 $ 86,906 ======== ======== ======== ========
See notes to consolidated condensed financial statements 3 PROTECTIVE LIFE INSURANCE COMPANY CONSOLIDATED CONDENSED BALANCE SHEETS (Dollars in thousands)
SEPTEMBER 30 DECEMBER 31 1999 1998 --------------- ------------- (Unaudited) ASSETS Investments: Fixed maturities $6,233,825 $ 6,400,262 Equity securities 19,867 12,258 Mortgage loans on real estate 1,895,574 1,623,603 Investment in real estate, net of accumulated depreciation 16,201 14,868 Policy loans 231,824 232,670 Other long-term investments 71,466 70,078 Short-term investments 88,304 159,655 ----------- ------------ Total investments 8,557,061 8,513,394 Cash 24,763 Accrued investment income 103,808 100,395 Accounts and premiums receivable, net of allowance for uncollectible amounts 60,034 31,265 Reinsurance receivables 802,808 756,370 Deferred policy acquisition costs 960,092 841,425 Property and equipment, net 48,808 42,374 Other assets 38,759 34,632 Assets related to separate accounts Variable Annuity 1,494,577 1,285,952 Variable Universal Life 29,086 13,606 Other 3,465 3,482 -------------- -------------- $12,123,261 $11,622,895 =========== =========== LIABILITIES Policy liabilities and accruals $4,920,766 $ 4,529,297 Guaranteed investment contract deposits 2,669,845 2,691,697 Annuity deposits 1,559,579 1,519,820 Other policyholders' funds 119,399 219,356 Other liabilities 305,803 226,310 Accrued income taxes (4,360) (10,992) Deferred income taxes (15,835) 51,735 Notes payable 2,346 2,363 Indebtedness to related parties 16,000 20,898 Liabilities related to separate accounts Variable Annuity 1,494,577 1,285,952 Variable Universal Life 29,086 13,606 Other 3,465 3,482 -------------- -------------- 11,100,671 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 779,081 686,519 Accumulated other comprehensive income Net unrealized gains (losses) on investments (net of income tax (benefit): 1999 - $(45,412); 1998 - $29,646) (84,337) 55,057 ------------- ------------- 1,022,590 1,069,371 ------------ ------------ $12,123,261 $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)
NINE MONTHS ENDED SEPTEMBER 30 ------------------- 1999 1998 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 92,563 $ 86,906 Adjustments to reconcile net income to net cash provided by operating activities: Realized investment gains (454) (1,460) Amortization of deferred policy acquisition costs 82,315 89,053 Capitalization of deferred policy acquisition costs (176,029) (156,279) Depreciation expense 5,713 5,635 Deferred income tax 10,944 (3,029) Accrued income tax 6,632 (18,764) Interest credited to universal life and investment products 234,402 259,672 Policy fees assessed on universal life and investment products (118,452) (104,173) Change in accrued investment income and other receivables (140,686) (76,407) Change in policy liabilities and other policyholders' funds of traditional life and health products 183,097 514,633 Change in other liabilities 79,494 (25,545) Other (net) (6,785) (24,205) ------------ ------------ Net cash provided by operating activities 252,754 546,037 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Maturities and principal reductions of investments Investments available for sale 3,506,275 6,536,807 Other 208,300 149,765 Sale of investments Investments available for sale 291,153 524,624 Other 267,676 270,257 Cost of investments acquired Investments available for sale (3,801,199) (7,625,131) Other (742,912) (433,390) Acquisition and bulk reinsurance assumptions 46,508 Purchase of property and equipment (14,111) (8,751) Sale of property and equipment 1,964 15 ------------ -------------- Net cash used in investing activities (236,346) (585,804) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from borrowings under line of credit arrangements and debt 4,279,677 1,615,996 Principal payments on line of credit arrangements and debt (4,279,694) (1,255,566) Dividends to PLC 0 (50) Principal payment on surplus note to PLC (2,000) 0 Investment product deposits and change in universal life deposits 866,850 739,488 Investment product withdrawals (856,478) (1,099,298) ----------- ---------- Net cash provided by financing activities 8,355 570 ------------- ------------- INCREASE (DECREASE) IN CASH 24,763 (39,197) CASH AT BEGINNING OF PERIOD 0 39,197 --------------- ------------ CASH AT END OF PERIOD $ 24,763 $ 0 ============ ============== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period: Interest on debt $ 4,834 $ 6,273 Income taxes $ 34,828 $ 57,229 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Reduction of principal on note from ESOP $ 51
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 and subsidiaries ("Protective Life") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the disclosures required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. Operating results for the nine month period ended September 30, 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 (where Protective Life maintains its headquarters), juries have substantial discretion in awarding punitive and non-economic compensatory 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. 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 NINE MONTHS ENDED SEPTEMBER 30, 1999 ------------------------------------------------------------------------- (IN THOUSANDS) SPECIALTY INSURANCE LIFE INSURANCE PRODUCTS DENTAL AND INDIVIDUAL CONSUMER FINANCIAL LIFE WEST COAST ACQUISITIONS BENEFITS INSTITUTIONS -------- ---------- ------------ --------- ------------ Premiums and policy fees $200,913 $62,520 $113,527 $233,460 $212,747 Reinsurance ceded (126,454) (42,802) (24,420) (56,961) (132,233) -------- ------- --------- -------- -------- Net of reinsurance ceded 74,459 19,718 89,107 176,499 80,514 Net investment income 45,376 56,779 99,587 11,517 17,382 Realized investment gains (losses) Other income (1,614) 1,302 (9) 3,914 11,378 --------- -------- ----------- --------- --------- Total revenues 118,221 77,799 188,685 191,930 109,274 -------- ------- -------- -------- -------- Benefits and settlement expenses 55,265 50,471 98,237 131,264 40,586 Amortization of deferred policy acquisition costs 20,317 5,055 15,309 7,629 18,654 Other operating expenses 18,457 2,839 22,675 40,905 33,615 -------- -------- -------- --------- -------- Total benefits and expenses 94,039 58,365 136,221 179,798 92,855 -------- ------- -------- -------- -------- Income before income tax 24,182 19,434 52,464 12,132 16,419 RETIREMENT SAVINGS AND INVESTMENT PRODUCTS STABLE CORPORATE VALUE INVESTMENT AND TOTAL PRODUCTS PRODUCTS OTHER ADJUSTMENTS CONSOLIDATED -------- ---------- --------- ----------- ------------ Premiums and policy fees $17,610 $ 214 $840,991 Reinsurance ceded (382,870) ---------- --------- -------- Net of reinsurance ceded 17,610 214 458,121 -------- Net investment income $155,634 78,712 (2,005) 462,982 Realized investment gains (losses) (82) 892 $ (356) 454 Other income 1,587 3,288 19,846 ------------ -------- ------ --------- -------- Total revenues 155,552 98,801 1,497 (356) 941,403 -------- ------- ------ ------- -------- Benefits and settlement expenses 131,016 64,477 2,280 573,596 Amortization of deferred acquisition costs 575 14,777 (1) 82,315 Other operating expenses 2,963 11,018 6,854 139,326 --------- ------- ------ -------- Total benefits and expenses 134,554 90,272 9,133 795,237 -------- ------- ------ -------- Income before income tax 20,998 8,529 (7,636) 146,166 Income tax expense 53,603 53,603 --------- Net income $ 92,563 =========
7
OPERATING SEGMENT INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 ------------------------------------------------------------------------- (IN THOUSANDS) SPECIALTY INSURANCE LIFE INSURANCE PRODUCTS DENTAL AND INDIVIDUAL CONSUMER FINANCIAL LIFE WEST COAST ACQUISITIONS BENEFITS INSTITUTIONS ---------- ---------- ------------ ---------- ------------ Premiums and policy fees $209,189 $56,944 $ 92,289 $182,507 $203,184 Reinsurance ceded (111,364) (37,694) (21,505) (50,163) (116,453) -------- ------- -------- -------- -------- Net of reinsurance ceded 97,825 19,250 70,784 132,344 86,731 Net investment income 40,307 46,837 79,860 11,794 16,970 Realized investment gains (losses) Other income 102 1,600 2,464 7,323 ---------- ---------- --------- --------- --------- Total revenues 138,234 66,087 152,244 146,602 111,024 -------- ------- -------- -------- -------- Benefits and settlement expenses 80,768 42,944 84,171 95,946 39,806 Amortization of deferred policy acquisition costs 24,376 3,866 13,594 7,731 25,182 Other operating expense 11,614 3,604 16,281 36,388 32,450 -------- -------- -------- -------- -------- Total benefits and expenses 116,758 50,414 114,046 140,065 97,438 -------- ------- -------- -------- -------- Income before income tax 21,476 15,673 38,198 6,537 13,586 RETIREMENT SAVINGS AND INVESTMENT PRODUCTS STABLE CORPORATE VALUE INVESTMENT AND TOTAL PRODUCTS PRODUCTS OTHER ADJUSTMENTS CONSOLIDATED -------- ---------- -------- ----------- ------------ Premiums and policy fees $13,827 $ 153 $758,093 Reinsurance ceded (337,179) -------- ------- -------- Net of reinsurance ceded 13,827 153 420,914 Net investment income $160,735 79,471 14,255 450,229 Realized investment gains (losses) (895) 678 $ 1,677 1,460 Other income 1,093 1,525 14,107 -------- -------- ------- ---------- --------- Total revenues 159,840 95,069 15,933 1,677 886,710 -------- ------- ------- ------- -------- Benefits and settlement expenses 134,531 62,283 438 540,887 Amortization of deferred policy acquisition costs 554 13,752 (2) 89,053 Other operating expenses 1,864 11,598 7,854 121,653 --------- ------- ------- -------- Total benefits and expenses 136,949 87,633 8,290 751,593 -------- ------- ------- -------- Income before income tax 22,891 7,436 7,643 135,117 Income tax expense 48,211 48,211 --------- Net income $ 86,906 ========
8
OPERATING SEGMENT ASSETS SEPTEMBER 30, 1999 --------------------------------------------------------------------------- (IN THOUSANDS) SPECIALTY INSURANCE LIFE INSURANCE PRODUCTS DENTAL AND INDIVIDUAL CONSUMER FINANCIAL LIFE WEST COAST ACQUISITIONS BENEFITS INSTITUTIONS ---------- ---------- ------------ -------- ------------ Investments and other assets $1,171,669 $1,292,180 $1,618,478 $207,009 $709,895 Deferred policy acquisition costs 352,654 183,164 240,037 25,396 51,034 ----------- ----------- ----------- --------- --------- Total assets $1,524,323 $1,475,344 $1,858,515 $232,405 $760,929 ========== ========== ========== ======== ======== RETIREMENT SAVINGS AND INVESTMENT PRODUCTS STABLE CORPORATE VALUE INVESTMENT AND TOTAL PRODUCTS PRODUCTS OTHER CONSOLIDATED -------- ---------- --------- ------------ Investments and other assets $2,781,357 $2,835,797 $546,784 $11,163,169 Deferred policy acquisition costs 1,240 106,557 10 960,092 ------------- ----------- ----------- ------------- Total assets $2,782,597 $2,942,354 $546,794 $12,123,261 ========== ========== ======== =========== 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 STABLE CORPORATE VALUE INVESTMENT AND TOTAL PRODUCTS 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 September 30, 1999, and for the nine 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 $534.9 million and $49.1 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 September 30, 1999 and December 31, 1998, prepared on the basis of reporting investments at amortized cost rather than at market values, are as follows:
SEPTEMBER 30, 1999 DECEMBER 31, 1998 ------------------ ----------------- (IN THOUSANDS) Total investments $ 8,695,275 $ 8,412,167 Deferred policy acquisition costs 951,627 857,949 All other assets 2,606,108 2,268,076 ------------ ------------ $12,253,010 $11,538,192 =========== =========== Deferred income taxes $ 29,577 $ 22,089 All other liabilities 11,116,506 10,501,789 ----------- ----------- 11,146,083 10,523,878 Share-owner's equity 1,106,927 1,014,314 ------------ ------------ $12,253,010 $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 swaps, options and futures contracts are sometimes used as hedges against changes in interest rates for certain investments, primarily outstanding mortgage loan commit ments, 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 September 30, 1999, open option and open futures contracts with a notional amount of $400.0 million were in a $1.1 million net unrealized loss position. Additionally, 10 Protective Life uses interest rate 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 September 30, 1999, related open interest rate swap contracts with a notional amount of $868.0 million were in a $1.7 million net unrealized gain position. NOTE G - COMPREHENSIVE INCOME (LOSS) The following table sets forth Protective Life's comprehensive income (loss) for the three and nine months ended September 30, 1999 and 1998:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ------------------------------------------------------------ (IN THOUSANDS) 1999 1998 1999 1998 ---- ---- ---- ---- Net income $27,023 $30,362 $ 92,563 $ 86,906 Increase (decrease) in net unrealized gains on investments (net of income tax: three months: 1999 - $3,072; 1998 - $23,220 nine months: 1999 - $(74,899); 1998 - $24,181) 5,704 43,123 (139,099) 44,909 Reclassification adjustment for amounts included in net income (net of income tax: three months: 1999 - $1,123; 1998 - $(144) nine months: 1999 - $(159); 1998 - $(511)) 2,087 (267) (295) (949) -------- -------- -------- --------- Comprehensive income (loss) $34,814 $73,218 $(46,831) $130,866 ======== ======== ======== =========
NOTE H - ACQUISITIONS In September 1999, Protective Life acquired a block of credit life and disability policies which it had ceded to NationsCredit Insurance Corporation. 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. NOTE I - RECLASSIFICATIONS Certain reclassifications have been made in the previously reported financial statements and accompanying notes to make the prior year amounts comparable to those of the current year. Such reclassifications had no effect on previously reported net income, total assets, or share- owner's equity. NOTE J - SUBSEQUENT EVENTS On October 20, 1999, PLC announced that Protective Life has agreed to acquire the Lyndon Insurance Group ("Lyndon") from the Frontier Insurance Group, Inc. Headquartered in St. Louis, Lyndon manufactures and markets a variety of specialty insurance products, including 11 credit life and disability insurance, and vehicle and marine service agreements. Lyndon distributes products on a national basis through financial institutions and automobile dealers. The transaction is subject to regulatory approval and certain customary closing conditions. 12 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 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. The Stable Value Products Division (formerly known as the Guaranteed Investment Products ("GIC") Division) was renamed during the second quarter of 1999 to reflect its broader product offerings and customer base. 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. Revenues The following table sets forth revenues by source for the period shown, and the percentage change from the prior period:
NINE MONTHS PERCENTAGE ENDED INCREASE/ SEPTEMBER 30 (DECREASE) -------------------------------------------------- (IN THOUSANDS) 1999 1998 ---- ---- Premiums and policy fees $458,121 $420,914 8.8 % Net investment income 462,982 450,229 2.8 Realized investment gains 454 1,460 (68.9) Other income 19,846 14,107 40.7 -------- --------- $941,403 $886,710
13 Premiums and policy fees increased $37.2 million or 8.8% in the first nine months of 1999 over the first nine months of 1998. Premiums and policy fees in the Individual Life Division decreased $23.4 million in the first nine months of 1999 as compared to the same period in 1998 primarily due to an increase in the use of reinsurance by this Division. Premiums and policy fees in the West Coast Division increased $0.5 million in the first nine months of 1999 as compared to the same period in 1998. In the Acquisitions Division, decreases in older acquired blocks resulted in a $5.0 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 $23.3 million increase in premiums and policy fees. In the Dental Division premiums and policy fees related to dental indemnity insurance increased $27.2 million in the first nine months of 1999 as compared to the same period in 1998. Premiums and policy fees related to the Dental Division's other businesses increased $17.0 million in the first nine months of 1999 as compared to the same period in 1998. Premiums and policy fees from the Financial Institutions Division decreased $6.2 million in the first nine months of 1999 as compared to the first nine months of 1998. Decreases of $8.9 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 Division's other businesses increased $2.7 million in the first nine months of 1999 as compared to the same period in 1998. The increase in premiums and policy fees from the Investment Products Division was $3.8 million. Net investment income in the first nine months of 1999 increased by $12.8 million over the corresponding period of the preceding year primarily due to an increase in the average amount of invested assets. 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 nine months of 1999 were $0.5 million as compared to $1.5 million in the corresponding period of 1998. Other income consists primarily of fees from the sale of automobile 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 $5.7 million in the first nine months of 1999 as compared with the first nine months of 1998. Revenues from Protective Life's automobile service contract business increased $4.1 million in the first nine months of 1999 as compared to the same period of 1998. 14 Income Before Income Tax The following table sets forth operating income or loss and income or loss before income tax by business segment for the periods shown:
OPERATING INCOME (LOSS) AND INCOME (LOSS) BEFORE INCOME TAX NINE MONTHS ENDED SEPTEMBER 30 (IN THOUSANDS) 1999 1998 ---- ---- Operating Income (Loss)1 Life Insurance Individual Life $ 24,182 $ 21,476 West Coast 19,434 15,673 Acquisitions 52,464 38,198 Specialty Insurance Products Dental and Consumer Benefits 12,132 6,537 Financial Institutions 16,419 13,586 Retirement Savings and Investment Products Stable Value Products 21,080 23,786 Investment Products 8,529 7,125 Corporate and Other (7,636) 7,643 --------- --------- Total operating income 146,604 134,024 -------- -------- Realized Investment Gains (Losses) Stable Value Products (82) (895) Investment Products 892 678 Unallocated Realized Investment Gains (Losses) (356) 1,677 Related Amortization of Deferred Policy Acquisition Costs Investment Products (892) (367) --------- ---------- Total net (438) 1,093 --------- --------- Income (Loss) Before Income Tax Life Insurance Individual Life 24,182 21,476 West Coast 19,434 15,673 Acquisitions 52,464 38,198 Specialty Insurance Products Dental and Consumer Benefits 12,132 6,537 Financial Institutions 16,419 13,586 Retirement Savings and Investment Products Stable Value Products 20,998 22,891 Investment Products 8,529 7,436 Corporate and Other (7,636) 7,643 Unallocated Realized Investment Gains (Losses) (356) 1,677 ---------- ---------- Total income before income tax $146,166 $135,117 ======== ========
1 Income before income tax excluding realized investment gains and losses and related amortization of deferred acquisition costs. 15 The Individual Life Division's pretax operating income was $24.2 million in the first nine months of 1999 compared to $21.5 million in the same period of 1998. The Division's 1999 results include a $4.1 million loss relating to a venture to sell term and term-like products through direct response. The Division has reinsured most of its mortality risk such that mortality fluctuations have been significantly reduced. West Coast had pretax operating income of $19.4 million for the first nine months of 1999 compared to $15.7 million for the same period last year. This increase reflects the Division's growth through sales. Pretax operating income from the Acquisitions Division was $52.5 million in the first nine months of 1999 as compared to $38.2 million in the same period of 1998. The Division's mortality experience was approximately $6.2 million better than expected in the first nine months of 1999 as compared to being approximately $2.1 million worse than expected in the first nine 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 $7.0 million in the first nine months of 1999. The Dental Division's pretax operating income was $12.1 million in the first nine months of 1999 compared to $6.5 million in the same period last year. The increase was primarily due to more favorable claims experience in the first nine months of 1999 as compared to the same period in 1998. Pretax operating income of the Financial Institutions Division was $16.4 million in the first nine months of 1999 as compared to $13.6 million last year. In September 1999, Protective Life reacquired a block of credit life and disability policies which it had ceded to NationsCredit Insurance Corporation. This transaction resulted in $1.0 million of earnings in the third quarter of 1999. In addition, the Division's other lines of business improved in the first nine months of 1999 as compared to the same period of 1998. The Stable Value Products Division had pretax operating income of $21.1 million in the first nine months of 1999 and $23.8 million in the corresponding period of 1998. This decrease was primarily due to lower interest rate spreads. Realized investment losses associated with this Division in the first nine months of 1999 were $0.1 million as compared to losses of $0.9 million in the same period last year. As a result, total pretax earnings were $21.0 million in the first nine months of 1999 compared to $22.9 million for the same period last year. Investment Products Division pretax operating income was $8.5 million in the first nine months of 1999 compared to $7.1 million in the same period of 1998. The Division had no realized investment gains (net of related amortization of deferred policy acquisition costs) in the first nine months of 1999 as compared to gains of $0.3 million in the same period of 1998. Total pretax earnings were $8.5 million in the first nine months of 1999 as compared to $7.4 million in the same period of 1998. 16 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 management fees paid to PLC and interest on substantially all debt), and the on substantially all debt), and the operations of a small noninsurance subsidiary. The pretax loss for this segment was $7.6 million in the first nine months of 1999 compared to income of $7.6 million in the first nine 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: NINE MONTHS ENDED ESTIMATED EFFECTIVE SEPTEMBER 30 INCOME TAX RATES ------------ ------------------- 1998 35.7 % 1999 36.7 The effective income tax rate for the full year of 1998 was 35%. Management's estimate of the effective income tax rate for 1999 is approximately 36%. Net Income The following table sets forth net income for the periods shown, and the percentage change from the prior period: NET INCOME --------------------------------- NINE MONTHS ENDED TOTAL PERCENTAGE SEPTEMBER 30 (IN THOUSANDS) INCREASE 1998 $86,906 16.7 % 1999 92,563 6.5 Compared to the same period in 1998, net income in the first nine months of 1999 increased $5.7 million, reflecting improved operating earnings in the Individual Life, West Coast, Acquisitions, Dental, Financial Institutions, and Investment Products Divisions which were partially offset by lower operating earnings in the Stable Value Products Division and the Corporate and Other segment and higher realized investment losses (net of related amortization of deferred policy acquisition costs). Recently Issued Accounting Standards The Financial Accounting Standards Board (FASB) has issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative 17 Instruments and Hedging Activities." 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. SFAS No. 133 is effective January 1, 2001. 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, PLC, and other affiliates of PLC. PLC began work on the Year 2000 problem in 1995. At that time, PLC identified and assessed its 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 its insurance administration systems and general administration systems. All remediated systems are currently in production. Mainframe application remediation was completed December 31, 1998. Personal computer network hardware, software, and operating systems have been reviewed, with upgrades implemented where necessary. In March 1999 a personal computer test lab was established to facilitate client server system testing. That testing is now materially complete and the lab facility is being used for desktop application testing. 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. 18 Future date tests are complete for PLC's mission critical systems. Integrated tests involve multiple system testing and are used to verify the Year 2000 readiness of interfaces and connectivity across multiple systems. PLC used its mainframe computer to simulate a Year 2000 production environment and to facilitate integrated testing. Integrated tests were completed during August 1999. Additional testing will be conducted whenever changing circumstances warrant additional testing. Significant business partners and suppliers that provide products or services critical to PLC operations are being reviewed for year 2000 readiness. To date, no significant partners or suppliers have reported that they expect to be unable to continue supplying products and services after January 1, 2000. PLC cannot specifically identify all of the costs to develop and implement its Year 2000 plan. The costs 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 August 31, 1999, costs that have been specifically identified as relating to the Year 2000 problem total $4.9 million, with an additional $0.3 million estimated to be required to support continued Year 2000 preparations. 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 assurance that PLC's efforts will be successful, that interactions with other service providers with Year 2000 issues will not impair PLC's or Protective Life's operations, or that the Year 2000 issue will not otherwise adversely affect PLC or Protective Life. A formal contingency plan has been prepared and approved by senior management. Systems and functions identified as mission critical are included in the contingency plan. 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. 19 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: November 12, 1999 /s/ Jerry W. DeFoor ------------------- Jerry W. DeFoor Vice President and Controller, and Chief Accounting Officer (Duly authorized officer) 20 EX-27 2
7 This schedule contains summary financial information extracted from the consolidated financial statements of Protective Life Insurance Company and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 6,233,825 0 0 19,867 1,895,574 16,201 8,557,061 24,763 802,808 960,092 12,123,261 4,400,823 519,934 0 119,399 2,346 2 0 5,000 1,017,588 12,123,261 458,121 462,982 454 19,846 573,596 82,315 139,326 146,166 53,603 92,563 0 0 0 92,563 0 0 0 0 0 0 0 0 0 Protective Life Insurance Company is a wholly-owned subsidiary of Protective Life Corporation (NYSE: PL) and is not required to present EPS information.
EX-99 3 Exhibit 99 to Form 10-Q of Protective Life Insurance Company for the nine months ended September 30, 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. Unless the context otherwise requires, "Protective Life" refers to the consolidated group of Protective Life Insurance Company and its affiliates. WE OPERATE IN A MATURE, HIGHLY COMPETITIVE INDUSTRY, WHICH COULD LIMIT OUR ABILITY TO GAIN OR MAINTAIN OUR POSITION IN THE INDUSTRY. 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. Additionally, the United States Congress has approved legislation that would permit commercial banks, insurance companies and investment banks to combine, provided certain requirements are satisfied. 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 and claims-paying-ability ratings from rating agencies. Protective Life competes against other insurance companies and financial institutions in the origination of commercial mortgage loans. A RATINGS DOWNGRADE COULD ADVERSELY AFFECT OUR ABILITY TO COMPETE. Ratings are an important factor in Protective Life's competitive position. Rating organizations periodically review the financial performance and condition of insurers, including Protective Life. A downgrade in the ratings of Protective Life 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 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. OUR POLICY CLAIMS FLUCTUATE FROM YEAR TO YEAR. Protective Life's results may fluctuate from year to year on account of fluctuations in policy claims received by Protective Life. WE COULD BE FORCED TO SELL ILLIQUID INVESTMENTS AT A LOSS TO COVER POLICYHOLDER WITHDRAWALS. Many of the products offered by Protective Life allow policyholders and contract holders to withdraw their funds under defined circumstances. Protective Life designs products and configures 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 owns a significant amount of liquid assets, many of its assets are relatively illiquid. Significant unanticipated withdrawal or surrender activity could, under some circumstances, compel Protective Life to dispose of illiquid assets on unfavorable terms, which could have a material adverse effect on Protective Life. INTEREST-RATE FLUCTUATIONS COULD NEGATIVELY AFFECT OUR SPREAD INCOME. Significant changes in interest rates expose insurance companies to the risk of not earning anticipated spreads between the interest rate earned on investments and the credited rates paid on outstanding policies. Both rising and declining interest rates can negatively affect Protective Life's spread income. For example, certain of Protective Life's insurance and investment products guarantee a minimum credited interest rate. While Protective Life develops and maintains asset/liability management programs and procedures designed to preserve spread income in rising or falling interest rate environments, no assurance can be given that significant changes in interest rates will not materially affect such spreads. Lower interest rates may result in lower sales of Protective Life's insurance and investment products. INSURANCE COMPANIES ARE HIGHLY REGULATED. Protective Life is subject to government regulation in each of the states in which it conducts 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 owners. Protective Life cannot predict the form of any regulatory initiatives. Protective Life acts as a fiduciary and is subject to regulation by the United States Department of Labor when providing a variety of products and services to employee benefit plans governed by ERISA. Severe penalties are imposed by ERISA on fiduciaries that breach their duties to the plans under ERISA's prohibited transaction provisions. Certain policies, contracts and annuities offered by Protective Life are subject to regulation under the federal securities laws administered by the Securities and Exchange Commission. The federal securities laws contain regulatory restrictions and criminal, administrative and private remedial provisions. A TAX LAW CHANGE COULD ADVERSELY AFFECT OUR ABILITY TO COMPETE WITH NON-INSURANCE PRODUCTS. Under the Internal Revenue Code of 1986, as amended, 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 Internal Revenue 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, 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. In addition, life insurance products are often used to fund estate tax obligations. If the estate tax was eliminated, the demand for certain life insurance products would be adversely affected. Protective Life cannot predict what future tax initiatives may be proposed which could affect Protective Life. INDUSTRYWIDE LITIGATION CONCERNING SALES PRACTICES, AGENT MISCONDUCT, FAILURE TO SUPERVISE AGENTS, AND OTHER MATTERS COULD RESULT IN SUBSTANTIAL JUDGEMENTS AGAINST US. 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 (where Protective Life maintains its headquarters), juries have substantial discretion in awarding punitive and non-economic compensatory 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. 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. OUR INVESTMENTS ARE SUBJECT TO RISKS. Protective Life's invested assets (including 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. OUR ACQUISITION STRATEGY INVOLVES RISKS. 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. WE ARE DEPENDENT ON 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; and a portion of the sales in the Individual Life, West Coast, Dental, and Financial Institutions Divisions comes from arrangements with unrelated marketing organizations. YEAR 2000 COMPUTER COMPLIANCE ISSUES MAY ADVERSELY AFFECT US. 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 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. Because 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 or Protective Life's operations, or that the Year 2000 issue will not otherwise adversely affect PLC or Protective Life. Should some of PLC's systems not be available due to Year 2000 problems, in a reasonable likely worst case scenario, PLC or Protective Life may experience significant delays in its ability to perform certain functions, but does not expect an inability to perform critical functions or to otherwise conduct business. However, other worst case scenarios, depending upon their duration, could have a material adverse effect on PLC and Protective Life and their operations. OUR REINSURANCE PROGRAM INVOLVES RISKS. Protective Life cedes insurance to other insurance companies through reinsurance. 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-----