- --------------------------------------------------------------------------------
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 June 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 Number 333-42425
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
ALABAMA 63-0761690
(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, $10.00 par value, outstanding as of
August 6, 1999: 250,000 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).
<PAGE>
Protective Life and Annuity Insurance Company
INDEX
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Report of Independent Accountants.....................................
Condensed Statements of Income for the Three and Six Months
ended June 30, 1999 and 1998 (unaudited)............................
Condensed Balance Sheets as of June 30, 1999
(unaudited) and December 31, 1998...................................
Condensed Statements of Cash Flows for the
Six Months ended June 30, 1999 and 1998 (unaudited).................
Notes to 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.....................................................................
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Share Owners
Protective Life and Annuity Insurance Company
Birmingham, Alabama
We have reviewed the accompanying condensed balance sheet of Protective Life and
Annuity Insurance Company as of June 30, 1999, and the related condensed
statements of income for the three-month and six-month periods ended June 30,
1999 and 1998, and consolidated condensed statements of cash flows for the
six-month periods ended June 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 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 balance sheet as of December 31, 1998 and the related statements of income,
share-owners' 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 financial statements. In our opinion, the information set forth
in the accompanying condensed balance sheet as of December 31, 1998, is fairly
stated in all material respects in relation to the balance sheet from which it
has been derived.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Birmingham, Alabama
July 27, 1999
2
<PAGE>
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
CONDENSED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Premiums and policy fees $15,567,150 $ 1,924,760 $32,182,258 $3,887,846
Reinsurance ceded (5,488,619) (350,465) (11,001,856) (785,579)
------------ ----------- ----------- -----------
Premiums and policy fees, net of reinsurance ceded 10,078,531 1,574,295 21,180,402 3,102,267
Net investment income 5,954,040 1,265,388 12,889,667 2,845,683
Realized investment gains (losses) 37 (500,000) 11,081 (500,000)
Other income (loss) 2,344 (6,392)
------------ ----------- ----------- -----------
16,034,952 2,339,683 34,074,758 5,447,950
------------ ----------- ----------- -----------
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance ceded:
three months: 1999 - $5,278,386; 1998 - $1,464,688
six months: 1999 - $9,699,037; 1998 - $1,611,589) 6,059,584 2,125,140 16,526,171 3,281,445
Amortization of deferred policy acquisition costs 3,043,818 77,998 5,269,548 204,596
Other operating expenses (net of reinsurance ceded:
three months: 1999 - $68,922; 1998 - $74,910
six months: 1999 - $139,687; 1998 - $(8,074)) 3,544,292 517,489 5,857,733 915,015
----------- ----------- ----------- ----------
12,647,694 2,720,627 27,653,452 4,401,056
----------- ----------- ----------- ----------
INCOME (LOSS) BEFORE INCOME TAX 3,387,258 (380,944) 6,421,306 1,046,894
Income tax expense (benefit) 948,433 (106,664) 1,797,966 293,130
------------ ---------- ----------- -----------
NET INCOME (LOSS) $ 2,438,825 $ (274,280) $4,623,340 $ 753,764
=========== ========== ========== ===========
</TABLE>
See notes to condensed financial statements
3
<PAGE>
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1999 1998
--------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Investments
Fixed maturities $370,420,788 $360,113,277
Mortgage loans on real estate 5,798,217 7,900,221
Policy loans 53,844,889 54,103,044
Short-term investments 5,306,243 18,267,431
------------- -------------
Total investments 435,370,137 440,383,973
Cash 4,623,274
Accrued investment income 7,623,722 7,597,305
Accounts and premiums receivable, net 555,336 673,967
Reinsurance receivables 22,425,140 22,405,337
Deferred policy acquisition costs 128,324,394 133,275,451
Other assets 42,098 55,968
Assets related to separate accounts
Variable annuity 2,302,447 237,565
-------------- ---------------
$601,266,548 $604,629,566
============== ===============
LIABILITIES
Policy liabilities and accruals $436,823,295 $442,329,379
Annuity deposits 6,253,256 3,434,342
Other policyholders' funds 11,344,669 12,143,006
Other liabilities 20,238,699 7,941,276
Deferred income taxes 1,937,822 7,305,381
Liabilities related to separate accounts
Variable annuity 2,302,447 237,565
-------------- --------------
478,900,188 473,390,949
-------------- --------------
COMMITMENTS AND CONTINGENT LIABILITIES - NOTE B
SHARE-OWNERS' EQUITY
Preferred Stock, $1.00 par value, shares authorized, issued, and
outstanding: 2,000 2,000 2,000
Common Stock, $10 par value
Shares authorized: 500,000
Shares issued and outstanding: 250,000 2,500,000 2,500,000
Additional paid-in capital 101,386,324 101,574,516
Retained earnings 22,976,832 18,353,492
Accumulated other comprehensive income
Net unrealized gains (losses) on investments (net of income
tax: 1999 - $(2,422,428); 1998 - $4,743,097 (4,498,796) 8,808,609
--------------- --------------
122,366,360 131,238,617
--------------- --------------
$601,266,548 $604,629,566
============== ==============
</TABLE>
See notes to condensed financial statements
4
<PAGE>
<TABLE>
<CAPTION>
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED
JUNE 30
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,623,340 $ 753,764
Adjustments to reconcile net income to net cash used in operating activities:
Realized investment gains (11,081)
Amortization of deferred policy acquisition costs 5,269,548 204,596
Capitalization of deferred policy acquisition costs (318,491) (353,845)
Deferred income tax 1,797,966 131,774
Interest credited to universal life and investment products 3,101,263 502,210
Policy fees assessed on universal life and investment products (488,856) (501,699)
Change in accrued investment income and other receivables 72,411 410,447
Change in policy liabilities and other policyholder
funds of traditional life and health products (8,326,802) (331,383)
Change in other liabilities 12,297,423 (2,772,450)
Other (net) (174,455) 18,409
------------ -------------
Net cash provided by (used in) operating activities 17,842,266 (1,938,177)
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reductions of investments
Investments available for sale 33,623,078 43,867,398
Other 2,107,560 1,396,084
Cost of investments acquired
Investments available for sale (51,178,518) (46,470,555)
------------- -------------
Net cash (used in) investing activities (15,447,880) (1,207,073)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends to share owners (50,000)
Investment product deposits and change in universal life deposits 2,228,888 (500,848)
Capital contributions 2,000,000
------------ -------------
Net cash provided by (used in) financing activities 2,228,888 1,449,152
------------ -------------
INCREASE (DECREASE) IN CASH 4,623,274 (1,696,098)
CASH AT BEGINNING OF PERIOD 0 2,218,201
------------ -------------
CASH AT END OF PERIOD $ 4,623,274 $ 522,103
============ =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period:
Income taxes $ 200,000
</TABLE>
See notes to condensed financial statements
5
<PAGE>
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of Protective
Life and Annuity Insurance Company ("the Company") 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 six month period ended June 30, 1999, are not necessarily
indicative of the results that may be expected for the year ending December 31,
1999. The year-end 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 financial
statements and notes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 1998.
All outstanding shares of the Company's common stock are owned by
Protective Life Insurance Company ("Protective"), which is the principal
operating subsidiary of Protective Life Corporation ("PLC"), an insurance
holding company domiciled in the state of Delaware. All outstanding shares of
the Company's preferred stock are owned by PLC. Protective is a wholly-owned
subsidiary of 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. The Company 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 the Company 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 addition, in
some class action and other lawsuits involving insurers' sales practices,
insurers have made material settlement payments. In some states (including
Alabama), juries have substantial discretion in awarding punitive damages which
creates the potential for unpredictable material adverse judgments in any given
punitive damages suit. The Company and its affiliates, like other insurers, in
the ordinary course of business, are involved in such litigation or
alternatively in arbitration. Although the outcome of any such litigation or
arbitration cannot be predicted with certainty, the Company believes that at the
present time there are no pending or threatened lawsuits that are
6
<PAGE>
reasonably likely to have a material adverse effect on the financial position,
results of operations, or liquidity of the Company.
NOTE C - OPERATING SEGMENTS
The following table sets forth operating segment income and assets for
the periods shown. Adjustments represent the recognition of income tax expense.
There are no asset adjustments.
<TABLE>
<CAPTION>
OPERATING SEGMENT INCOME FOR THE
SIX MONTHS ENDED JUNE 30, 1999
--------------------------------------------------------------------
DENTAL AND
CONSUMER FINANCIAL
ACQUISITIONS BENEFITS INSTITUTIONS
------------ ---------- ------------
<S> <C> <C> <C>
Premiums and policy fees $30,186,919 $1,241,619 $744,800
Reinsurance ceded (10,633,046) (368,810)
----------- ---------- --------
Net of reinsurance ceded 19,553,873 872,809 744,800
Net investment income 12,350,158 218,497 108,455
Realized investment gains (losses)
Other income (8,718)
----------- ---------- --------
Total revenues 31,895,313 1,091,306 853,255
----------- ---------- --------
Benefits and settlement expenses 15,203,723 842,643 408,742
Amortization of deferred policy
acquisition costs 5,085,560 183,988
Other operating expenses 5,529,534 23,096 (35,861)
----------- ---------- --------
Total benefits and expenses 25,818,817 865,739 556,869
----------- ---------- --------
Income before income tax 6,076,496 225,567 296,386
CORPORATE
INVESTMENT AND
PRODUCTS OTHER ADJUSTMENTS TOTAL
---------- --------- ----------- -----
Premiums and policy fees $ 8,920 $ 32,182,258
Reinsurance ceded (11,001,856)
--------- -----------
Net of reinsurance ceded 8,920 21,180,402
Net investment income $ 212,557 12,889,667
Realized investment gains (losses) 11,081 11,081
Other income 2,326 (6,392)
-------- --------- -----------
Total revenues 11,246 223,638 34,074,758
-------- --------- -----------
Benefits and settlement expenses 71,063 16,526,171
Amortization of deferred policy
acquisition costs 5,269,548
Other operating expenses 315,834 25,130 5,857,733
-------- --------- -----------
Total benefits and expenses 386,897 25,130 27,653,452
-------- --------- -----------
Income (loss) before income tax (375,651) 198,508 6,421,306
Income tax expense $1,797,966 1,797,966
-----------
Net income $ 4,623,340
===========
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
OPERATING SEGMENT INCOME FOR THE
SIX MONTHS ENDED JUNE 30, 1998
------------------------------------------------------------------
DENTAL AND
CONSUMER FINANCIAL
ACQUISITIONS BENEFITS INSTITUTIONS
------------ ---------- ------------
<S> <C> <C> <C>
Premiums and policy fees $2,403,520 $1,211,314 $273,012
Reinsurance ceded (474,885) (310,694)
---------- --------- --------
Net of reinsurance ceded 1,928,635 900,620 273,012
Net investment income 2,095,553 327,846
---------- ----------
Total revenues 4,024,188 1,228,466 273,012
---------- ---------- --------
Benefits and settlement expenses 2,691,819 465,462 124,164
Amortization of deferred policy
acquisition costs 156,597 47,999
Other operating expenses 358,701 552,412 29,763
---------- ---------- --------
Total benefits and expenses 3,207,117 1,017,874 201,926
---------- ---------- --------
Income before tax 817,071 210,592 71,086
CORPORATE
INVESTMENT AND
PRODUCTS OTHER ADJUSTMENTS TOTAL
---------- --------- ----------- -----
Premiums and policy fees $3,887,846
Reinsurance ceded (785,579)
----------
Net of reinsurance ceded 3,102,267
Net investment income $422,284 2,845,683
Realized investment gains (losses) (500,000) (500,000)
-------- ----------
Total revenues (77,716) 5,447,950
-------- ----------
Benefits and settlement expenses 3,281,445
Amortization of deferred policy
acquisition costs 204,596
Other operating expenses $(25,861) 915,015
-------- ----------
Total benefits and expenses (25,861) 4,401,056
-------- --------- ----------
Income before tax 25,861 (77,716) 1,046,894
Income tax expense $293,130 293,130
----------
Net income $ 753,764
==========
8
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
OPERATING SEGMENT ASSETS
JUNE 30, 1999
-----------------------------------------------------------------
DENTAL AND
CONSUMER FINANCIAL
ACQUISITIONS BENEFITS INSTITUTIONS
------------ ----------- ------------
<S> <C> <C> <C>
Investments and other assets $427,107,112 $6,195,170 $3,334,135
Deferred policy acquisition costs 127,496,966 827,428
------------ ----------- ----------
Total assets $554,604,078 $6,195,170 $4,161,563
============ =========== ==========
CORPORATE
INVESTMENT AND
PRODUCTS OTHER TOTAL
---------- ----------- -----
Investments and other assets $3,734,025 $32,571,712 $472,942,154
Deferred policy acquisition costs 128,324,394
---------- ----------- ------------
Total assets $3,734,025 $32,571,712 $601,266,548
========== =========== ============
OPERATING SEGMENT ASSETS
DECEMBER 31, 1998
-----------------------------------------------------------------
DENTAL AND
CONSUMER FINANCIAL
ACQUISITIONS BENEFITS INSTITUTIONS
------------ ---------- ------------
Investments and other assets $434,928,613 $6,642,241 $2,658,668
Deferred policy acquisition costs 132,582,526 692,925
------------ ---------- ----------
Total assets $567,511,139 $6,642,241 $3,351,593
============ ========== ==========
CORPORATE
INVESTMENT AND
PRODUCTS OTHER TOTAL
-------- ----------- ------------
Investments and other assets $774,504 $26,350,089 $471,354,115
Deferred policy acquisition costs 133,275,451
-------- ----------- ------------
Total assets $774,504 $26,350,089 $604,629,566
======== =========== ============
</TABLE>
9
<PAGE>
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 June 30, 1999, and for the six months then ended, the Company
had share-owners' equity and net income prepared in conformity with statutory
reporting practices of $32.6 million and $7.3 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-owners' 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 the Company's operations, its reported share-owners' equity will
fluctuate significantly as interest rates change.
The Company's balance sheets at June 30, 1999 and December 31, 1998,
prepared on the basis of reporting investments at amortized cost rather than at
market values, are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
------------- -----------------
<S> <C> <C>
Total investments $442,291,359 $426,832,267
Deferred policy acquisition costs 128,324,394 133,275,451
All other assets 37,572,017 30,970,142
------------ ------------
$608,187,770 $591,077,860
============ ============
Deferred income taxes $ 4,360,250 $ 2,562,284
All other liabilities 476,962,364 466,085,568
------------ ------------
481,322,614 468,647,852
Share-owners' equity 126,865,156 122,430,008
------------ ------------
$608,187,770 $591,077,860
============ ============
</TABLE>
10
<PAGE>
NOTE F - COMPREHENSIVE INCOME (LOSS)
The following table sets forth the Company's comprehensive income
(loss) for the six months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Six Months Ended
----------------------------------
1999 1998
---- ----
<S> <C> <C>
Net income $ 4,623,340 $ 753,764
Increase (decrease) in net unrealized gains
on investments (net of income tax:
1999 - $(7,162,422); 1998 - $(17,670)) (13,299,427) 227,326
Reclassification adjustment for amounts
included in net income (net of income
tax: 1999 - $(3,103); 1998 - $140,000) (7,978) 360,000
----------- ----------
Comprehensive income (loss) $(8,684,065) $1,341,090
=========== ==========
</TABLE>
NOTE G - 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- owners' equity.
11
<PAGE>
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF THE
RESULTS OF OPERATIONS
Protective Life and Annuity Insurance Company ("the Company"), a stock
life insurance company, was founded in 1978 as American Foundation Life
Insurance Company. Effective March 1, 1999, the Company was renamed Protective
Life and Annuity Insurance Company. Since 1983, all outstanding shares of the
Company's common stock have been owned by Protective Life Insurance Company
("Protective"), which 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". All outstanding shares of
the Company's preferred stock are owned by PLC. The Company is authorized to
transact insurance business as an insurance company or a reinsurance company in
48 states, including New York.
In accordance with General Instruction H(2)(a), the Company includes
the following analysis with the reduced disclosure format.
PLC through its subsidiaries provides financial services through the
production, distribution, and administration of insurance and investment
products. PLC through its subsidiaries 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.
The Company, since it is licensed in the State of New York, is the
entity through which PLC markets, distributes, and services insurance and
annuity products in New York. As of June 30, 1999, the Company was involved in
the businesses of four of PLC's seven divisions: the Acquisition Division, the
Dental Division, the Financial Institutions Division and the Investment Products
Division. The Company has an additional business segment which is described
herein as Corporate and Other.
Protective has entered into an intercompany guaranty agreement,
enforceable by the Company or its successors, whereby Protective has guaranteed
the Company's payment of claims made by the holders of Company policies
according to the terms of such policies. The guarantee will remain in force
until the earlier of (a) when the Company achieves a claims-paying rating equal
to or better than Protective without the benefit of any intercompany guaranty
agreement or (b) 90 days after the guaranty agreement is revoked by written
instrument; provided, however, even after any revocation or termination by such
notice, the guarantee shall remain effective as to policies issued during the
existence of the guaranty agreement.
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 subject
to a number of risks and uncertainties, and the Company cannot
12
<PAGE>
give assurance that such statements will prove to be correct. Please refer to
Exhibit 99 for more information about factors which could affect future results.
REVENUES
The following table sets forth revenues by source for the period shown,
and the percentage change from the prior period:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED PERCENTAGE
JUNE 30 INCREASE
------------------------------- ------------
1999 1998
---- ----
<S> <C> <C> <C>
Premiums and policy fees $21,180,402 $3,102,267 582.7 %
Net investment income 12,889,667 2,845,683 353.0
Realized investment gains 11,081 (500,000) - -
Other (6,392) - -
----------- ----------
$34,074,758 $5,447,950
=========== ==========
</TABLE>
Premiums and policy fees, net of reinsurance ("premiums and policy
fees") increased $18.1 million or 582.7% in the first six months of 1999 over
the first six months of 1998. Premiums and policy fees from the Acquisitions
Division increased $17.6 million primarily due to the coinsurance of a block of
policies from Lincoln National Corporation ("Lincoln National") in October 1998.
Premiums and policy fees related to the Dental Division decreased slightly in
the first six months of 1999 as compared to the same period in 1998. The
Financial Institutions Division's premiums and policy fees increased $0.5
million in the first six months of 1999 over the first six months of 1998 due to
increased marketing efforts and sales momentum. The Investment Products Division
began marketing certain annuity products in the state of New York through the
Company during the latter part of 1998, which resulted in a small amount of new
premiums and policy fees in the first six months of 1999.
Net investment income in the first six months of 1999 increased $10.0
million or 353.0% as compared to the corresponding period of the preceding year
primarily due to increases in the average amount of invested assets associated
with the coinsurance transaction described above.
The Company generally purchases its investments with the intent to hold
to maturity by purchasing investments that match future cash-flow needs.
However, the Company may sell any of its investments to maintain approximate
matching of assets and liabilities. Accordingly, the Company has classified its
fixed maturities and certain other securities as "available for sale." The sales
of investments that have occurred generally result from portfolio management
decisions to maintain proper matching of assets and liabilities.
The Company reported an insignificant amount of realized investment
gains and other income (loss) in the first six months of 1999.
13
<PAGE>
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:
<TABLE>
<CAPTION>
OPERATING INCOME (LOSS) AND INCOME (LOSS) BEFORE INCOME TAX
SIX MONTHS ENDED JUNE 30
1999 1998
---- ----
<S> <C> <C>
Operating Income (Loss)1
Acquisitions $6,076,496 $ 817,071
Dental and Consumer Benefits 225,567 210,592
Financial Institutions 296,386 71,086
Investment Products (375,651) 25,861
Corporate and Other 187,427 422,284
---------- ---------
Total operating income 6,410,225 1,546,894
---------- ---------
Realized Investment Gains (Losses)
Corporate and Other 11,081 (500,000)
---------- ---------
Total net 11,081 (500,000)
---------- ---------
Income (Loss) Before Income Tax
Acquisitions 6,076,496 817,071
Dental and Consumer Benefits 225,567 210,592
Financial Institutions 296,386 71,086
Investment Products (375,651) 25,861
Corporate and Other 198,508 (77,716)
---------- ----------
Total income before tax $6,421,306 $1,046,894
========== ==========
</TABLE>
1 Income (loss) before tax excluding realized investment gains and losses.
Pretax operating income from the Acquisitions Division was $6.1 million
in the first six months of 1999 as compared to $0.8 million in the same period
of 1998. Earnings from the Acquisitions Division are expected to decline over
time (due to the lapsing of policies resulting from deaths of insureds or
terminations of coverage) unless new acquisitions are made. In October 1998, the
Division coinsured a block of policies from Lincoln National. This acquisition
represented most of the increase in pretax earnings for the Division.
Dental Division pretax earnings were $0.2 million in the first six
months of 1999 and 1998.
The Financial Institutions Division's pretax operating income was $0.3
million for the first six months of 1999 as compared to $0.1 million the first
six months of 1998. The increase was primarily due to increased marketing
efforts.
The Investment Products Division began marketing certain annuity
products in the state of New York in the latter part of 1998. The Division had a
pretax operating loss of $0.4 million in the first six months of 1999 primarily
related to start-up expenses.
14
<PAGE>
The Corporate and Other segment consists of net investment income and realized
investment gains not identified with the preceding operating divisions. Pretax
operating income from this segment was $0.2 million in the first six months of
1999 and $0.4 million in the first six months of 1998.
INCOME TAXES
The following table sets forth the effective tax rates for the periods
shown:
SIX MONTHS
ENDED ESTIMATED EFFECTIVE
JUNE 30 INCOME TAX RATES
----------- -------------------
1998 28.0 %
1999 28.0
The effective income tax rate for the full year of 1998 was 28%.
Management's estimate of the effective income tax rate for 1999 is 28%.
Net Income
The following table sets forth net income for the periods shown, and
the percentage change from the prior period:
NET INCOME
-------------------------------
SIX MONTHS
ENDED PERCENTAGE
JUNE 30 TOTAL INCREASE
----------- ----- ----------
1998 $ 753,764 (34.2)%
1999 4,623,340 513.3
Compared to the same period in 1998, net income in the first six months
of 1999 increased $3.9 million, reflecting increases related to the
Acquisitions, Dental, and Financial Institutions Divisions, and the Corporate
and Other segment, and realized investment gains which were partially offset by
a decrease in the Investment Products Division.
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 the Company, 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.
15
<PAGE>
The Company shares computer hardware and software with 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 most of its
insurance administration systems and general administration systems. Of the
general administration systems that are not yet remediated, the majority are new
systems that were implemented during 1998 and are scheduled for year 2000
testing in August 1999 with the compliant, tested version to be placed in
production by September 1999. 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. Remaining Year 2000
personal computer preparations are expected to be completed by September 30,
1999. 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.
Future date tests are complete for the majority of PLC's mission
critical systems and are expected to be completed by August 31, 1999. Integrated
tests involve multiple system testing and are used to verify the Year 2000
readiness of interfaces and connectivity across multiple systems. PLC is using
its mainframe computer to simulate a Year 2000 production environment and to
facilitate integrated testing. Current expectations are that integrated testing
will be completed on or before September 30, 1999.
Significant business partners and suppliers that provide products or
services critical to Company operations are being reviewed for year 2000
readiness. To date, no 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 cost of new systems to replace non-compliant
systems have been capitalized in the ordinary course of business. Other costs
have been expensed as incurred. Through June 30, 1999, costs that have been
specifically identified as relating to the Year 2000 problem total $4.7 million,
with an additional $0.5 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 or the Company's operations, or that the Year 2000 issue
will not otherwise adversely affect PLC or the Company.
A formal contingency plan is being prepared for senior management
approval in September 1999. The plan will also be reviewed with the Finance and
Investments Committee of PLC's
16
<PAGE>
Board of Directors at their October meeting. Those 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, the Company 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.
17
<PAGE>
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 AND ANNUITY INSURANCE COMPANY
Date: August 13, 1999 /s/ Jerry W. DeFoor
-------------------
Jerry W. DeFoor
Vice President and Controller,
and Chief Accounting Officer
(Duly authorized officer)
18
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Protective Life and Annuity Insurance Company and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 370,420,788
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 5,798,217
<REAL-ESTATE> 0
<TOTAL-INVEST> 435,370,137
<CASH> 4,623,274
<RECOVER-REINSURE> 22,425,140
<DEFERRED-ACQUISITION> 128,324,394
<TOTAL-ASSETS> 601,266,548
<POLICY-LOSSES> 436,823,295
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 11,344,669
<NOTES-PAYABLE> 0
2,000
0
<COMMON> 2,500,000
<OTHER-SE> 119,864,360
<TOTAL-LIABILITY-AND-EQUITY> 601,266,548
10,078,531
<INVESTMENT-INCOME> 5,954,040
<INVESTMENT-GAINS> 37
<OTHER-INCOME> 2,344
<BENEFITS> 6,059,584
<UNDERWRITING-AMORTIZATION> 3,043,818
<UNDERWRITING-OTHER> 3,544,292
<INCOME-PRETAX> 3,387,258
<INCOME-TAX> 948,433
<INCOME-CONTINUING> 2,438,825
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,438,825
<EPS-BASIC> 0 <F1>
<EPS-DILUTED> 0 <F1>
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Protective Life and Annuity Life Insurance Company is a wholly-owned
subsidiary of Protective Life Insurance Company, which is a wholly--owned
subsidiary of Protective Life Corporation (NYSE: PL)and is not required to
present EPS information.
</FN>
</TABLE>
Exhibit 99
to
Form 10-Q
of
Protective Life and Annuity Insurance Company
for the six months
ended June 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 and Annuity
Insurance Company ("the Company") 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. The Company provides the following information to
qualify forward-looking statements for the safe harbor protection of the Act.
The Company is a stock life insurance company founded in 1978. All
outstanding shares of the Company's common stock are owned by Protective Life
Insurance Company ("Protective"), which is the principal operating 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". All
outstanding shares of Company's preferred stock are owned by PLC. The Company is
authorized to transact insurance business, as an insurance company or
reinsurance company in 48 states, including New York.
Protective Life Corporation ("PLC") through its subsidiaries provides
financial services through the production, distribution, and administration of
insurance and investment products. PLC operates through seven divisions whose
principal strategic focuses can be grouped into six general categories: life
insurance, specialty insurance products, and retirement savings and investment
products. The life insurance category includes the Acquisitions, Individual
Life, and West Coast 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.
The Company, since it is licensed in the State of New York, is the
entity through which PLC markets, distributes, and services insurance and
annuity products in New York. As of June 30, 1999, the Company was involved in
the operations of four of PLC's Divisions: the Acquisition Division, the Dental
Division, the Financial Institutions Division and the Investment Products
Division. The Company has an additional business segment which is described
herein as Corporate and Other.
<PAGE>
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 the Company are discussed more fully below.
MATURE INDUSTRY; COMPETITION. Life and health insurance is a mature
industry. In recent years, the industry has experienced virtually no growth in
life insurance sales, though the aging population has increased the demand for
retirement savings products. Insurance is a highly competitive industry and the
Company encounters significant competition in all lines of business from other
insurance companies, many of which have greater financial resources than the
Company, 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 is considering
legislation that would permit commercial banks, insurance companies and
investment banks to combine.
Management believes that the Company's ability to compete is dependent
upon, among other things, its ability to attract and retain distribution
channels to market its insurance and investment products, its ability to develop
competitive and profitable products, its ability to maintain low unit costs, and
its maintenance of strong financial strength ratings from rating agencies.
The Company and its affiliates compete against other insurance
companies and financial institutions in the origination of commercial mortgage
loans.
RATINGS. Ratings are an important factor in the competitive position of
life insurance companies. Rating organizations periodically review the financial
performance and condition of insurers, including the Company and its insurance
affiliates. A downgrade in the ratings of the Company and its life insurance
affiliates could adversely affect its ability to sell its products and its
ability to compete for attractive acquisition opportunities.
Rating organizations assign ratings based upon several factors. While
most of the considered factors relate to the rated company, some of the factors
relate to general economic conditions and circumstances outside the rated
company's control. For the past several years rating downgrades in the industry
have exceeded upgrades.
POLICY CLAIMS FLUCTUATIONS. The Company's results may fluctuate from
year to year on account of fluctuations in policy claims received by the
Company.
LIQUIDITY AND INVESTMENT PORTFOLIO. Many of the products offered by the
Company and its insurance affiliates allow policyholders and contractholders to
withdraw their funds under defined circumstances. The Company and its insurance
affiliates design products and configure investment portfolios so as to provide
and maintain sufficient liquidity to support anticipated withdrawal demands and
contract benefits and maturities. Formal asset/liability management programs and
procedures are used to monitor the relative duration of the Company's assets and
liabilities. While the Company and its insurance affiliates own a significant
amount of liquid assets, many of their assets are relatively illiquid.
Significant unanticipated withdrawal
<PAGE>
or surrender activity could, under some circumstances, compel the Company and
its insurance affiliates to dispose of illiquid assets on unfavorable terms,
which could have a material adverse effect on the Company.
INTEREST RATE FLUCTUATIONS. 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 the Company's spread income. For example, certain of the Company's
insurance and investment products guarantee a minimum credited interest rate.
While the Company 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 the Company's
insurance and investment products.
REGULATION AND TAXATION. The Company and its insurance affiliates are
subject to government regulation in each of the states in which they conduct
business. Such regulation is vested in state agencies having broad
administrative power dealing with many aspects of the insurance business, which
may include premium rates, marketing practices, advertising, policy forms, and
capital adequacy, and is concerned primarily with the protection of
policyholders rather than share owners. The Company cannot predict the form of
any regulatory initiatives.
Under the Internal Revenue Code of 1986, as amended (the Code), income
tax payable by policyholders on investment earnings is deferred during the
accumulation period of certain life insurance and annuity products. This
favorable tax treatment may give certain of the Company's products a competitive
advantage over other non-insurance products. To the extent that the Code is
revised to reduce the tax-deferred status of life insurance and annuity
products, or to increase the tax-deferred status of competing products, all life
insurance companies, including the Company and its affiliates, 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. The
Company cannot predict what initiatives the President or Congress may propose
which may affect the Company.
LITIGATION. A number of civil jury verdicts have been returned against
insurers in the jurisdictions in which the Company does business involving the
insurers' sales practices, alleged agent misconduct, failure to properly
supervise agents, and other matters. Increasingly these lawsuits have resulted
in the award of substantial judgments against the insurer that are
disproportionate to the actual damages, including material amounts of punitive
damages. In some states (including Alabama), juries have substantial discretion
in awarding punitive damages which creates the potential for unpredictable
material adverse judgments in any given punitive damages suit. The Company and
its affiliates, like other insurers, in the ordinary course of business, are
involved in such litigation or alternatively in arbitration. The outcome of any
such litigation or arbitration cannot be predicted with certainty. In addition,
in some class action and other lawsuits involving insurers' sales practices,
insurers have made material settlement payments.
<PAGE>
INVESTMENT RISKS. The Company's invested assets are subject to
customary risks of defaults and changes in market values. The value of the
Company's commercial mortgage portfolio depends in part on the financial
condition of the tenants occupying the properties which the Company has
financed. Factors that may affect the overall default rate on, and market value
of, the Company's invested assets include interest rate levels, financial market
performance, and general economic conditions, as well as particular
circumstances affecting the businesses of individual borrowers and tenants.
CONTINUING SUCCESS OF ACQUISITION STRATEGY. The Company's parent has
actively pursued a strategy of acquiring blocks of insurance policies. This
acquisition strategy has increased the parent's and certain of its subsidiaries'
earnings in part by allowing the parent to position itself to realize certain
operating efficiencies associated with economies of scale. There can be no
assurance, however, that suitable acquisitions, presenting opportunities for
continued growth and operating efficiencies, will continue to be available to
the parent, or that the parent and its subsidiaries will realize the anticipated
financial results from its acquisitions.
RELIANCE UPON THE PERFORMANCE OF OTHERS. The Company's results may be
affected by the performance of others because the Company has entered into
various ventures involving other parties. Examples include, but are not limited
to: many of the Company's products are sold through independent distribution
channels; the Investment Products Division's variable annuity deposits are
invested in funds managed by unaffiliated investment managers; a portion of the
sales in the Dental and Financial Institutions Divisions comes from arrangements
with unrelated marketing organizations. Therefore the Company's results may be
affected by the performance of others.
YEAR 2000. Computer hardware and software often denote the year using
two digits rather than four; for example, the year 1998 often is denoted by such
hardware and software as "98." It is probable that such hardware and software
will malfunction when calculations involving the year 2000 are attempted because
the hardware and/or software will interpret "00" as representing the year 1900
rather that the year 2000. This "Year 2000" issue potentially affects all
individuals and companies (including the Company, 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.
The Company shares computer hardware and software with Protective Life
Corporation ("PLC"), its ultimate parent, and other affiliates of PLC. Due to
the fact that PLC does not control all of the factors that could impact its Year
2000 readiness, there can be no assurances that PLC's efforts will be
successful, that interactions with other service providers with Year 2000 issues
will not impair PLC's operations, or that the Year 2000 issue will not otherwise
adversely affect PLC or the Company.
Should some of PLC's systems not be available due to Year 2000
problems, in a reasonably likely worst case scenario, PLC may experience
significant delays in its ability to perform certain functions, but does not
expect an inability to perform critical functions or to attempt to otherwise
conduct business. However, other worst case scenarios, depending upon their
duration, could have a material adverse effect on PLC and the Company and their
operations.
REINSURANCE. The Company and its insurance affiliates cede insurance to other
insurance companies. However, the Company remains liable with respect to ceded
insurance
<PAGE>
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 the
Company. Under certain reinsurance agreements, the reinsurer may increase the
rate it charges the Company for the reinsurance, though the Company 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 the
Company, the Company could be adversely affected.
Additionally, the Company assumes policies of other insurers. Any
regulatory or other adverse development affecting the ceding insurer could also
have an adverse effect on the Company.
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, THE COMPANY 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.
