- --------------------------------------------------------------------------------
FORM 10-Q
------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File 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
May 7, 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 Months
ended March 31, 1999 and 1998 (unaudited)............................
Condensed Balance Sheets as of March 31, 1999
(unaudited) and December 31, 1998....................................
Condensed Statements of Cash Flows for the
Three Months ended March 31, 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 March 31, 1999, and the related condensed
statements of income and cash flows for the three-month periods ended March 31,
1999 and 1998. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed financial statements referred to above for them to be
in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the 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.
PricewaterhouseCoopers LLP
Birmingham, Alabama
April 23, 1999
2
<PAGE>
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
CONDENSED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
-------------------
1999 1998
---- ----
<S> <C> <C>
REVENUES
Premiums and policy fees $16,615,108 $1,963,086
Reinsurance ceded (5,513,237) (435,114)
---------- ---------
Premiums and policy fees, net of reinsurance ceded 11,101,871 1,527,972
Net investment income 6,935,627 1,580,295
Realized investment gains 11,044
Other income (8,736)
---------- ---------
18,039,806 3,108,267
---------- ---------
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance ceded:
1999 - $4,420,651; 1998 - $146,901) 10,466,587 1,156,305
Amortization of deferred policy acquisition costs 2,225,730 126,598
Other operating expenses (net of reinsurance ceded:
1999 - $70,765; 1998 - $(82,984)) 2,313,441 397,526
---------- ---------
15,005,758 1,680,429
INCOME BEFORE INCOME TAX 3,034,048 1,427,838
Income tax expense 849,533 399,794
----------- ----------
NET INCOME $ 2,184,515 $1,028,044
=========== ==========
</TABLE>
See notes to condensed financial statements
3
<PAGE>
<TABLE>
<CAPTION>
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
CONDENSED BALANCE SHEETS
MARCH 31 DECEMBER 31
1999 1998
-------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Investments
Fixed maturities $373,626,924 $360,113,277
Mortgage loans on real estate 5,908,784 7,900,221
Policy loans 53,672,596 54,103,044
Short-term investments 4,811,445 18,267,431
------------ ------------
Total investments 438,019,749 440,383,973
Cash 996,165
Accrued investment income 7,426,710 7,597,305
Accounts and premiums receivable, net 4,122,314 673,967
Reinsurance receivables 22,684,396 22,405,337
Deferred policy acquisition costs 131,190,127 133,275,451
Other assets 41,823 55,968
Assets related to separate accounts
Variable annuity 1,494,370 237,565
------------ ------------
$605,975,654 $604,629,566
============ ============
LIABILITIES
Policy liabilities and accruals:
Future policy benefits and claims $441,781,972 $439,842,102
Unearned premiums 2,798,974 2,487,277
------------ ------------
444,580,946 442,329,379
Annuity deposits 4,660,998 3,434,342
Other policyholders' funds 11,839,638 12,143,006
Other liabilities 8,509,055 7,941,276
Deferred income taxes 5,814,324 7,305,381
Liabilities related to separate accounts
Variable annuity 1,494,370 237,565
------------ ------------
Total liabilities 476,899,331 473,390,949
------------ ------------
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 101,574,516 101,574,516
Retained earnings 20,538,007 18,353,492
Accumulated other comprehensive income
Net unrealized gains on investments (net of income
tax: 1999 - $2,402,508; 1998 - $4,743,097) 4,461,800 8,808,609
------------ ------------
Total share-owners' equity 129,076,323 131,238,617
------------ ------------
$605,975,654 $604,629,566
============ ============
</TABLE>
See notes to condensed financial statements
4
<PAGE>
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
------------------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,184,515 $ 1,028,044
Adjustments to reconcile net income to net cash used in operating activities:
Realized investment gains (11,044)
Amortization of deferred policy acquisition costs 2,225,730 126,598
Capitalization of deferred policy acquisition costs (140,406) (152,577)
Deferred income tax 849,533 (209,275)
Interest credited to universal life and investment products 2,928,606 252,161
Policy fees assessed on universal life and investment products (250,505) (257,535)
Change in accrued investment income and other receivables (3,556,811) 61,964
Change in policy liabilities and other policyholder
funds of traditional life and health products (800,200) (1,109,247)
Change in other liabilities 567,779 (455,686)
Other (net) 14,012 19,925
------------- -------------
Net cash provided by (used in) operating activities 4,011,209 (695,628)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reductions of investments
Investments available for sale 96,448,241 48,399,721
Other 1,994,242 246,103
Sale of investments
Investments available for sale 14,009,410
Cost of investments acquired
Investments available for sale (116,763,891) (49,063,670)
------------- ------------
Net cash (used in) investing activities (4,311,998) (417,846)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Investment product deposits and change in universal life deposits 1,296,954 (182,408)
------------- ------------
Net cash provided by (used in) financing activities 1,296,954 (182,408)
------------- ------------
INCREASE (DECREASE) IN CASH 996,165 (1,295,882)
CASH AT BEGINNING OF PERIOD 0 2,218,201
------------- ------------
CASH AT END OF PERIOD $ 996,165 $ 922,319
============= ============
</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 three month period ended March 31, 1999, are not necessarily
indicative of the results that may be expected for the year ending December 31,
1999. The year-end 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
THREE MONTHS ENDED MARCH 31, 1999
--------------------------------------------------------------------
DENTAL AND
CONSUMER FINANCIAL
ACQUISITIONS BENEFITS INSTITUTIONS
------------ ---------- ------------
<S> <C> <C> <C>
Premiums and policy fees $ 15,658,767 $605,037 $349,482
Reinsurance ceded (5,336,719) (176,518)
------------- --------- -------
Net of reinsurance ceded 10,322,048 428,519 349,482
Net investment income 6,657,571 120,269 59,342
Realized investment gains (losses)
Other income (8,718)
------------- --------- -------
Total revenues 16,970,901 548,788 408,824
------------- --------- -------
Benefits and settlement expenses 9,850,644 436,081 153,913
Amortization of deferred policy
acquisition costs 2,138,361 87,369
Other operating expenses 2,182,085 8,554 (57,899)
------------ --------- -------
Total benefits and expenses 14,171,090 444,635 183,383
------------ --------- -------
Income before income tax 2,799,811 104,153 225,441
CORPORATE
INVESTMENT AND
PRODUCTS OTHER ADJUSTMENTS TOTAL
---------- --------- ----------- ------------
Premiums and policy fees $ 1,822 $16,615,108
Reinsurance ceded (5,513,237)
---------- ------------
Net of reinsurance ceded 1,822 11,101,871
Net investment income $ 98,445 6,935,627
Realized investment gains (losses) 11,044 11,044
Other income (18) (8,736)
---------- --------- ------------
Total revenues 1,804 109,489 18,039,806
---------- --------- ------------
Benefits and settlement expenses 25,949 10,466,587
Amortization of deferred policy
acquisition costs 2,225,730
Other operating expenses 155,571 25,130 2,313,441
---------- --------- -----------
Total benefits and expenses 181,520 25,130 15,005,758
---------- --------- -----------
Income (loss) before income tax (179,716) 84,359 3,034,048
Income tax expense $849,533 849,533
-----------
Net income $ 2,184,515
===========
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
OPERATING SEGMENT INCOME FOR THE
THREE MONTHS ENDED MARCH 31, 1998
------------------------------------------------------------------
DENTAL AND
CONSUMER FINANCIAL
ACQUISITIONS BENEFITS INSTITUTIONS
------------ ----------- ------------
<S> <C> <C> <C>
Premiums and policy fees $1,388,183 $475,952 $98,951
Reinsurance ceded (435,114)
------------ ----------- ------------
Net of reinsurance ceded 953,069 475,952 98,951
------------ ----------- ------------
Net investment income 1,156,083 194,703
Total revenues 2,109,152 670,655 98,951
Benefits and settlement expenses 1,120,588 288 35,429
Amortization of deferred policy
acquisition costs 110,597 16,001
Other operating expenses 68,225 343,317 11,845
------------ ----------- ------------
Total benefits and expenses 1,299,410 343,605 63,275
------------ ----------- ------------
Income before tax 809,742 327,050 35,676
CORPORATE
INVESTMENT AND
PRODUCTS OTHER ADJUSTMENTS TOTAL
---------- --------- ----------- -----------
Premiums and policy fees $1,963,086
Reinsurance ceded (435,114)
---------
Net of reinsurance ceded 1,527,972
Net investment income $229,509 1,580,295
-------- -----------
Total revenues 229,509 3,108,267
-------- -----------
Benefits and settlement expenses 1,156,305
Amortization of deferred policy
acquisition costs 126,598
Other operating expenses $(25,861) 397,526
----------- -----------
Total benefits and expenses (25,861) 1,680,429
----------- -------- -----------
Income before tax 25,861 229,509 1,427,838
Income tax expense $399,794 399,794
-----------
Net income $1,028,044
===========
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
OPERATING SEGMENT ASSETS
MARCH 31, 1999
---------------------------------------------------------------------
DENTAL AND
CONSUMER FINANCIAL
ACQUISITIONS BENEFITS INSTITUTIONS
------------ ---------- ------------
<S> <C> <C> <C>
Investments and other assets $433,753,378 $6,509,592 $2,913,165
Deferred policy acquisition costs 130,444,165 745,962
------------ ---------- -----------
Total assets $564,197,543 $6,509,592 $3,659,127
============ ========== ===========
Corporate
Investment and
Products Other Total
---------- ------------ ------------
Investments and other assets $2,073,981 $29,535,411 $474,785,527
Deferred policy acquisition costs 131,190,127
---------- ------------ ------------
Total assets $2,073,981 $29,535,411 $605,975,654
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 March 31, 1999, and for the three months then ended, the Company
had share-owners' equity and net income prepared in conformity with statutory
reporting practices of $29.5 million and $3.8 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 March 31, 1999 and December 31, 1998,
prepared on the basis of reporting investments at amortized cost rather than at
market values, are as follows:
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
<S> <C> <C>
Total investments $431,155,441 $426,832,267
Deferred policy acquisition costs 131,190,127 133,275,451
All other assets 36,765,778 30,970,142
------------ ------------
$599,111,346 $591,077,860
============ ============
Deferred income taxes $ 3,411,816 $ 2,562,284
All other liabilities 471,085,007 466,085,568
------------ ------------
474,496,823 468,647,852
Share-owners' equity 124,614,523 122,430,008
------------ ------------
$599,111,346 $591,077,860
============ ============
</TABLE>
10
<PAGE>
NOTE F - COMPREHENSIVE INCOME (LOSS)
The following table sets forth the Company's comprehensive income
(loss) for the three months ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------
1999 1998
---- ----
<S> <C> <C>
Net income $ 2,184,515 $1,028,044
Increase (decrease) in net unrealized gains
on investments (net of income tax:
1999 - $(2,336,724); 1998 - $17,349) (4,339,630) 32,219
Reclassification adjustment for amounts
included in net income (net of income
tax: 1999 - $(3,865)) (7,179)
------------ ----------
Comprehensive income (loss) $(2,162,294) $1,060,263
============ ==========
</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 Guaranteed
Investment Contracts 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 March 31, 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
therefore subject to a number of risks and uncertainties, and the Company cannot
give assurance that such statements will prove to be correct. Please refer to
Exhibit 99 for more information about factors which could affect future results.
12
<PAGE>
Revenues
The following table sets forth revenues by source for the period shown,
and the percentage change from the prior period:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED PERCENTAGE
MARCH 31 INCREASE
---------------------------------- ----------
1999 1998
---- ----
<S> <C> <C> <C>
Premiums and policy fees $11,101,871 $1,527,972 626.6 %
Net investment income 6,935,627 1,580,295 338.9
Realized investment gains 11,044 - -
Other (8,736) - -
------------ -----------
$18,039,806 $3,108,267
============ ===========
</TABLE>
Premiums and policy fees, net of reinsurance ("premiums and policy
fees") increased $9.6 million or 626.6% in the first three months of 1999 over
the first three months of 1998. Premiums and policy fees from the Acquisitions
Division increased $9.4 million primarily due to the coinsurance of a block of
policies from Lincoln National Corporation in October 1998. Premiums and policy
fees related to the Dental Division decreased slightly in the first three months
of 1999 as compared to the same period in 1998. The Financial Institutions
Division's premiums and policy fees increased $0.3 million in the first three
months of 1999 over the first three 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 three months of 1999.
Net investment income in the first three months of 1999 increased $5.4
million or 338.9% 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 three 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:
OPERATING INCOME (LOSS) AND INCOME (LOSS) BEFORE INCOME TAX
THREE MONTHS ENDED MARCH 31
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Operating Income (Loss)(1)
Acquisitions $2,799,811 $ 809,742
Dental and Consumer Benefits 104,153 327,050
Financial Institutions 225,441 35,676
Investment Products (179,716) 25,861
Corporate and Other 73,315 229,509
--------- ---------
Total operating income 3,023,004 1,427,838
--------- ---------
Realized Investment Gains (Losses)
Corporate and Other 11,044
---------
Total net 11,044
---------
Income (Loss) Before Income Tax
Acquisitions 2,799,811 809,742
Dental and Consumer Benefits 104,153 327,050
Financial Institutions 225,441 35,676
Investment Products (179,716) 25,861
Corporate and Other 84,359 229,509
--------- ---------
Total income before tax $3,034,048 $1,427,838
========= =========
</TABLE>
(1) Income (loss) before tax excluding realized investment gains and losses.
Pretax earnings from the Acquisitions Division increased $2.0 million
in the first three months of 1999 as compared to 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 Corporation. This
acquisition represented most of the increase in pretax earnings for the
Division.
Dental Division pretax earnings were $0.2 million lower in the first
three months of 1999 as compared to the first three months of 1998.
The Financial Institutions Division began operations in the Company in
late 1997. The Division had pretax earnings of $0.2 million for the first three
months of 1999 as compared to an insignificant level of earnings for the first
three months of 1998.
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 loss of $0.2 million in the first three 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 income from this segment was $0.1 million in the first three months of
1999 and $0.2 million in the first three months of 1998.
Income Taxes
The following table sets forth the effective tax rates for the periods
shown:
THREE MONTHS
ENDED ESTIMATED EFFECTIVE
MARCH 31 INCOME TAX RATES
------------ -------------------
1998 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:
THREE MONTHS NET INCOME
ENDED PERCENTAGE
MARCH 31 TOTAL INCREASE
------------ ---------- ----------
1998 $1,028,044 39.5 %
1999 2,184,515 112.5
Compared to the same period in 1998, net income in the first three
months of 1999 increased $1.2 million, reflecting increases related to the
Acquisitions and Financial Institutions Divisions, and realized investment gains
which were partially offset by decreases related to the Dental and Investment
Products Divisions, and the Corporate and Other segment.
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
PLC's critical mainframe systems, and prioritized the remediation efforts that
were to follow. During 1998 all other hardware and software, including
non-information technology (non-IT) related hardware and software, were included
in the process. PLC's Year 2000 plan includes all subsidiaries.
PLC estimates that Year 2000 remediation is complete for most of its
insurance administration and general administration systems. Of the general
administration systems that are not yet remediated, the majority are new systems
that were implemented during 1998 and are scheduled to be upgraded to the
current release of the system during the second quarter of 1999. All remediated
systems are currently in production. Personal computer network hardware and
software have been reviewed, with upgrades implemented where necessary. A review
of personal computer desktop software is in progress, but not complete. All Year
2000 personal computer preparations are expected to be completed by June 30,
1999. With respect to non-IT equipment and processes, the assessment and
remediation is progressing on schedule and all known issues are expected to be
remediated before December 31, 1999.
One insurance administration system, a personal computer database
system that processes member information for one subsidiary, has been identified
as mission critical is not yet fully remediated. This effort is on schedule and
targeted to be complete by June 30, 1999.
Future date tests are used to verify a system's ability to process
transactions dated up to and beyond January 1, 2000. Future date tests are
complete or in-progress for the majority of PLC's mission-critical systems. A
large portion of the testing is conducted by a contract programming staff
dedicated full time to Year 2000 preparations. These resources have been part of
PLC's Year 2000 project since 1995.
Integrated tests involve multiple system testing and are used to verify
the Year 2000 readiness of interfaces and connectivity across multiple systems.
PLC is using its mainframe computer to simulate a Year 2000 production
environment and to facilitate integrated testing.
Integrated testing will continue throughout 1999.
Business partners and suppliers that provide products or services
critical to PLC's operations are being reviewed and in some cases their Year
2000 preparations are being monitored by the Company. To date, no partners or
suppliers have reported that they expect to be unable to continue supplying
products and services after January 1, 2000. Monitoring and testing of critical
partners and suppliers will continue throughout 1999. Formal contingency
planning began in March 1999 and will continue throughout the year. These plans
will augment PLC's existing disaster recovery plans.
PLC cannot specifically identify all of the costs to develop and
implement its Year 2000 plan. The cost of new systems to replace non-compliant
systems have been capitalized in the ordinary course of business. Other costs
have been expensed as incurred. Through February 28, 1999, costs that have been
specifically identified as relating to the Year 2000 problem total $4.1 million,
with an additional $1.1 million estimated to be required to support continued
testing activity. PLC's Year 2000 efforts have not adversely affected its normal
procurement and development of information technology.
16
<PAGE>
Although PLC believes that a process is in place to successfully
address Year 2000 issues, there can be no assurances that PLC's efforts will be
successful, that interactions with other service providers with Year 2000 issues
will not impair the Company's operations, or that the Year 2000 issue will not
otherwise adversely affect the Company.
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: May 14, 1999 /s/ Jerry W. DeFoor
Jerry W. DeFoor
Vice President and Controller,
and Chief Accounting Officer
(Duly authorized officer)
18
<PAGE>
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 373,626,927
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 5,908,784
<REAL-ESTATE> 0
<TOTAL-INVEST> 438,019,749
<CASH> 996,165
<RECOVER-REINSURE> 4,122,314
<DEFERRED-ACQUISITION> 131,190,127
<TOTAL-ASSETS> 605,975,654
<POLICY-LOSSES> 444,580,946
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 11,839,638
<NOTES-PAYABLE> 0
2,000
0
<COMMON> 2,500,000
<OTHER-SE> 126,574,323
<TOTAL-LIABILITY-AND-EQUITY> 605,975,654
11,101,871
<INVESTMENT-INCOME> 6,935,627
<INVESTMENT-GAINS> 0
<OTHER-INCOME> (8,736)
<BENEFITS> 10,466,587
<UNDERWRITING-AMORTIZATION> 2,225,730
<UNDERWRITING-OTHER> 2,313,441
<INCOME-PRETAX> 3,034,048
<INCOME-TAX> 849,533
<INCOME-CONTINUING> 2,184,515
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,184,515
<EPS-PRIMARY> 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 three months
ended March 31, 1999
Safe Harbor for Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the "Act")
encourages companies to make "forward-looking statements" by creating a safe
harbor to protect the companies from securities law liability in connection with
forward-looking statements. Forward-looking statements can be identified by use
of words such as "expect," "estimate," "project," "budget," "forecast,"
"anticipated," "plan," and similar expressions. Protective Life 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 three 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
Guaranteed Investment Contracts 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 March 31, 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.
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 or surrender activity could, under some
circumstances, compel the Company and its insurance
<PAGE>
affiliates to dispose of illiquid assets on unfavorable terms, which could have
a material adverse effect on the Company.
INTEREST RATE FLUCTUATIONS. Sudden changes in interest rates expose
insurance companies to the risk of not earning anticipated spreads between the
interest rate earned on investments and the credited rates paid on outstanding
policies. Both rising and declining interest rates can negatively affect 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 future regulatory initiatives.
Under the Internal Revenue Code of 1986, as amended (the Code), income
tax payable by policyholders on investment earnings is deferred during the
accumulation period of certain life insurance and annuity products. This
favorable tax treatment may give certain of 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. The Company cannot predict what future
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.
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
<PAGE>
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 has actively
pursued a strategy of acquiring blocks of insurance policies. This acquisition
strategy has increased the Company's earnings in part by allowing the Company 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 Company, or that the Company
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 PLC, Protective,
and other affiliates of PLC. The majority of the modifications necessary for
PLC's mainframe systems to be able to process transactions dated beyond 1999
have been completed. PLC currently anticipates that its remaining systems with
Year 2000 issues will have been addressed and appropriate action taken before
December 31, 1999.
Due to the fact that PLC does not control all of the factors that could
impact its Year 2000 readiness, there can be no assurances that PLC's efforts
will be successful, that interactions with other service providers with Year
2000 issues will not impair PLC's operations, or that the Year 2000 issue will
not otherwise adversely affect PLC.
Should some of PLC's systems not be available due to Year 2000
problems, in a reasonably likely worst case scenario, PLC may experience
significant delays in its ability to perform certain functions, but does not
expect an inability to perform critical functions or to 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.
<PAGE>
REINSURANCE. The Company and its insurance affiliates cede insurance to
other insurance companies. However, the Company remains liable with respect to
ceded insurance should any reinsurer fail to meet the obligations assumed by it.
The cost of reinsurance is, in some cases, reflected in the premium rates
charged by 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.
<PAGE>
