<PAGE>
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, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Numbers 33-31940; 33-39345; 33-57052
PROTECTIVE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
TENNESSEE 63-0169720
(State of incorporation) (IRS Employer Identification Number)
2801 HIGHWAY 280 SOUTH
BIRMINGHAM, ALABAMA 35223
(Address of principal executive offices)
(205) 879-9230
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
Number of shares of Common Stock, $1.00 par value, outstanding as of May 6,
1994: 5,000,000 shares.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(A) AND
(B) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT PURSUANT TO GENERAL INSTRUCTION H(2).
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
INDEX
Page Number
-----------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Report of Independent Accountants. . . . . . . . . . . . . . . . . . . 2
Consolidated Condensed Statements of Income for the Three
Months ended March 31, 1994 and 1993 (unaudited). . . . . . . . . . . 3
Consolidated Condensed Balance Sheets as of March 31, 1994
(unaudited) and December 31, 1993 . . . . . . . . . . . . . . . . . . 4
Consolidated Condensed Statements of Cash Flows for the
Three Months ended March 31, 1994 and 1993 (unaudited). . . . . . . 5
Notes to Consolidated Condensed Financial Statements (unaudited) . . . 6
Item 2. Management's Narrative Analysis of the Results of Operations. . . 8
Signature. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Stockholder
Protective Life Insurance Company
Birmingham, Alabama
We have reviewed the accompanying consolidated condensed balance sheet of
Protective Life Insurance Company and subsidiaries as of March 31, 1994, and the
related consolidated condensed statements of income and cash flows for the
three-month periods ended March 31, 1994 and 1993. These financial statements
are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated condensed financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1993, and the
related consolidated statements of income, stockholder's equity, and cash flows
for the year then ended (not presented herein); and in our report dated February
14, 1994, we expressed an unqualified opinion which contains an explanatory
paragraph regarding the changes in accounting for certain investments in debt
and equity securities in 1993 and postretirement benefits other than pensions in
1992 on those consolidated financial statements. In our opinion, the
information set forth in the accompanying consolidated condensed balance sheet
as of December 31, 1993, is fairly stated in all material respects in relation
to the consolidated balance sheet from which it has been derived.
COOPERS & LYBRAND
Birmingham, Alabama
April 26, 1994
2
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
-----------------------
1994 1993
--------- ---------
<S> <C> <C>
REVENUES
Premiums and policy fees (net of premiums
ceded: 1994 - $34,126; 1993 - $29,504) $ 89,437 $ 76,280
Net investment income 98,825 77,133
Realized investment gains 2,297 125
Other income 752 1,508
---------- ----------
191,311 155,046
---------- ----------
BENEFITS AND EXPENSES
Benefits and settlement expenses
(net of reinsurance: (1994 - $24,111;
1993 - $22,552) 115,876 102,771
Amortization of deferred policy acquisition costs 20,039 16,898
Other operating expenses (net of reinsurance:
(1994 - $2,729; 1993 - $2,030) 26,272 20,447
---------- ---------
162,187 140,116
---------- ---------
INCOME BEFORE INCOME TAX 29,124 14,930
Income tax expense 9,320 4,669
--------- ---------
NET INCOME $ 19,804 $ 10,261
---------- ---------
---------- ---------
</TABLE>
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
3
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1994 1993
---------- ----------
(Unaudited)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities $3,101,454 $3,051,292
Equity securities 72,458 40,596
Mortgage loans on real estate 1,358,024 1,408,444
Investment in real estate, net 28,458 21,928
Policy loans 139,284 141,136
Other long-term investments 18,958 22,760
Short-term investments 81,708 79,772
---------- ----------
Total investments 4,800,344 4,765,928
Cash 15,312 23,951
Accrued investment income 53,408 51,330
Accounts and premiums receivable, net 13,358 20,473
Reinsurance receivables 103,148 102,559
Deferred policy acquisition costs 311,640 299,307
Property and equipment, net 32,134 33,046
Securities and indebtedness of related parties 3,781 382
Other assets 9,086 7,473
Assets held in separate accounts 3,862 3,400
---------- ----------
TOTAL ASSETS $5,346,073 $5,307,849
---------- ----------
---------- ----------
LIABILITIES
Policy liabilities and accruals $1,496,042 $1,469,630
Guaranteed investment contract deposits 2,065,103 2,015,075
Annuity deposits 1,036,828 1,005,742
Other policyholders' funds 141,008 141,975
Other liabilities 68,814 74,375
Accrued income taxes 10,517 7,483
Deferred income taxes 38,575 69,118
Debt 99 118
Indebtedness to related parties 48,943 48,943
Liabilities related to separate accounts 3,862 3,400
---------- ----------
TOTAL LIABILITIES 4,909,791 4,835,859
---------- ----------
REDEEMABLE PREFERRED STOCK, $1 par value,
at redemption value; Shares authorized
and issued: 2,000 2,000 2,000
----- -----
STOCKHOLDER'S EQUITY
Common Stock, $1 par value
Shares authorized and issued: 5,000,000 5,000 5,000
Additional paid-in capital 126,494 126,494
Net unrealized gains (losses) on investments
(Net of income tax: 1994 - $(8,753);
1993 - $19,774) (16,256) 39,284
Retained earnings 324,980 305,176
Note receivable from PLC
Employee Stock Ownership Plan (5,936) (5,964)
---------- ----------
TOTAL STOCKHOLDER'S EQUITY 434,282 469,990
---------- ----------
$5,346,073 $5,307,849
----------- ----------
----------- ----------
</TABLE>
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
4
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
-----------------------
1994 1993
-------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 19,804 $ 10,261
Adjustments to reconcile net income to net cash
provided by operating activities:
Net change in deferred policy acquisition costs (12,333) (5,815)
Depreciation expense 770 701
Deferred income taxes (30,543) (294)
Accrued income taxes 3,034 (44)
Interest credited to universal life and
investment products 58,460 50,344
Policy fees assessed on universal life and
investment products (19,089) (13,657)
Change in accrued investment income and other
receivables 1,049 (84,906)
Change in policy liabilities and other
policyholders' funds of traditional
life and health products 6,575 97,112
Change in other liabilities (5,624) 8,274
Other (net) (1,838) 728
--------- --------
Net cash provided by operating activities 20,265 62,704
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Cost of investments acquired
Investments available for sale (304,422)
Other (100,621) (581,866)
Maturities and principal reductions of investments
Investments available for sale 166,705
Other 85,840 204,583
Sale of investments
Investments available for sale 60,609
Other 2,249 112,381
Purchase of property and equipment (1,059) (736)
Sale of property and equipment 1,201 1
--------- ---------
Net cash used in investing activities (89,498) (265,637)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings under line of credit
arrangements and long-term debt 152,700
Principal payments on line of credit arrangements
and long-term debt (19) (98,108)
Change in universal life and investment
product deposits 60,613 136,774
--------- ---------
Net cash provided by financing activities 60,594 191,366
--------- ---------
DECREASE IN CASH (8,639) (11,567)
CASH AT BEGINNING OF PERIOD 23,951 11,567
--------- ---------
CASH AT END OF PERIOD $ 15,312 $ 0
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period:
Interest on notes and mortgages payable $ (1,526) $ (100)
Income taxes $ (6,922) $ (5,000)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Change in minority interest in consolidated
subsidiary $ (1,311)
Reduction of principal on note from ESOP $ 28 $ 156
Transfer of SEHP to PLC $ 2,535
</TABLE>
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
5
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements of
Protective Life Insurance Company ("Protective Life") have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01
of Regulation S-X. Accordingly, they do not include all of the disclosures
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation have been
included. Operating results for the three month period ended March 31, 1994
are not necessarily indicative of the results that may be expected for the
year ending December 31, 1994. For further information, refer to the
consolidated financial statements and notes thereto included in Protective
Life's annual report on Form 10-K for the year ended December 31, 1993.
Protective Life is a wholly-owned subsidiary of Protective Life Corporation
("PLC").
NOTE B - CONTINGENT LIABILITIES AND COMMITMENTS
At March 31, 1994, Protective Life was committed to fund approximately
$222.5 million of long-term investments. Also, PLC has issued a guarantee in
connection with the sale of certain tax exempt mortgage loans which may be
put to Protective Life in the event of default. At March 31, 1994, the loans
totaled $25.7 million.
Under insurance guaranty fund laws, in most states, insurance companies
doing business therein can be assessed up to prescribed limits for
policyholder losses incurred by insolvent companies. Protective Life does
not believe such assessments will be materially different from amounts
already provided for in the financial statements. Most of these laws do
provide, however, that an assessment may be excused or deferred if it would
threaten an insurer's own financial strength.
Protective Life and its subsidiaries, like other life and health insurers,
from time to time are involved in litigation. To date, no such lawsuit has
resulted in the award of any significant amount of damages against Protective
Life. There are currently four lawsuits pending against Protective Life in
Alabama involving the sales practices of agents, three of which involve
allegations concerning the sale of credit insurance. Although the outcome of
any litigation cannot be predicted with certainty, Protective Life believes
that such litigation will not have a material adverse effect on its financial
position.
6
<PAGE>
NOTE C - 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, 1994, Protective Life and its life insurance
subsidiaries had consolidated net income and stockholder's equity prepared in
conformity with statutory reporting practices of $13.5 million and $274.9
million, respectively.
NOTE D - RECENTLY ADOPTED ACCOUNTING STANDARDS
At December 31, 1993, Protective Life adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." For purposes of adopting SFAS No. 115
Protective Life has classified all of its investments in fixed maturities,
equity securities, and short-term investments as "available for sale." As
prescribed in SFAS No. 115, these investments are recorded at their market
values with the resulting net unrealized gain or loss, net of income tax,
recorded as a component of stockholder's equity. The effect of adopting SFAS
No. 115 at December 31, 1993 was to increase fixed maturities by $65.6
million, decrease deferred policy acquisition costs by $12.4 million,
increase the liability for deferred income taxes by $18.6 million, and
increase stockholder's equity by $34.6 million. The effect of having adopted
SFAS No. 115 at March 31, 1994 (compared to financial statements prepared
under previous accounting standards) was to decrease fixed maturities by
$28.7 million, decrease the liability for deferred income taxes by $10.0
million, and decrease stockholder's equity by $18.7 million.
NOTE E - CONSOLIDATED PRO FORMA RESULTS
Summarized below are the consolidated results of operations for the three
months ended March 31, 1993, on an unaudited pro forma basis, as if the
Wisconsin National acquisition had occurred as of January 1, 1993. The pro
forma information is based on Protective Life's historical consolidated results
of operations for the three months ended March 31, 1993 and on data provided by
Wisconsin National, using financial statement classifications consistent with
those used by Protective Life after giving effect to certain pro forma
adjustments. The pro forma financial information does not purport to be
indicative of results of operations that would have occurred had the
transactions occurred on the basis assumed above nor are they indicative of
the future operations of the combined enterprises.
THREE MONTHS ENDED
MARCH 31, 1993
------------------
(IN THOUSANDS)
(UNAUDITED)
Total revenues $170,995
Net income $ 11,232
7
<PAGE>
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF THE
RESULTS OF OPERATIONS
Protective Life Insurance Company ("Protective Life") is a wholly-owned and
the principal operating subsidiary of Protective Life Corporation ("PLC"), an
insurance holding company. Founded in 1907, Protective Life provides
financial services through the production, distribution, and administration
of insurance and investment products.
Over the last twenty-five years PLC has made over thirty acquisitions of
smaller insurance companies or blocks of policies. Many of these
transactions included Protective Life. Additionally, PLC has from time to
time merged other life insurance companies it has acquired into Protective
Life. In July 1993, Protective Life acquired Wisconsin National Life
Insurance Company ("Wisconsin National") and reinsured a block of universal
life policies.
In accordance with General Instruction J(2)(a), Protective Life includes
the following analysis with the reduced disclosure format.
REVENUES
The following table sets forth revenues by source for the period shown:
<TABLE>
<CAPTION>
THREE MONTHS PERCENTAGE
ENDED MARCH 31 INCREASE
(IN THOUSANDS) (DECREASE)
-------------- ----------
1994 1993
------ ------
<S> <C> <C> <C>
Premiums and policy fees $ 89,437 $ 76,280 17.2%
Net investment income 98,825 77,133 28.1
Realized investment gains 2,297 125 1,737.6
Other income 752 1,508 (50.1)
-------- --------
$191,311 $155,046
-------- --------
-------- --------
</TABLE>
Premiums and policy fees increased $13.2 million or 17.2% in the first
three months of 1994 over the first three months of 1993. Increases in
premiums and policy fees from the Agency, Group, and Financial Institutions
Divisions represent increases of $2.1 million, $1.0 million, and $3.9
million, respectively. The Wisconsin National acquisition resulted in a $5.0
million increase in premiums and policy fees. The reinsurance in 1993 of a
block of universal life policies resulted in a $1.8 million increase.
Decreases in older acquired blocks of policies represent a $0.6 million
decrease in premiums and policy fees.
Net investment income in the first three months of 1994 increased by $21.7
million or 28.1% over the corresponding period of the preceding year,
primarily due to increases in the average amount of invested assets.
Invested assets have increased primarily due to receiving annuity and
guaranteed investment contract ("GIC") deposits and to acquisitions. Annuity
and GIC deposits are not considered revenues in accordance with generally
accepted accounting
8
<PAGE>
principles. These deposits are included in the liability section of the
balance sheet. The Wisconsin National acquisition resulted in an increase in
net investment income of $6.5 million.
Protective Life generally purchases its investments with the intent to hold
to maturity by purchasing investments that match future cash-flow needs. The
sales of investments that have occurred result from portfolio management
decisions to maintain proper matching of assets and liabilities.
Realized investment gains for the first three months of 1994 was $2.2
million higher than the corresponding period of 1993. Realized investment
gains were lower in the 1993 first quarter primarily due to a $2.2 million
increase in Protective Life's allowance for uncollectible accounts on
investments (primarily relating to mortgage loans) which was recorded as a
realized investment loss.
Recently, rising interest rates have caused market values to fall below
amortized cost for many of Protective Life's fixed maturity investments.
Therefore, some realized investment losses may be incurred upon future sales
of investments to maintain proper matching of assets and liabilities.
Protective Life does not anticipate such realized investment losses will be
material.
Other income consists primarily of fees from administrative-services-only
types of group accident and health insurance contracts, and from rental of
space in its administrative building to PLC.
INCOME BEFORE INCOME TAX
The following table sets forth income or loss before income tax by business
segment for the periods shown:
<TABLE>
<CAPTION>
INCOME (LOSS) BEFORE INCOME TAX
THREE MONTHS ENDED MARCH 31
(IN THOUSANDS)
-------------------------------
BUSINESS SEGMENT 1994 1993
------- --------
<S> <C> <C>
Agency $ 5,112 $ 4,287
Group 1,880 2,476
Financial Institutions 2,137 1,923
Investment Products 1,660 778
Guaranteed Investment Contracts 10,203 5,307
Acquisitions 8,967 5,931
Corporate and Other (978) (6,193)
Unallocated Realized Investment Gains (Losses) 143 421
------- --------
$29,124 $14,930
------- --------
------- --------
</TABLE>
Agency pretax earnings increased $0.8 million in the first three months of
1994 as compared to the first three months of 1993 primarily due to
improvements in mortality.
Group pretax earnings were $0.6 million lower in the first three months of
1994 as compared to the first three months of 1993 due to lower traditional
group health earnings and
9
<PAGE>
lower life and annuity earnings, partially offset by improved earnings in
cancer and dental products.
Pretax earnings of the Financial Institutions Division were $0.2 million
higher in the first three months of 1994 as compared to the same period in
1993. Earnings in one line of business increased by $0.8 million but were
partially offset by decreases in other areas.
Investment Products Division pretax earnings were $0.9 million higher in
the first three months of 1994 compared to the same period of 1993. The
Division's earnings have increased due to the growth in annuity deposits,
though the increase was largely offset by increased expenses of $0.9 million
related to the development of new investment products.
The Guaranteed Investment Contract ("GIC") Division had pretax earnings of
$10.2 million in the first three months of 1994 and $5.3 million in the
corresponding period of 1993. Realized investment gains associated with this
Division were $2.6 million higher in the 1994 first quarter as compared to
the same period last year. GIC earnings have also increased due to improved
investment results and to the growth in deposits placed with Protective Life.
At March 31, 1994, GIC deposits totaled $2.1 billion compared to $1.8 billion
one year earlier.
Pretax earnings from the Acquisitions Division increased $3.0 million in
the first three months of 1994 as compared to the same period of 1993.
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. As previously
discussed, Protective Life completed its acquisition of Wisconsin National
and reinsured a block of universal life policies during the 1993 third
quarter. These two acquisitions represent approximately $2.8 million of the
increase. The Division also experienced improved results in its other blocks
of acquired policies due to improved mortality which more than offset
earnings declines due to lapsing of policies. Additionally, Protective Life
recently agreed to reinsure a small block of payroll deduction policies.
The Corporate and Other segment consists of several small insurance lines
of business, net investment income and other operating expenses not
identified with the preceding operating divisions (including interest on
substantially all debt), and the operations of a small noninsurance
subsidiary. Pretax earnings for this segment were $5.2 million higher in the
first three months of 1994 as compared to the first three months of 1993
primarily due to a decrease in management fees paid to PLC, and to higher
investment income.
Income Taxes
The following table sets forth the effective tax rates for the periods
shown:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED ESTIMATED INTERIM
MARCH 31 EFFECTIVE TAX RATES
- - --------------- --------------------
<S> <C>
1994 32.0%
1993 31.3
</TABLE>
10
<PAGE>
The effective income tax rate for the first three months of 1993 was 31.3%.
In August 1993, the corporate income tax rate was increased from 34% to 35%.
Management's estimate of the effective income tax rate for 1994 is 32%.
NET INCOME
The following table sets forth net income for the periods shown:
<TABLE>
<CAPTION>
THREE MONTHS NET INCOME
ENDED ------------------------------
MARCH 31 TOTAL PERCENTAGE
(IN THOUSANDS) INCREASE
--------- -------------- ----------
<S> <C> <C>
1994 $19,804 93.0%
1993 10,261 27.4
</TABLE>
Compared to the same period in 1993, net income in the first three months
of 1994 increased $19.8 million, reflecting improved earnings in most of its
major lines and higher realized investment gains which were partially offset
by lower earnings in the Group Division.
RECENTLY ISSUED ACCOUNTING STANDARDS
Protective Life recently adopted Statement of Financial Accounting
Standards ("SFAS") No. 115 which requires Protective Life to carry its
investment in fixed maturities and certain other securities at market value
instead of amortized cost. Under SFAS No. 115, unrealized gains and losses,
net of income tax, on such investments are reported as a component of
stockholder's equity. The market values of fixed maturities increase or
decrease as interest rates fall or rise. Therefore, SFAS No. 115 will cause
reported stockholder's equity to fluctuate as interest rates change.
During the 1994 first quarter, interest rates rose approximately one
percentage point. Even though Protective Life believes its asset/liability
matching practices and certain product features provide significant
protection for Protective Life against the effects of changes in interest
rates, the new accounting rule required reporting a $53.3 million decrease in
stockholder's equity.
Although the adoption of SFAS No. 115 will not affect Protective Life's
operations, its reported stockholder's equity may be materially affected.
In May 1993, the Financial Accounting Standards Board issued SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan." Protective Life
anticipates that the impact of adopting SFAS No. 114 on its financial
condition will be immaterial.
11
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PROTECTIVE LIFE INSURANCE COMPANY
Date: May 16, 1994 /s/ Jerry W. DeFoor
---------------------------------
Jerry W. DeFoor
Vice President and Controller,
and Chief Accounting Officer
(Duly authorized officer)
12
