<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 JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Numbers 33-31940; 33-39345; 33-57052; 333-02249
PROTECTIVE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
TENNESSEE 63-0169720
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
2801 HIGHWAY 280 SOUTH
BIRMINGHAM, ALABAMA 35223
(Address of principal executive offices and zip code)
(205) 879-9230
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Number of shares of Common Stock, $1.00 par value, outstanding as of August 8,
1997: 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....................................
Consolidated Condensed Statements of Income for the Three and Six
Months ended June 30, 1997 and 1996 (unaudited)....................
Consolidated Condensed Balance Sheets as of June 30, 1997
(unaudited) and December 31, 1996..................................
Consolidated Condensed Statements of Cash Flows for the
Six Months ended June 30, 1997 and 1996 (unaudited)...............
Notes to Consolidated Condensed Financial Statements (unaudited).....
Item 2. Management's Narrative Analysis of the Results of Operations....
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K.................................
Signature...................................................................
<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 June 30, 1997, and the
related consolidated condensed statements of income for the three-month and
six-month periods ended June 30, 1997 and 1996, and consolidated condensed
statements of cash flows for the six-month periods ended June 30, 1997 and 1996.
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, 1996, 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
11, 1997, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
consolidated condensed balance sheet as of December 31, 1996, is fairly stated
in all material respects in relation to the consolidated balance sheet from
which it has been derived.
COOPERS & LYBRAND L.L.P.
Birmingham, Alabama
July 23, 1997
2
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------------------------------------------
1997 1996 1997 1996
---- ------ ---- -----
<S> <C> <C> <C> <C>
REVENUES
Premiums and policy fees (net of reinsurance ceded:
three months: 1997 - $71,873; 1996 - $88,232
six months: 1997 - $125,916; 1996 - $166,535) $108,493 $124,134 $228,870 $232,801
Net investment income 132,197 126,421 255,793 244,764
Realized investment gains (losses) 2,138 600 1,720 5,021
Other income 681 1,251 1,488 3,198
---------- --------- --------- ----------
243,509 252,406 487,871 485,784
-------- -------- -------- --------
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance ceded:
three months: 1997 - $24,394; 1996 - $61,030
six months: 1997 - $40,833; 1996 - $117,781) 164,451 159,533 322,153 308,761
Amortization of deferred policy acquisition costs 18,202 29,521 39,029 51,340
Other operating expenses (net of reinsurance ceded:
three months: 1997 - $22,042; 1996 - $25,007
six months: 1997 - $36,616; 1996 - $42,809) 24,386 30,958 56,467 63,715
-------- -------- --------- ---------
207,039 220,012 417,649 423,816
-------- -------- -------- --------
INCOME BEFORE INCOME TAX 36,470 32,394 70,222 61,968
Income tax expense 12,884 10,539 24,455 21,153
-------- -------- -------- --------
NET INCOME $ 23,586 $ 21,855 $ 45,767 $ 40,815
======== ======== ======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
3
<PAGE>
<TABLE>
<CAPTION>
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
JUNE 30 DECEMBER 31
1997 1996
-------------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities $5,193,790 $4,662,997
Equity securities 24,425 35,250
Mortgage loans on real estate 1,738,242 1,503,781
Investment in real estate, net 11,939 14,172
Policy loans 195,635 166,704
Other long-term investments 24,002 29,193
Short-term investments 190,756 101,215
----------- -----------
Total investments 7,378,789 6,513,312
Cash 321 114,384
Accrued investment income 82,098 70,541
Accounts and premiums receivable, net 36,784 43,469
Reinsurance receivables 442,758 332,614
Deferred policy acquisition costs 621,298 488,201
Property and equipment, net 37,711 35,489
Other assets 14,103 14,636
Assets held in separate accounts 746,226 550,697
----------- -----------
TOTAL ASSETS $9,360,088 $8,163,343
========== ==========
LIABILITIES
Policy liabilities and accruals $3,361,829 $2,706,002
Guaranteed investment contract deposits 2,545,193 2,474,728
Annuity deposits 1,516,256 1,331,067
Other policyholders' funds 167,479 142,221
Other liabilities 125,320 117,847
Accrued income taxes 13,388 1,854
Deferred income taxes 31,896 37,722
Indebtedness to related parties 24,769 25,014
Liabilities related to separate accounts 746,226 550,697
----------- -----------
TOTAL LIABILITIES 8,532,356 7,387,152
---------- ----------
COMMITMENTS AND CONTINGENT LIABILITIES - NOTE B
STOCKHOLDER'S EQUITY
Preferred Stock, $1.00 par value, shares authorized and
issued: 2,000, liquidation preference $2,000 2 2
Common Stock, $1 par value
Shares authorized and issued: 5,000,000 5,000 5,000
Additional paid-in capital 237,992 237,992
Net unrealized gains (losses) on investments
(net of income tax: 1997 -$6,612; 1996 - $3,601) 12,261 6,688
Retained earnings 577,854 532,088
Note receivable from PLC
Employee Stock Ownership Plan (5,377) (5,579)
------------ ------------
TOTAL STOCKHOLDER'S EQUITY 827,732 776,191
----------- -----------
$9,360,088 $8,163,343
========== ==========
</TABLE>
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
4
<PAGE>
<TABLE>
<CAPTION>
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
SIX MONTHS ENDED
JUNE 30
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 45,767 $ 40,815
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred policy acquisition 39,029 51,340
Capitalization of deferred policy acquisition costs (49,674) (47,830)
Depreciation expense 2,303 2,617
Deferred income tax (8,838) (11,251)
Accrued income tax 6,680 5,427
Interest credited to universal life and investment products 220,542 135,915
Policy fees assessed on universal life and investment products (63,778) (53,936)
Change in accrued investment income and other receivables 4,071 (67,490)
Change in policy liabilities and other policyholders'
funds of traditional life and health products (134,897) 109,036
Change in other liabilities (11,206) 14,124
Other (net) (1,565) (2,453)
------------- ------------
Net cash provided by operating activities 48,434 176,314
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reductions of investments
Investments available for sale 2,188,595 364,292
Other 58,635 35,649
Sale of investments
Investments available for sale 1,012,132 550,200
Other 3,247 560,840
Cost of investments acquired
Investments available for sale (3,226,556) (1,628,369)
Other (202,403) (244,164)
Acquisitions and bulk reinsurance assumptions (146,868) 172,726
Purchase of property and equipment (2,564) (2,184)
Sale of property and equipment 597 33
-------------- --------------
Net cash used in investing activities (315,185) (190,977)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contribution from PLC 0 78,699
Proceeds from borrowings under line of credit arrangements and debt 1,041,738 689,000
Principal payments on line of credit arrangements and debt (1,037,738) (689,000)
Principal payment on surplus note to PLC (5,193) (2,538)
Dividends to PLC 0 (50)
Investment product deposits and change in universal life deposits 465,132 425,110
Investment product withdrawals (311,251) (479,124)
------------ -----------
Net cash provided by financing activities 152,688 22,097
----------- ------------
INCREASE (DECREASE) IN CASH (114,063) 7,434
CASH AT BEGINNING OF PERIOD 114,384 6,198
------------ ------------
CASH AT END OF PERIOD $ 321 $ 13,632
============== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period:
Interest on notes and mortgages payable $ (3,112) $ (2,663)
Income taxes $ (26,437) $(26,566)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Reduction of principal on note from ESOP $ 202 $ 186
Acquisitions and bulk reinsurance assumptions
Assets acquired $ 941,123 $204,435
Liabilities assumed (784,709) (253,480)
------------ -----------
Net $ 156,414 $ (49,045)
============ ===========
</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 six month period ended June 30, 1997, are not necessarily
indicative of the results that may be expected for the year ending December 31,
1997. The year-end consolidated condensed balance sheet data was derived from
audited financial statements, but does not include all disclosures required by
generally accepted accounting principles. For further information, refer to the
consolidated financial statements and notes thereto included in Protective
Life's annual report on Form 10-K for the year ended December 31, 1996.
Protective Life is a wholly-owned subsidiary of Protective Life
Corporation ("PLC").
NOTE B - COMMITMENTS AND CONTINGENT LIABILITIES
Under insurance guaranty fund laws in most states, insurance companies
doing business therein can be assessed up to prescribed limits for policyholder
losses incurred by insolvent companies. Protective Life does not believe such
assessments will be materially different from amounts already provided for in
the financial statements. Most of these laws do provide, however, that an
assessment may be excused or deferred if it would threaten an insurer's own
financial strength.
A number of civil jury verdicts have been returned against life and
health insurers in the jurisdictions in which Protective Life does business
involving the insurers' sales practices, alleged agent misconduct, failure to
properly supervise agents, and other matters. Increasingly these lawsuits have
resulted in the award of substantial judgments against the insurers that are
disproportionate to the actual damages, including material amounts of punitive
damages. In 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. Protective Life
and its subsidiaries, like other life and health insurers, in the ordinary
course of business, are involved in such litigation. The outcome of any such
litigation cannot be predicted with certainty. In addition, in some lawsuits
involving insurers' sales practices, insurers have made material settlement
payments to end litigation.
Pending litigation includes a class action filed in Jefferson County
(Birmingham), Alabama with respect to the refund of certain cancer insurance
premiums. Although the outcome of any litigation cannot be predicted with
certainty, Protective Life believes that at the present time there
6
<PAGE>
are no pending or threatened lawsuits that are reasonably likely to have a
material adverse effect on the financial position, results of operations, or
liquidity of Protective Life.
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 June 30, 1997, and for the six months then ended, Protective
Life and its life insurance subsidiaries had consolidated stockholder's equity
and net income prepared in conformity with statutory reporting practices of
$407.5 million and $60.0 million, respectively.
NOTE D - INVESTMENTS
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 and a related
adjustment to deferred policy acquisition costs, recorded as a component of
stockholder's equity.
Protective Life's balance sheets at June 30, 1997 and December 31,
1996, prepared on the basis of reporting investments at amortized cost rather
than at market values, are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Total investments $7,353,618 $6,495,259
Deferred policy acquisition costs 627,596 495,965
All other assets 1,360,001 1,161,830
---------- ----------
$9,341,215 $8,153,054
========== ==========
Deferred income taxes $ 18,157 $ 34,121
All other liabilities 8,507,587 7,349,430
---------- ----------
8,525,744 7,383,551
Stockholder's equity 815,471 769,503
----------- -----------
$9,341,215 $8,153,054
========== ==========
</TABLE>
NOTE E - ACCOUNTING POLICIES FOR DERIVATIVE FINANCIAL INSTRUMENTS
Protective Life does not use derivative financial instruments for
trading purposes. Combinations of futures contracts and options on treasury
notes are currently being used as hedges for asset/liability management of
certain investments, primarily mortgage loans on real estate, mortgage-backed
securities, and liabilities arising from interest-sensitive products such as
guaranteed investment contracts and annuities. Realized investment gains and
losses on such contracts are deferred and amortized over the life of the hedged
asset. At June 30, 1997, open
7
<PAGE>
option contracts with a notional amount of $1,225.0 million were in a $1.0
million unrealized loss position. Additionally, Protective Life uses interest
rate swap contracts to convert certain investments from a variable to a fixed
rate of interest. At June 30, 1997, related open interest rate swap contracts
with a notional amount of $135.3 million were in a $0.8 million unrealized loss
position.
NOTE F - RECENTLY ADOPTED ACCOUNTING STANDARDS
In June 1996 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
statement is effective for transactions entered into after January 1, 1997.
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 stockholder's equity.
8
<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 whose common stock is traded on the New York Stock
Exchange. Founded in 1907, Protective Life provides financial services through
the production, distribution, and administration of insurance and investment
products.
In accordance with General Instruction H(2)(a), Protective Life
includes the following analysis with the reduced disclosure format.
Protective Life has six operating divisions: Acquisitions, Dental
and Consumer Benefits ("Dental"), Financial Institutions, Guaranteed Investment
Contracts ("GIC"), Individual Life, and Investment Products. Protective Life
also has an additional business segment which is described herein as Corporate
and Other.
The Dental Division (formerly known as the Group Division) recently
exited from the traditional group major medical business, fulfilling the
Division's strategy to focus primarily on dental and related products.
Accordingly, the Division was renamed the Dental and Consumer Benefits Division.
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 PERCENTAGE
ENDED INCREASE/
JUNE 30 (DECREASE)
(IN THOUSANDS)
1997 1996
---- ----
<S> <C> <C> <C>
Premiums and policy fees $228,870 $232,801 (1.7)%
Net investment income 255,793 244,764 4.5
Realized investment gains 1,720 5,021 (65.7)
Other income 1,488 3,198 (53.5)
--------- ---------
$487,871 $485,784
========= =======
</TABLE>
Premiums and policy fees decreased $3.9 million or 1.7% in the first
six months of 1997 over the first six months of 1996. The coinsurance by the
Acquisitions Division of a block of policies and the acquisition of a small life
insurance company in the fourth quarter of 1996, and the acquisition of West
Coast Life Insurance Company ("West Coast") in the second quarter of 1997
resulted in a $6.6 million increase in premiums and policy fees. Decreases in
older acquired blocks resulted in a $4.6 million decrease in premiums and policy
fees. Premiums and policy fees from the Dental Division increased $6.1 million
in the first six months of 1997 as compared
9
<PAGE>
to the same period in 1996. Premiums and policy fees related to the Division's
dental business increased $11.2 million in the first six months of 1997 as
compared to the same period in 1996. This increase was partially offset by a
decrease in premiums related to the Division's exit from the group major medical
business. Premiums and policy fees from the Financial Institutions Division
decreased $21.0 million in the first six months of 1997 as compared to the first
six months of 1996. Decreases of $11.9 million resulted from a reinsurance
arrangement begun in 1995 whereby most of the Division's new credit insurance
sales are being ceded to a reinsurer. Decreases of $9.1 million relate to the
normal decrease in premiums on a closed block of credit insurance policies
reinsured in 1996. Increases in premiums and policy fees from the Individual
Life and Investment Product Divisions were $8.0 million and $1.3 million,
respectively.
Net investment income in the first six months of 1997 increased by
$11.0 million 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 deposits and to acquisitions. The
coinsurance of a block of policies and the acquisition of a small life insurance
company in the fourth quarter of 1996 and the acquisition of West Coast in the
second quarter of 1997 resulted in an increase in net investment income of $8.4
million in the first six months of 1997 as compared to the same period in 1996.
Protective Life generally purchases its investments with the intent to
hold to maturity by purchasing investments that match future cash-flow needs.
However, Protective Life may sell any of its investments to maintain approximate
matching of assets and liabilities. Accordingly, Protective Life has classified
its fixed maturities and certain other securities as "available for sale." The
sales of investments that have occurred have resulted principally from portfolio
management decisions to maintain approximate matching of assets and liabilities.
Realized investment gains for the first six months of 1997 were $1.7
million as compared to $5.0 million in the corresponding period of 1996. In the
1996 first quarter, Protective Life sold $554 million of its commercial mortgage
loans in a securitization transaction, resulting in a $6.1 million realized
investment gain.
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 and
affiliates.
10
<PAGE>
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
SIX MONTHS ENDED JUNE 30
(IN THOUSANDS)
<S> <C> <C>
BUSINESS SEGMENT 1997 1996
---------------- ---- ----
Acquisitions $29,866 $26,122
Dental and Consumer Benefits 7,542 4,865
Financial Institutions 5,600 3,863
Guaranteed Investment Contracts 15,800 15,171
Individual Life 6,586 7,271
Investment Products 4,731 7,244
Corporate and Other (927) (4,379)
Unallocated Realized Investment Gains (Losses) 1,024 1,811
-------- --------
$70,222 $61,968
======= =======
</TABLE>
Pretax earnings from the Acquisitions Division increased $3.7 million
in the first six months of 1997 as compared to the same period of 1996. 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. The Division's most recent
acquisitions resulted in a $2.8 million increase in pretax earnings. In
addition, the Division's mortality experience was approximately $2.1 million
more favorable in the first six months of 1997 as compared to the same period
last year.
Dental Division pretax earnings were $2.7 million higher in the first
six months of 1997 as compared to the first six months of 1996. $1.8 million of
the increase was a one-time release of reserves associated with exiting the
group major medical business. Lower cancer earnings partially offset improved
traditional group life and health results. Dental earnings were $1.6 million
(including expenses of $1.0 million to develop a new discounted fee-for-service
program) in the first six months of 1997 as compared to $2.6 million in the
first six months of 1996.
Pretax earnings of the Financial Institutions Division were $1.7
million higher in the first six months of 1997 as compared to the same period in
1996. Included in the Division's 1997 results are earnings from the coinsurance
of a block of policies in the second quarter of 1996.
The GIC Division had pretax operating earnings of $15.7 million in the
first six months of 1997 and $19.6 million in the corresponding period of 1996.
In December, 1996, the Company sold a major portion of its bank loan
participations in a securitization transaction which has subsequently reduced
the Division's earnings. The decrease was partially offset by a related
improvement in earnings in the Corporate and Other segment. In addition, the
Division has shortened the duration of its invested assets which also reduced
earnings. Realized investment gains associated with this Division in the first
six months of 1997 were $0.1 million as compared to realized investment losses
of $4.4 million in the same period last year. As a result, total pretax earnings
were $15.8 million in the first six months of 1997 compared to $15.2 million for
the same period last year.
11
<PAGE>
The Individual Life Division had pretax operating earnings of $6.6
million in the first six months of 1997 as compared to $6.2 million in the same
period of 1996. During the second quarter of 1997 the Division experienced
record high mortality. After an extensive audit of second quarter claims,
management concluded this experience was a random fluctuation. Furthermore,
claims in July 1997 were at expected levels. This decrease was partially offset
by earnings from Empire General (an insurance subsidiary which distributes
products through brokerage general agencies) which improved $1.9 million in the
first six months of 1997 as compared to the same period in 1996 and by
reductions in expenses related to new marketing ventures. Realized investment
gains, net of related amortization of deferred policy acquisition costs,
associated with this Division were $1.1 million in 1996. As a result, total
pretax earnings were $6.6 million in the first six months of 1997 as compared to
$7.3 million in the first six months of 1996.
Investment Products Division pretax operating earnings in the first six
months of 1997 of $4.5 million were $0.6 million lower than the same period of
1996. The Division's 1996 results included a one-time $0.9 million addition to
earnings. Realized investment gains associated with the Division, net of related
amortization of deferred policy acquisition costs, were $0.2 million as compared
to $2.1 million last year, resulting in total pretax earnings of $4.7 million in
the first six months of 1997 as compared to $7.2 million in the same period of
1996.
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 losses for this segment were $3.5 million lower the first six months of
1997 as compared to the first six months of 1996.
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
1996 34.1%
1997 34.8
The effective income tax rate for the full year of 1996 was 34.1%.
Management's estimate of the effective income tax rate for 1997 is 34%.
12
<PAGE>
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 PERCENTAGE
ENDED TOTAL INCREASE/
JUNE 30 (IN THOUSANDS) (DECREASE)
1996 $40,815 7.5%
1997 45,767 12.1
Compared to the same period in 1996, net income in the first six months
of 1997 increased $5.0 million, reflecting improved operating earnings in the
Acquisitions, Dental, Financial Institutions, and Individual Life Divisions and
the Corporate and Other segment which were offset by lower operating earnings in
the Guaranteed Investment Contracts and Investment Products Divisions and lower
realized investment gains (net of related amortization of deferred policy
acquisition costs).
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." Protective Life anticipates that the impact of adopting
these accounting standards will be immaterial to its financial condition
13
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)Exhibit 27 - Financial data schedule
Exhibit 99 - Safe Harbor for Forward-Looking Statements
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PROTECTIVE LIFE INSURANCE COMPANY
Date: August 14, 1997 /S/ JERRY W. DEFOOR
-------------------
Jerry W. DeFoor
Vice President and Controller,
and Chief Accounting Officer
(Duly authorized officer)
14
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of Protective Life Insurance Company and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 5,193,790
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 24,425
<MORTGAGE> 1,738,242
<REAL-ESTATE> 11,939
<TOTAL-INVEST> 7,378,789
<CASH> 321
<RECOVER-REINSURE> 442,758
<DEFERRED-ACQUISITION> 621,298
<TOTAL-ASSETS> 9,360,088
<POLICY-LOSSES> 3,112,330
<UNEARNED-PREMIUMS> 249,499
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 167,479
<NOTES-PAYABLE> 0
2
0
<COMMON> 5,000
<OTHER-SE> 822,730
<TOTAL-LIABILITY-AND-EQUITY> 9,360,088
228,870
<INVESTMENT-INCOME> 255,793
<INVESTMENT-GAINS> 1,720
<OTHER-INCOME> 1,488
<BENEFITS> 322,153
<UNDERWRITING-AMORTIZATION> 39,029
<UNDERWRITING-OTHER> 56,467
<INCOME-PRETAX> 70,222
<INCOME-TAX> 24,455
<INCOME-CONTINUING> 45,767
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 45,767
<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 Insurance Company 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 Insurance Company
for the six months
Ended June 30, 1997
Safe Harbor for Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the "Act")
encourages companies to make "forward-looking statements" by creating a safe
harbor to protect the companies from securities law liability in connection with
forward-looking statements. Forward-looking statements can be identified by use
of words such as "expect," "estimate," "project," "budget," "forecast,"
"anticipated," "plan," and similar expressions. Protective Life Insurance
Company ("Protective Life") intends to qualify both its written and oral
forward-looking statements for protection under the Act.
To qualify oral forward-looking statements for protection under the
Act, a readily available written document must identify important factors that
could cause actual results to differ materially from those in the
forward-looking statements. Protective Life provides the following information
to qualify forward-looking statements for the safe harbor protection of the Act.
The operating results of companies in the insurance industry have
historically been subject to significant fluctuations due to competition,
economic conditions, interest rates, investment performance, maintenance of
insurance ratings, and other factors. Certain known trends and uncertainties
which may affect future results of Protective Life are discussed more fully
below.
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. Life and health insurance is a highly competitive industry and
Protective Life's Divisions encounter significant competition in all their
respective lines of business from other insurance companies, many of which have
greater financial resources than Protective Life, as well as competition from
other providers of financial services.
Management believes that Protective Life's ability to compete is
dependent upon, among other things, its ability to attract and retain
distribution channels to market its insurance and investment products, its
ability to develop competitive and profitable products, its ability to maintain
low unit costs, and its maintenance of strong claims-paying and financial
strength ratings from rating agencies.
Protective Life competes 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.Ratings organizations periodically review the financial
performance and condition
<PAGE>
of insurers, including Protective Life's insurance subsidiaries. A downgrade in
the ratings of Protective Life's insurance subsidiaries 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 related to the rated company, some of the factors
relate to general economic conditions and circumstances outside the rated
company's control.
POLICY CLAIMS FLUCTUATIONS. Protective Life's results may fluctuate
from year to year on account of fluctuations in policy claims received by
Protective Life.
LIQUIDITY AND INVESTMENT PORTFOLIO. Many of the products offered by
Protective Life's insurance subsidiaries allow policyholders and contractholders
to withdraw their funds under defined circumstances. Protective Life's insurance
subsidiaries design products and configure investment portfolios so as to
provide and maintain sufficient liquidity to support anticipated withdrawal
demands and contract benefits and maturities. Asset/liability management
programs and procedures are used to monitor the relative duration of Protective
Life's assets and liabilities. While Protective Life's insurance subsidiaries
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 Protective Life's insurance subsidiaries to
dispose of illiquid assets on unfavorable terms, which could have a material
adverse effect on Protective Life.
INTEREST RATE FLUCTUATIONS. Significant changes in interest rates
expose life insurance companies to the risk of not earning anticipated spreads
between the interest rate earned on investments and the interest rate credited
to its life insurance and investment products. Both rising and declining
interest rates can negatively affect Protective Life's spread income. For
example, certain of Protective Life's insurance and investment products
guarantee a minimum credited interest rate. While Protective Life develops and
maintains asset/liability management programs and procedures designed to
preserve spread income in rising or falling interest rate environments, no
assurance can be given that significant changes in interest rates will not
materially affect such spreads.
Lower interest rates may result in lower sales of Protective Life's
insurance and investment products.
INVESTMENT RISKS. Protective Life's invested assets are subject to
inherent risks of defaults and changes in market values. The value of Protective
Life's commercial mortgage portfolio depends in part on the financial condition
of the tenants occupying the properties on which Protective Life has made loans.
Factors that may affect the overall default rate on, and market value of,
Protective Life's invested assets include the level of interest rates,
performance of the financial markets, and general economic conditions, as well
as particular circumstances affecting the businesses of individual borrowers and
tenants.
CONTINUING SUCCESS OF ACQUISITION STRATEGY. Protective Life has
actively pursued a strategy of acquiring blocks of insurance policies. This
acquisition strategy has increased Protective Life's earnings in part by
allowing Protective Life to position itself to realize certain operating
efficiencies associated with economies of scale. There can be no assurance,
however, that suitable acquisitions, presenting opportunities for continued
growth and operating
<PAGE>
efficiencies, will continue to be available to Protective Life, or that
Protective Life will realize the anticipated financial results from its
acquisitions.
REGULATION AND TAXATION. Protective Life's insurance subsidiaries 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 all aspects of the insurance business
including premium rates, benefits, marketing practices, advertising, policy
forms, underwriting standards, and capital adequacy, and is concerned primarily
with the protection of policyholders rather than stockholders. Protective Life
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 Protective Life'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 Protective Life's subsidiaries, would be
adversely affected.
Protective Life cannot predict what future initiatives the President or
Congress may propose which may affect the life and health insurance industry and
Protective Life.
LITIGATION. A number of civil verdicts have been returned against life
and health insurers in the jurisdictions in which Protective Life does business
involving the insurers' sales practices, alleged agent misconduct, failure to
properly supervise agents, and other matters. Increasingly these lawsuits have
resulted in the award of substantial judgments against the insurer that are
disproportionate to the actual damages, including material amounts of punitive
damages. In some states (including Alabama), juries have substantial discretion
in awarding punitive damages which creates the potential for unpredictable
material adverse judgments in any given punitive damages suit. Protective Life
and its subsidiaries, like other life and health insurers, in the ordinary
course of business, are involved in such litigation. The outcome of any such
litigation cannot be predicted with certainty. In addition, in some lawsuits
involving insurers' sales practices, insurers have made material settlement
payments to end litigation.
RELIANCE UPON THE PERFORMANCE OF OTHERS. Protective Life has entered
into various ventures involving other parties. Examples include, but are not
limited to: many of Protective Life's products are sold through independent
distribution channels; the Investment Products Division's variable annuity
deposits are invested in funds managed by four unaffiliated investment managers;
a portion of the sales in the Financial Institutions, Dental and Consumer
Benefits, and Individual Life Divisions comes from arrangements with unrelated
marketing organizations; and Protective Life has entered the Hong Kong insurance
market in a joint venture with the Lippo Group. Therefore, Protective Life's
results may be affected by the performance of others.
REINSURANCE. As is customary in the insurance industry, Protective
Life's insurance subsidiaries cede insurance to other insurance companies.
However, the ceding insurance company remains liable with respect to ceded
insurance should any reinsurer fail to meet the obligations assumed by it.
Additionally, Protective Life assumes policies of other insurers. Any regulatory
<PAGE>
or other adverse development affecting the ceding insurer could also have an
adverse effect on Protective Life.
Forward-looking statements express expectations of future events and/or
results. All forward-looking statements are inherently uncertain as they are
based on various expectations and assumptions concerning future events and they
are subject to numerous known and unknown risks and uncertainties which could
cause actual events or results to differ materially from those projected. Due to
these inherent uncertainties, investors are urged not to place undue reliance on
forward-looking statements. In addition, Protective Life undertakes no
obligation to update or revise forward-looking statements to reflect changed
assumptions, the occurrence of unanticipated events, or changes to projections
over time.
