- -------------------------------------------------------------------------------
FORM 10-Q
------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Numbers 33-31940; 33-39345; 33-57052; 333-02249
PROTECTIVE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
TENNESSEE 63-0169720
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
2801 HIGHWAY 280 SOUTH
BIRMINGHAM, ALABAMA 35223
(Address of principal executive offices and zip code)
(205) 879-9230
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Number of shares of Common Stock, $1.00 par value, outstanding as of
November 6, 1998: 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
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Report of Independent Accountants.....................................
Consolidated Condensed Statements of Income for the Three and Nine
Months ended September 30, 1998 and 1997 (unaudited)................
Consolidated Condensed Balance Sheets as of September 30, 1998
(unaudited) and December 31, 1997...................................
Consolidated Condensed Statements of Cash Flows for the
Nine Months ended September 30, 1998 and 1997 (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 September 30, 1998, and
the related consolidated condensed statements of income for the three-month and
nine-month periods ended September 30, 1998 and 1997, and consolidated condensed
statements of cash flows for the nine-month periods ended September 30, 1998 and
1997. 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, 1997, 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, 1998, 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, 1997, is fairly stated
in all material respects in relation to the consolidated balance sheet from
which it has been derived.
PricewaterhouseCoopers LLP
Birmingham, Alabama
October 27, 1998
2
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------------- -------------------
1998 1997 1998 1997
---- ----- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Premiums and policy fees (net of reinsurance ceded:
three months: 1998 - $127,850; 1997 - $95,507
nine months: 1998 - $337,182; 1997 - $221,292) $141,659 $104,833 $420,914 $333,703
Net investment income 156,059 149,452 450,229 405,245
Realized investment gains (losses) 411 61 1,460 1,781
Other income 4,570 893 14,107 2,381
--------- ---------- --------- ---------
302,699 255,239 886,710 743,110
-------- -------- -------- --------
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance ceded:
three months: 1998 - $109,513; 1997 - $51,059
nine months: 1998 - $236,241; 1997 - $93,780) 181,298 157,407 540,887 479,560
Amortization of deferred policy acquisition costs 30,795 28,488 89,053 67,517
Other operating expenses (net of reinsurance ceded:
three months: 1998 - $47,133; 1997 - $26,459
nine months: 1998 - $112,985; 1997 - $63,086) 44,058 26,225 121,653 82,692
-------- --------- -------- ---------
256,151 212,120 751,593 629,769
-------- -------- -------- --------
INCOME BEFORE INCOME TAX 46,548 43,119 135,117 113,341
Income tax expense 16,186 14,433 48,211 38,888
-------- -------- -------- --------
NET INCOME $ 30,362 $ 28,686 $ 86,906 $ 74,453
======== ======== ======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
3
<PAGE>
<TABLE>
<CAPTION>
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
SEPTEMBER 30 DECEMBER 31
1998 1997
----------------- ----------------
(Unaudited)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities $ 6,728,732 $ 6,348,252
Equity securities 11,861 15,006
Mortgage loans on real estate 1,450,363 1,313,478
Investment in real estate, net 14,677 13,469
Policy loans 188,590 194,109
Other long-term investments 73,452 54,704
Short-term investments 97,816 54,337
------------ --------------
Total investments 8,565,491 7,993,355
Cash 0 39,197
Accrued investment income 103,387 94,095
Accounts and premiums receivable, net 46,102 42,255
Reinsurance receivables 660,359 591,457
Deferred policy acquisition costs 691,994 632,605
Property and equipment, net 38,610 36,407
Other assets 37,091 14,445
Indebtedness of related parties 5,634
Assets held in separate accounts 1,091,017 931,465
------------ -------------
$11,239,685 $10,375,281
LIABILITIES
Policy liabilities and accruals $ 4,046,239 $ 3,720,990
Guaranteed investment contract deposits 2,642,885 2,684,676
Annuity deposits 1,525,592 1,511,553
Other policyholders' funds 188,867 183,324
Other liabilities 220,536 246,081
Accrued income taxes (17,824) 941
Deferred income taxes 69,893 49,417
Indebtedness to related parties 20,000 28,055
Notes payable 362,706
Liabilities related to separate accounts 1,091,017 931,465
----------- ------------
10,149,911 9,356,502
----------- -----------
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 327,992 327,992
Note receivable from PLC Employee Stock Ownership Plan (5,199) (5,378)
Retained earnings 656,292 629,436
Accumulated other comprehensive income
Net unrealized gains on investments (net of income
tax: 1998 -$56,908; 1997 - $33,238) 105,687 61,727
------------- -------------
1,089,774 1,018,779
------------- -------------
$11,239,685 $10,375,281
============= =============
</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)
NINE MONTHS ENDED
SEPTEMBER 30
------------------------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 86,906 $ 74,453
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred policy acquisition costs 89,053 67,517
Capitalization of deferred policy acquisition costs (156,279) (88,403)
Depreciation expense 5,635 1,740
Deferred income tax (3,029) (17,639)
Accrued income tax (18,764) 17,669
Interest credited to universal life and investment products 259,672 357,880
Policy fees assessed on universal life and investment products (104,173) (97,491)
Change in accrued investment income and other receivables (76,407) (33,948)
Change in policy liabilities and other policyholders'
funds of traditional life and health products 514,633 (5,602)
Change in other liabilities (25,545) (15,877)
Other (net) (25,665) (5,089)
-------------- --------------
Net cash provided by operating activities 546,037 255,210
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reductions of investments
Investments available for sale 6,536,807 4,613,642
Other 149,765 225,427
Sale of investments
Investments available for sale 524,624 1,060,668
Other 270,257 689,043
Cost of investments acquired
Investments available for sale (7,625,131) (6,476,664)
Other (433,390) (582,300)
Acquisition and bulk reinsurance assumptions 0 (169,124)
Purchase of property and equipment (8,751) (3,285)
Sale of property and equipment 15 2,681
---------------- -------------
Net cash used in investing activities (585,804) (639,912)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contribution from PLC 1,988
Proceeds from borrowings under line of credit arrangements and debt 1,615,996 1,134,538
Principal payments on line of credit arrangements and debt (1,255,566) (1,134,538)
Dividend to PLC (50) (50)
Principal payment on surplus note to PLC 0 (4,893)
Investment product deposits and change in universal life deposits 739,488 771,804
Investment product withdrawals (1,099,298) (498,531)
------------ -------------
Net cash provided by financing activities 570 270,318
--------------- -------------
INCREASE (DECREASE) IN CASH (39,197) (114,384)
CASH AT BEGINNING OF PERIOD 39,197 114,384
-------------- -------------
CASH AT END OF PERIOD $ 0 $ 0
================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period:
Interest on notes and mortgages payable $ 6,273 $ 3,634
Income taxes $ 57,229 $ 34,992
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Reduction of principal on note from ESOP $ 202
Acquisitions and bulk reinsurance assumptions
Assets acquired $1,114,832
Liabilities assumed (902,267)
------------
Net $ 212,565
============
</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 nine month period ended September 30, 1998, are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998. 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, 1997.
Protective Life is a wholly-owned subsidiary of Protective Life
Corporation ("PLC").
NOTE B - COMMITMENTS AND CONTINGENT LIABILITIES
Under insurance guaranty fund laws in most states, insurance companies
doing business therein can be assessed up to prescribed limits for policyholder
losses incurred by insolvent companies. Protective Life does not believe such
assessments will be materially different from amounts already provided for in
the financial statements. Most of these laws do provide, however, that an
assessment may be excused or deferred if it would threaten an insurer's own
financial strength.
A number of civil jury verdicts have been returned against insurers in
the jurisdictions in which Protective Life does business involving the insurers'
sales practices, alleged agent misconduct, failure to properly supervise agents,
and other matters. Increasingly these lawsuits have resulted in the award of
substantial judgments against the insurers that are disproportionate to the
actual damages, including material amounts of punitive damages. In addition, in
some class action and other lawsuits involving insurers' sales practices,
insurers have made material settlement payments. In some states (including
Alabama), 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
insurers, in the ordinary course of business, are involved in such litigation.
Although the outcome of any such litigation cannot be predicted with certainty,
Protective Life believes that at the present time there are no pending or
threatened lawsuits that are reasonably likely to have a material adverse effect
on the financial position, results of operations, or liquidity of Protective
Life.
6
<PAGE>
NOTE C - OPERATING SEGMENTS
The following table sets forth operating segment income and assets for
the periods shown. Adjustments represent the inclusion of unallocated realized
investment gains (losses) and the recognition of income tax expense. There are
no asset adjustments.
<TABLE>
<CAPTION>
OPERATING SEGMENT INCOME FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS)
---------------------------------------------------------------------------
SPECIALTY INSURANCE
LIFE INSURANCE PRODUCTS
----------------------------------------- ------------------------
DENTAL AND
INDIVIDUAL CONSUMER FINANCIAL
ACQUISITIONS LIFE WEST COAST BENEFITS INSTITUTIONS
------------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Premiums and policy fees $ 70,784 $ 97,825 $19,250 $132,344 $ 86,731
Net investment income 79,860 40,307 46,837 11,794 16,970
Realized investment gains (losses)
Other income 1,600 102 2,464 7,323
--------- ---------- ---------- --------- ---------
Total revenues 152,244 138,234 66,087 146,602 111,024
-------- -------- ------- -------- --------
Benefits and settlement expenses 84,171 80,768 42,944 95,946 39,806
Amortization of deferred policy
acquisition costs 13,594 24,376 3,866 7,731 25,182
Other operating expenses 16,281 11,614 3,604 36,388 32,450
--------- -------- -------- -------- --------
Total benefits and expenses 114,046 116,758 50,414 140,065 97,438
-------- -------- ------- -------- --------
Income before income tax 38,198 21,476 15,673 6,537 13,586
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
GUARANTEED CORPORATE
INVESTMENT INVESTMENT AND TOTAL
CONTRACTS PRODUCTS OTHER ADJUSTMENTS CONSOLIDATED
--------- ------- -------- ----------- ------------
Premiums and policy fees $13,827 $ 153 $420,914
Net investment income $160,735 79,471 14,255 450,229
Realized investment gains (losses) (895) 678 $ 1,677 1,460
Other income 1,093 1,525 14,107
---------- -------- ------- ---------- ---------
Total revenues 159,840 95,069 15,933 1,677 886,710
-------- -------- ------- ------- --------
Benefits and settlement expenses 134,531 62,283 438 540,887
Amortization of deferred
acquisition costs 554 13,752 (2) 89,053
Other operating expenses 1,864 11,598 7,854 121,653
--------- ------- ------- ---------
Total benefits and expenses 136,949 87,633 8,290 751,593
-------- ------- ------- ---------
Income before income tax 22,891 7,436 7,643 135,117
Income tax expense 48,211 48,211
---------
Net income $ 86,906
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
OPERATING SEGMENT INCOME FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1997
--------------------------------------------------------------------------
(IN THOUSANDS)
SPECIALTY INSURANCE
LIFE INSURANCE PRODUCTS
---------------------------------------- --------------------------
DENTAL AND
INDIVIDUAL CONSUMER FINANCIAL
ACQUISITIONS LIFE WEST COAST BENEFITS INSTITUTIONS
------------ ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Premiums and policy fees $ 78,186 $ 95,724 $ 8,677 $111,510 $30,855
Net investment income 83,086 37,678 18,122 15,188 9,199
Realized investment gains (losses)
Other income 10 48 1,072 25
----------- ---------- ---------- --------- ---------
Total revenues 161,282 133,450 26,799 127,770 40,079
-------- -------- ------- -------- -------
Benefits and settlement expenses 87,303 88,905 14,179 83,367 11,972
Amortization of deferred policy
acquisition costs 13,017 19,900 4,586 7,700 11,113
Other operating expense 16,231 11,981 3,941 26,597 8,321
--------- -------- ------- -------- --------
Total benefits and expenses 116,551 120,786 22,706 117,664 31,406
-------- -------- ------- -------- -------
Income before income tax 44,731 12,664 4,093 10,106 8,673
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
GUARANTEED CORPORATE
INVESTMENT INVESTMENT AND TOTAL
CONTRACTS PRODUCTS OTHER ADJUSTMENTS CONSOLIDATED
--------- --------- --------- ----------- -------------
Premiums and policy fees $ 8,562 $ 189 $333,703
Net investment income $157,716 77,902 6,354 405,245
Realized investment gains (losses) (1,840) 589 $ 3,032 1,781
Other income (194) 1,420 2,381
------------ -------- ------ ---------- ---------
Total revenues 155,876 86,859 7,963 3,032 743,110
-------- ------- ------ ------- --------
Benefits and settlement expenses 132,334 61,179 321 479,560
Amortization of deferred policy
acquisition costs 436 10,766 (1) 67,517
Other operating expenses 3,024 8,428 4,169 82,692
--------- -------- ------ ---------
Total benefits and expenses 135,794 80,373 4,489 629,769
-------- ------- ------ --------
Income before income tax 20,082 6,486 3,474 113,341
Income tax expense 38,888 38,888
---------
Net income $ 74,453
========
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
OPERATING SEGMENT ASSETS
SEPTEMBER 30, 1998
-----------------------------------------------------------------------------
(IN THOUSANDS)
SPECIALTY INSURANCE
LIFE INSURANCE PRODUCTS
------------------------------------------- --------------------------
DENTAL AND
INDIVIDUAL CONSUMER FINANCIAL
ACQUISITIONS LIFE WEST COAST BENEFITS INSTITUTIONS
------------ ---------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
Investments and other assets $1,256,251 $1,051,847 $1,049,169 $203,129 $647,008
Deferred policy acquisition costs 124,012 284,585 138,801 25,123 56,766
----------- ----------- ----------- --------- ---------
Total assets $1,380,263 $1,336,432 $1,187,970 $228,252 $703,774
========== ========== ========== ======== ========
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
GUARANTEED CORPORATE
INVESTMENT INVESTMENT AND TOTAL
CONTRACTS PRODUCTS OTHER CONSOLIDATED
--------- -------------- ------------- --------------
Investments and other assets $2,856,619 $2,553,265 $930,403 $10,547,691
Deferred policy acquisition costs 1,490 61,205 12 691,994
------------ ------------ ----------- -------------
Total assets $2,858,109 $2,614,470 $930,415 $11,239,685
========== ========== ======== ===========
OPERATING SEGMENT ASSETS
DECEMBER 31, 1997
(IN THOUSANDS)
SPECIALTY INSURANCE
LIFE INSURANCE PRODUCTS
DENTAL AND
INDIVIDUAL CONSUMER FINANCIAL
ACQUISITIONS LIFE WEST COAST BENEFITS INSTITUTIONS
Investments and other assets $1,401,294 $ 960,316 $ 910,030 $208,071 $536,058
Deferred policy acquisition costs 138,052 252,321 108,126 22,459 52,836
----------- ----------- ----------- --------- ---------
Total assets $1,539,346 $1,212,637 $1,018,156 $230,530 $588,894
========== ========== ========== ======== ========
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
GUARANTEED CORPORATE
INVESTMENT INVESTMENT AND TOTAL
CONTRACTS PRODUCTS OTHER CONSOLIDATED
Investments and other assets $2,887,732 $2,313,279 $525,896 $ 9,742,676
Deferred policy acquisition costs 1,785 56,074 952 632,605
------------- ------------ ---------- -------------
Total assets $2,889,517 $2,369,353 $526,848 $10,375,281
========== ========== ======== ===========
</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 September 30, 1998, and for the nine 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 $575.2 million and $76.4 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
stockholder's equity. The market values of fixed maturities increase or decrease
as interest rates fall or rise. Therefore, although the adoption of SFAS No. 115
does not affect Protective Life's operations, its reported stockholder's equity
will fluctuate significantly as interest rates change.
Protective Life's balance sheets at September 30, 1998 and December 31,
1997, prepared on the basis of reporting investments at amortized cost rather
than at market values, are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
(IN THOUSANDS)
<S> <C> <C>
Total investments $ 8,373,553 $ 7,876,952
Deferred policy acquisition costs 721,337 654,043
All other assets 1,982,200 1,749,321
------------ ------------
$11,077,090 $10,280,316
=========== ===========
Deferred income taxes $ 12,985 $ 16,179
All other liabilities 10,080,018 9,307,085
----------- ------------
10,093,003 9,323,264
Stockholder's equity 984,087 957,052
------------- -------------
$11,077,090 $10,280,316
=========== ===========
</TABLE>
NOTE F - 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 individual annuities. Realized investment
gains and losses on such contracts are deferred and amortized over the life of
the hedged asset. At September 30, 1998, open option and open futures contracts
with a notional amount of $1,300.0 million were in a $1.7 million net unrealized
gain position. Additionally, Protective Life uses interest rate swap
10
<PAGE>
contracts to convert certain investments from a variable to a fixed rate of
interest. At September 30, 1998, related open interest rate swap contracts with
a notional amount of $55.3 million were in a $0.3 million net unrealized loss
position.
NOTE G - COMPREHENSIVE INCOME
The following table sets forth Protective Life's comprehensive income
for the nine months ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
(IN THOUSANDS)
--------------------------------
1998 1997
---- ----
<S> <C> <C>
Net income $ 86,906 $ 74,453
Increase (decrease) in net unrealized gains
on investments (net of income tax:
1998 - $24,181; 1997 - $17,351) 44,909 32,224
Reclassification adjustment for amounts included
in net income (net of income tax:
1998 - $(511); 1997 - $(623)) (949) (1,158)
---------- ----------
Comprehensive income $130,866 $105,519
======== ========
</TABLE>
NOTE H - ACQUISITION
On October 14, 1998, Protective Life completed its acquisition of
approximately 260,000 individual life insurance policies from Lincoln National
Corporation. The policies represent the payroll deduction business originally
marketed and underwritten by Aetna.
NOTE I - RECLASSIFICATIONS
Certain reclassifications have been made in the previously reported
financial statements and accompanying notes to make the prior year amounts
comparable to those of the current year. Such reclassifications had no effect on
previously reported net income, total assets, or stockholder's equity.
11
<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 seven operating divisions: Acquisitions, Individual
Life, West Coast, Dental and Consumer Benefits ("Dental"), Financial
Institutions, Guaranteed Investment Contracts ("GIC"), and Investment Products.
Protective Life also has an additional business segment which is described
herein as Corporate and Other.
This report includes "forward-looking statements" which express
Protective Life's current 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 that could cause actual results to differ materially from those
expressed. Protective Life 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.
REVENUES
The following table sets forth revenues by source for the period shown,
and the percentage change from the prior period:
<TABLE>
<CAPTION>
NINE MONTHS PERCENTAGE
ENDED INCREASE/
SEPTEMBER 3 (DECREASE)
----------------------------- ----------
(IN THOUSANDS)
1998 1997
---- ----
<S> <C> <C> <C>
Premiums and policy fees $420,914 $333,703 26.1 %
Net investment income 450,229 405,245 11.1
Realized investment gains 1,460 1,781 (18.0)
Other income 14,107 2,381 492.5
--------- ----------
$886,710 $743,110
======== ========
</TABLE>
Premiums and policy fees increased $87.2 million or 26.1% in the first
nine months of 1998 over the first nine months of 1997. Premiums and policy fees
from the Acquisitions Division decreased $7.4 million. The Individual Life
Division's premiums and policy fees increased $2.1 million. The acquisition of
West Coast Life Insurance Company ("West Coast") in the second
12
<PAGE>
quarter of 1997 increased premiums and policy fees $10.6 million in the first
nine months of 1998 as compared to the first nine months of 1997. The Dental
Division's exit from the group major medical business resulted in a $10.3
million decrease in premiums and policy fees. Premiums and policy fees related
to the Dental Division's other businesses increased $31.1 million in the first
nine months of 1998 as compared to the same period in 1997. Premiums and policy
fees from the Financial Institutions Division increased $55.9 million in the
first nine months of 1998 as compared to the first nine months of 1997. For this
Division, the acquisition of the Western Diversified Group ("Western
Diversified") and the coinsurance of an unrelated closed block of credit
insurance policies in late 1997 increased premiums and policy fees $55.3
million. The increase in premiums and policy fees from the Investment Products
Division was $5.3 million.
Net investment income in the first nine months of 1998 increased by
$44.9 million over the corresponding period of the preceding year, primarily due
to increases in the average amount of invested assets and an increase in
participating mortgage loan income. Invested assets have increased primarily due
to acquisitions and due to receiving annuity deposits. The acquisition of West
Coast, Western Diversified, and a block of credit policies in 1997 resulted in
an increase in net investment income of $38.5 million in the first nine months
of 1998 as compared to the same period in 1997.
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 nine months of 1998 were $1.4
million as compared to $1.8 million in the corresponding period of 1997.
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. The acquisition of Western Diversified in late 1997 resulted in a
$7.2 million increase in other income in the first nine months of 1998 as
compared to the same period last year. Other income from all other sources
increased $4.5 million in the first nine months of 1998 as compared with the
first nine months of 1997.
13
<PAGE>
INCOME BEFORE INCOME TAX
The following table sets forth operating income or loss and income or
loss before income tax by business segment for the periods shown:
<TABLE>
<CAPTION>
OPERATING INCOME (LOSS) AND INCOME (LOSS) BEFORE INCOME TAX
NINE MONTHS ENDED SEPTEMBER 30
(IN THOUSANDS)
1998 1997
---- ----
<S> <C> <C>
Operating Income (Loss)1
Life Insurance
Acquisitions $ 38,198 $ 44,731
Individual Life 21,476 12,664
West Coast 15,673 4,093
Specialty Insurance Products
Dental and Consumer Benefits 6,537 10,106
Financial Institutions 13,586 8,673
Retirement Savings and Investment Products
Guaranteed Investment Contracts 23,786 21,922
Investment Products 7,125 6,328
Corporate and Other 7,643 3,474
--------- ----------
Total operating income 134,024 111,991
-------- --------
Realized Investment Gains (Losses)
Guaranteed Investment Contracts (895) (1,840)
Investment Products 678 589
Unallocated Realized Investment Gains (Losses) 1,677 3,032
Related Amortization of Deferred Policy Acquisition Costs
Investment Products (367) (431)
---------- ----------
Total net 1,093 1,350
--------- ---------
Income (Loss) Before Income Tax
Life Insurance
Acquisitions 38,198 44,731
Individual Life 21,476 12,664
West Coast 15,673 4,093
Specialty Insurance Products
Dental and Consumer Benefits 6,537 10,106
Financial Institutions 13,586 8,673
Retirement Savings and Investment Products
Guaranteed Investment Contracts 22,891 20,082
Investment Products 7,436 6,486
Corporate and Other 7,643 3,474
Unallocated Realized Investment Gains (Losses) 1,677 3,032
---------- ----------
Total income before tax $135,117 $113,341
======== ========
</TABLE>
1 Income before tax excluding realized investment gains and losses and related
amortization of deferred acquisition costs.
14
<PAGE>
Pretax earnings from the Acquisitions Division decreased $6.5 million
in the first nine months of 1998 as compared to the same period of 1997. In
addition, the Division's mortality experience was approximately $2.1 million
worse than expected in the first nine months of 1998 as compared to being
approximately $4.9 million better than expected in the first nine months of
1997.
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. On October 14, 1998,
Protective Life acquired approximately 260,000 policies from Lincoln National
Corporation. The policies represent the payroll deduction business originally
marketed and underwritten by Aetna. The transaction represents approximately
$330 million of life insurance reserves and approximately $65 million of annual
premium. The transaction should contribute to earnings beginning in the second
quarter next year.
The Individual Life Division's pretax earnings of $21.5 million in the
first nine months of 1998 were $8.8 million above the same period of 1997. In
the second quarter of 1997, the Division experienced record high mortality.
Mortality experience was at expected levels in the second and third quarters of
1998 after having been above expected levels in the first quarter of 1998.
West Coast had pretax earnings of $15.7 million for the first nine
months of 1998 compared to $4.1 million for the period ended September 30,
1997. The Division was acquired by the Company in June 1997.
Dental Division pretax earnings were $3.6 million lower in the first
nine months of 1998 as compared to the first nine months of 1997. Last year's
results include approximately $4.0 million of earnings from the group major
medical business which the Division exited last year.
Pretax earnings of the Financial Institutions Division were $4.9
million higher in the first nine months of 1998 as compared to the same period
in 1997. At the end of the third quarter of 1997, the Division acquired the
Western Diversified Group and coinsured an unrelated block of policies. These
acquisitions increased earnings $5.4 million in the first nine months of 1998 as
compared to the same period last year.
The GIC Division had pretax operating earnings of $23.8 million in the
first nine months of 1998 and $21.9 million in the corresponding period of 1997.
Realized investment losses associated with this Division in the first nine
months of 1998 were less than $0.9 million as compared to $1.8 million in the
same period last year. As a result, total pretax earnings were $22.9 million in
the first nine months of 1998 compared to $20.1 million for the same period last
year.
Investment Products Division pretax operating earnings in the first
nine months of 1998 of $7.1 million were $0.8 million above the same period of
1997. Realized investment gains associated with the Division, net of related
amortization of deferred policy acquisition costs, were $0.3 million in the
first nine months of 1998 compared to $0.2 million in the first nine months of
1997, resulting in total pretax earnings of $7.4 million in the first nine
months of 1998 as compared to $6.5 million in the same period of 1997.
15
<PAGE>
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 income for this segment was $7.6 million in the first nine months of 1998
compared to $3.5 million in the first nine months of 1997. The increase in
earnings relates primarily to increased net investment income on capital and
income from a securitization transaction.
INCOME TAXES
The following table sets forth the effective tax rates for the periods
shown:
NINE MONTHS
ENDED ESTIMATED EFFECTIVE
SEPTEMBER 30 INCOME TAX RATES
------------ --------------------
1997 34.3%
1998 35.7
The effective income tax rate for the full year of 1997 was 34.9%.
Management's estimate of the effective income tax rate for 1998 is approximately
36%.
NET INCOME
The following table sets forth net income for the periods shown, and
the percentage change from the prior period:
NET INCOME
----------------------------------------------
NINE MONTHS
ENDED TOTAL PERCENTAGE
SEPTEMBER 30 (IN THOUSANDS) INCREASE
------------ -------------- -----------
1997 $74,453 25.9 %
1998 86,906 16.7
Compared to the same period in 1997, net income in the first nine
months of 1998 increased $12.5 million, reflecting improved operating earnings
in the Individual Life, West Coast, Financial Institutions, Guaranteed
Investment Contracts, and Investment Products Divisions and the Corporate and
Other segment, which were partially offset by lower operating earnings in the
Acquisitions and Dental Divisions and lower realized investment gains (net of
related amortization of deferred policy acquisition costs).
RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards ("SFAS") No. 132, "Employers' Disclosures About
Pension and Other Postretirement Benefits" which revises the footnote
disclosures about pension and other postretirement benefit plans. The FASB has
also issued SFAS No. 133, "Accounting for
16
<PAGE>
Derivative Instruments and Hedging Activities" and SFAS No. 134, "Accounting for
MortgageBacked Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." The adoption of these
accounting standards is not expected to have a material effect on Protective
Life's financial condition.
YEAR 2000 DISCLOSURE
Computer hardware and software often denote the year using two digits
rather than four; for example, the year 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 than the year 2000. This "Year 2000" issue potentially affects all
individuals and companies (including Protective Life, its customers, business
partners, suppliers, banks, custodians and administrators). The problem is most
prevalent in older mainframe systems, but personal computers and equipment
containing computer chips could also be affected.
Protective Life shares computer hardware and software with its parent,
Protective Life Corporation ("PLC"), and other affiliates of PLC. PLC began work
on the Year 2000 problem in 1995 and has developed and implemented a Year 2000
transition plan intended to identify and modify or replace important hardware
and/or software systems on which it relies that have Year 2000 issues or to
develop appropriate contingency measures. PLC is also confirming that its
service providers are implementing plans to identify and modify or replace their
systems that have a Year 2000 issue. Substantial resources are being devoted to
this effort; however, PLC cannot specifically identify all of the costs to
develop and implement these plans. Since 1995, the costs that have been
identified as relating to addressing the year 2000 problem total less than $5
million
The majority of the modifications necessary for PLC's mainframe systems to
be able to process transactions dated beyond 1999 have been completed and the
remainder are targeted for completion by December 31, 1998. PLC's other systems
are currently being addressed with most targeted completion dates being prior to
June 30, 1999. PLC is developing detailed contingency plans for a large
percentage of its remaining Year 2000 issues. PLC is also using research, direct
inquiry, and/or testing to attempt to determine the Year 2000 readiness of
critical vendors and business partners. During 1999, PLC will future date test
its systems in a production environment, and finalize its contingency plans.
PLC currently anticipates that its remaining systems with Year 2000 issues will
be 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 otherwise conduct business.
17
<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: November 13, 1998 /S/ JERRY W. DEFOOR
--------------------
Jerry W. DeFoor
Vice President and Controller,
and Chief Accounting Officer
(Duly authorized officer)
18
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of the Protective Life Insurance Company
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 6,728,732
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 11,861
<MORTGAGE> 1,450,363
<REAL-ESTATE> 14,677
<TOTAL-INVEST> 8,565,491
<CASH> 0
<RECOVER-REINSURE> 660,359
<DEFERRED-ACQUISITION> 691,994
<TOTAL-ASSETS> 11,239,685
<POLICY-LOSSES> 3,655,862
<UNEARNED-PREMIUMS> 401,817
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 188,867
<NOTES-PAYABLE> 0
2
0
<COMMON> 5,000
<OTHER-SE> 1,084,772
<TOTAL-LIABILITY-AND-EQUITY> 11,239,685
420,914
<INVESTMENT-INCOME> 450,229
<INVESTMENT-GAINS> 1,460
<OTHER-INCOME> 14,107
<BENEFITS> 540,887
<UNDERWRITING-AMORTIZATION> 89,053
<UNDERWRITING-OTHER> 121,653
<INCOME-PRETAX> 135,117
<INCOME-TAX> 48,211
<INCOME-CONTINUING> 86,906
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 86,906
<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>
<PAGE>
Exhibit 99
to
Form 10-Q
of
Protective Life Insurance Company
for the nine months
ended September 30, 1998
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.
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
Protective Life encounters significant competition in all lines of business from
other insurance companies, many of which have greater financial resources than
Protective Life, as well as competition from other providers of financial
services.
The life and health insurance industry is consolidating, with larger,
more efficient organizations emerging from consolidation. Also, mutual insurance
companies are converting to stock ownership which will give them greater access
to capital markets.
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.
<PAGE>
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 Protective Life's insurance
subsidiaries. A downgrade in the ratings of Protective Life's life 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 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. 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. Formal 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. Sudden and/or significant changes in
interest rates expose insurance companies to the risk of not earning anticipated
spreads between the interest rate earned on investments and the credited rates
paid on outstanding policies. Both rising and declining interest rates can
negatively affect Protective Life's spread income. For example, certain of
Protective Life's insurance and investment products guarantee a minimum credited
interest rate. While Protective Life develops and maintains asset/liability
management programs and procedures designed to preserve spread income in rising
or falling interest rate environments, no assurance can be given that
significant changes in interest rates will not materially affect such spreads.
Lower interest rates may result in lower sales of Protective Life's
insurance and investment products.
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 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 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
<PAGE>
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 with respect to their ability
to sell such products, and, depending on grandfathering provisions, the
surrenders of existing annuity contracts and life insurance policies. Protective
Life cannot predict what future initiatives the President or Congress may
propose which may affect Protective Life.
LITIGATION. A number of civil jury verdicts have been returned against
insurers in the jurisdictions in which Protective Life does business involving
the insurers' sales practices, alleged agent misconduct, failure to properly
supervise agents, and other matters. Increasingly these lawsuits have resulted
in the award of substantial judgments against the insurer that are
disproportionate to the actual damages, including material amounts of punitive
damages. In some states (including Alabama), 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 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 class action and other lawsuits
involving insurers' sales practices, insurers have made material settlement
payments.
INVESTMENT RISKS. Protective Life's invested assets are subject to
customary risks of defaults and changes in market values. The value of
Protective Life's commercial mortgage portfolio depends in part on the financial
condition of the tenants occupying the properties which Protective Life has
financed. Factors that may affect the overall default rate on, and market value
of, Protective Life's invested assets include interest rate levels, financial
market performance, and general economic conditions, as well as particular
circumstances affecting the businesses of individual borrowers and tenants.
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 efficiencies, will continue to be available to Protective
Life, or that Protective Life will realize the anticipated financial results
from its acquisitions.
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 unaffiliated investment managers; a
portion of the sales in the Individual Life, Dental, and Financial Institutions
Divisions comes from arrangements with unrelated marketing organizations; and
Protective Life has entered the Hong Kong insurance market in a joint venture.
Therefore Protective Life'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
<PAGE>
the year 2000 are attempted because the hardware and/or software will interpret
"00" as representing the year 1900 rather that the year 2000. This "Year 2000"
issue potentially affects all individuals and companies (including Protective
Life, its customers, business partners, suppliers, banks, custodians and
administrators). The problem is most prevalent in older mainframe systems, but
personal computers and equipment containing computer chips could also be
affected.
Protective Life shares computer hardware and software with its parent,
Protective Life Corporation ("PLC"), and other affiliates of PLC. PLC began work
on the Year 2000 problem in 1995 and has developed and implemented a Year 2000
transition plan intended to identify and modify or replace important hardware
and/or software systems on which it relies that have Year 2000 issues or to
develop appropriate contingency measures. PLC is also confirming that its
service providers are implementing plans to identify and modify or replace their
systems that have a Year 2000 issue.
PLC currently anticipates that its 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 otherwise conduct
business. However, other worst case scenarios, depending upon their duration,
could have a material adverse effect on PLC and Protective Life and their
operations.
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. The
cost of reinsurance is, in some cases, reflected in the premium rates charged by
Protective Life. Under certain reinsurance agreements, the reinsurer may
increase the rate it charges Protective Life for the reinsurance, though
Protective Life does not anticipate increases to occur. Therefore, if the cost
of reinsurance were to increase with respect to policies where the rates have
been guaranteed by Protective Life, Protective Life could be adversely affected.
Additionally, Protective Life assumes policies of other insurers. Any
regulatory or other adverse development affecting the ceding insurer could also
have an adverse effect on Protective Life.
<PAGE>
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.
