- -------------------------------------------------------------------------------
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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File 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 5,
1999: 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, 1999 and 1998 (unaudited).................
Consolidated Condensed Balance Sheets as of September 30, 1999
(unaudited) and December 31, 1998....................................
Consolidated Condensed Statements of Cash Flows for the
Nine Months ended September 30, 1999 and 1998 (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 Share Owner
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, 1999, and
the related consolidated condensed statements of income for the three-month and
nine-month periods ended September 30, 1999 and 1998, and consolidated condensed
statements of cash flows for the nine-month periods ended September 30, 1999 and
1998. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated condensed interim financial statements referred to
above for them to be in conformity with generally accepted accounting
principles.
We previously audited in accordance with generally accepted auditing standards,
the consolidated balance sheet as of December 31, 1998, and the related
consolidated statements of income, share- owner's equity, and cash flows for the
year then ended (not presented herein), and in our report dated February 11,
1999, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
consolidated condensed balance sheet as of December 31, 1998, is fairly stated
in all material respects in relation to the consolidated balance sheet from
which it has been derived.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Birmingham, Alabama
October 26, 1999
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
--------------------------- -----------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Premiums and policy fees $288,535 $269,509 $840,991 $758,096
Reinsurance ceded (134,573) (127,850) (382,870) (337,182)
-------- -------- -------- --------
Premiums and policy fees, net of reinsurance ceded 153,962 141,659 458,121 420,914
Net investment income 156,387 156,059 462,982 450,229
Realized investment gains (3,210) 411 454 1,460
Other income 8,631 4,570 19,846 14,107
--------- --------- -------- --------
315,770 302,699 941,403 886,710
-------- -------- -------- --------
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance ceded:
three months: 1999 - $85,055; 1998 - $109,513
nine months: 1999 - $242,578; 1998 - $236,241) 196,876 181,298 573,596 540,887
Amortization of deferred policy acquisition costs 23,090 30,795 82,315 89,053
Other operating expenses (net of reinsurance ceded:
three months: 1999 - $33,457; 1998 - $47,133
nine months: 1999 - $102,828; 1998 - $112,985) 53,068 44,058 139,326 121,653
--------- --------- -------- --------
273,034 256,151 795,237 751,593
-------- -------- -------- --------
INCOME BEFORE INCOME TAX 42,736 46,548 146,166 135,117
Income tax expense 15,713 16,186 53,603 48,211
--------- -------- -------- --------
NET INCOME $ 27,023 $ 30,362 $ 92,563 $ 86,906
======== ======== ======== ========
</TABLE>
See notes to consolidated condensed financial statements
3
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1999 1998
--------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities $6,233,825 $ 6,400,262
Equity securities 19,867 12,258
Mortgage loans on real estate 1,895,574 1,623,603
Investment in real estate, net of accumulated depreciation 16,201 14,868
Policy loans 231,824 232,670
Other long-term investments 71,466 70,078
Short-term investments 88,304 159,655
----------- ------------
Total investments 8,557,061 8,513,394
Cash 24,763
Accrued investment income 103,808 100,395
Accounts and premiums receivable, net of allowance for
uncollectible amounts 60,034 31,265
Reinsurance receivables 802,808 756,370
Deferred policy acquisition costs 960,092 841,425
Property and equipment, net 48,808 42,374
Other assets 38,759 34,632
Assets related to separate accounts
Variable Annuity 1,494,577 1,285,952
Variable Universal Life 29,086 13,606
Other 3,465 3,482
-------------- --------------
$12,123,261 $11,622,895
=========== ===========
LIABILITIES
Policy liabilities and accruals $4,920,766 $ 4,529,297
Guaranteed investment contract deposits 2,669,845 2,691,697
Annuity deposits 1,559,579 1,519,820
Other policyholders' funds 119,399 219,356
Other liabilities 305,803 226,310
Accrued income taxes (4,360) (10,992)
Deferred income taxes (15,835) 51,735
Notes payable 2,346 2,363
Indebtedness to related parties 16,000 20,898
Liabilities related to separate accounts
Variable Annuity 1,494,577 1,285,952
Variable Universal Life 29,086 13,606
Other 3,465 3,482
-------------- --------------
11,100,671 10,553,524
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES - NOTE B
SHARE-OWNER'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 (5,148) (5,199)
Retained earnings 779,081 686,519
Accumulated other comprehensive income
Net unrealized gains (losses) on investments
(net of income tax (benefit): 1999 - $(45,412); 1998 - $29,646) (84,337) 55,057
------------- -------------
1,022,590 1,069,371
------------ ------------
$12,123,261 $11,622,895
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements
4
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
-------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 92,563 $ 86,906
Adjustments to reconcile net income to net cash provided by operating activities:
Realized investment gains (454) (1,460)
Amortization of deferred policy acquisition costs 82,315 89,053
Capitalization of deferred policy acquisition costs (176,029) (156,279)
Depreciation expense 5,713 5,635
Deferred income tax 10,944 (3,029)
Accrued income tax 6,632 (18,764)
Interest credited to universal life and investment products 234,402 259,672
Policy fees assessed on universal life and investment products (118,452) (104,173)
Change in accrued investment income and other receivables (140,686) (76,407)
Change in policy liabilities and other policyholders'
funds of traditional life and health products 183,097 514,633
Change in other liabilities 79,494 (25,545)
Other (net) (6,785) (24,205)
------------ ------------
Net cash provided by operating activities 252,754 546,037
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reductions of investments
Investments available for sale 3,506,275 6,536,807
Other 208,300 149,765
Sale of investments
Investments available for sale 291,153 524,624
Other 267,676 270,257
Cost of investments acquired
Investments available for sale (3,801,199) (7,625,131)
Other (742,912) (433,390)
Acquisition and bulk reinsurance assumptions 46,508
Purchase of property and equipment (14,111) (8,751)
Sale of property and equipment 1,964 15
------------ --------------
Net cash used in investing activities (236,346) (585,804)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings under line of credit arrangements and debt 4,279,677 1,615,996
Principal payments on line of credit arrangements and debt (4,279,694) (1,255,566)
Dividends to PLC 0 (50)
Principal payment on surplus note to PLC (2,000) 0
Investment product deposits and change in universal life deposits 866,850 739,488
Investment product withdrawals (856,478) (1,099,298)
----------- ----------
Net cash provided by financing activities 8,355 570
------------- -------------
INCREASE (DECREASE) IN CASH 24,763 (39,197)
CASH AT BEGINNING OF PERIOD 0 39,197
--------------- ------------
CASH AT END OF PERIOD $ 24,763 $ 0
============ ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period:
Interest on debt $ 4,834 $ 6,273
Income taxes $ 34,828 $ 57,229
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Reduction of principal on note from ESOP $ 51
</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 and subsidiaries ("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, 1999, are not necessarily
indicative of the results that may be expected for the year ending December 31,
1999. 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, 1998.
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 (where Protective Life maintains its headquarters), juries have
substantial discretion in awarding punitive and non-economic compensatory
damages, which creates the potential for unpredictable material adverse
judgments in any given lawsuit. Protective Life, like other insurers, in the
ordinary course of business, is involved in such litigation or alternatively in
arbitration. Although the outcome of any such litigation or arbitration 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
Protective Life operates seven divisions whose principal strategic
focuses can be grouped into three general categories: life insurance, specialty
insurance products, and retirement savings and investment products. The
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, 1999
-------------------------------------------------------------------------
(IN THOUSANDS)
SPECIALTY INSURANCE
LIFE INSURANCE PRODUCTS
DENTAL AND
INDIVIDUAL CONSUMER FINANCIAL
LIFE WEST COAST ACQUISITIONS BENEFITS INSTITUTIONS
-------- ---------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C>
Premiums and policy fees $200,913 $62,520 $113,527 $233,460 $212,747
Reinsurance ceded (126,454) (42,802) (24,420) (56,961) (132,233)
-------- ------- --------- -------- --------
Net of reinsurance ceded 74,459 19,718 89,107 176,499 80,514
Net investment income 45,376 56,779 99,587 11,517 17,382
Realized investment gains (losses)
Other income (1,614) 1,302 (9) 3,914 11,378
--------- -------- ----------- --------- ---------
Total revenues 118,221 77,799 188,685 191,930 109,274
-------- ------- -------- -------- --------
Benefits and settlement expenses 55,265 50,471 98,237 131,264 40,586
Amortization of deferred policy
acquisition costs 20,317 5,055 15,309 7,629 18,654
Other operating expenses 18,457 2,839 22,675 40,905 33,615
-------- -------- -------- --------- --------
Total benefits and expenses 94,039 58,365 136,221 179,798 92,855
-------- ------- -------- -------- --------
Income before income tax 24,182 19,434 52,464 12,132 16,419
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
STABLE CORPORATE
VALUE INVESTMENT AND TOTAL
PRODUCTS PRODUCTS OTHER ADJUSTMENTS CONSOLIDATED
-------- ---------- --------- ----------- ------------
Premiums and policy fees $17,610 $ 214 $840,991
Reinsurance ceded (382,870)
---------- --------- --------
Net of reinsurance ceded 17,610 214 458,121
--------
Net investment income $155,634 78,712 (2,005) 462,982
Realized investment gains (losses) (82) 892 $ (356) 454
Other income 1,587 3,288 19,846
------------ -------- ------ --------- --------
Total revenues 155,552 98,801 1,497 (356) 941,403
-------- ------- ------ ------- --------
Benefits and settlement expenses 131,016 64,477 2,280 573,596
Amortization of deferred
acquisition costs 575 14,777 (1) 82,315
Other operating expenses 2,963 11,018 6,854 139,326
--------- ------- ------ --------
Total benefits and expenses 134,554 90,272 9,133 795,237
-------- ------- ------ --------
Income before income tax 20,998 8,529 (7,636) 146,166
Income tax expense 53,603 53,603
---------
Net income $ 92,563
=========
</TABLE>
7
<PAGE>
<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
LIFE WEST COAST ACQUISITIONS BENEFITS INSTITUTIONS
---------- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Premiums and policy fees $209,189 $56,944 $ 92,289 $182,507 $203,184
Reinsurance ceded (111,364) (37,694) (21,505) (50,163) (116,453)
-------- ------- -------- -------- --------
Net of reinsurance ceded 97,825 19,250 70,784 132,344 86,731
Net investment income 40,307 46,837 79,860 11,794 16,970
Realized investment gains (losses)
Other income 102 1,600 2,464 7,323
---------- ---------- --------- --------- ---------
Total revenues 138,234 66,087 152,244 146,602 111,024
-------- ------- -------- -------- --------
Benefits and settlement expenses 80,768 42,944 84,171 95,946 39,806
Amortization of deferred policy
acquisition costs 24,376 3,866 13,594 7,731 25,182
Other operating expense 11,614 3,604 16,281 36,388 32,450
-------- -------- -------- -------- --------
Total benefits and expenses 116,758 50,414 114,046 140,065 97,438
-------- ------- -------- -------- --------
Income before income tax 21,476 15,673 38,198 6,537 13,586
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
STABLE CORPORATE
VALUE INVESTMENT AND TOTAL
PRODUCTS PRODUCTS OTHER ADJUSTMENTS CONSOLIDATED
-------- ---------- -------- ----------- ------------
Premiums and policy fees $13,827 $ 153 $758,093
Reinsurance ceded (337,179)
-------- ------- --------
Net of reinsurance ceded 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 policy
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>
8
<PAGE>
<TABLE>
<CAPTION>
OPERATING SEGMENT ASSETS
SEPTEMBER 30, 1999
---------------------------------------------------------------------------
(IN THOUSANDS)
SPECIALTY INSURANCE
LIFE INSURANCE PRODUCTS
DENTAL AND
INDIVIDUAL CONSUMER FINANCIAL
LIFE WEST COAST ACQUISITIONS BENEFITS INSTITUTIONS
---------- ---------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C>
Investments and other assets $1,171,669 $1,292,180 $1,618,478 $207,009 $709,895
Deferred policy acquisition costs 352,654 183,164 240,037 25,396 51,034
----------- ----------- ----------- --------- ---------
Total assets $1,524,323 $1,475,344 $1,858,515 $232,405 $760,929
========== ========== ========== ======== ========
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
STABLE CORPORATE
VALUE INVESTMENT AND TOTAL
PRODUCTS PRODUCTS OTHER CONSOLIDATED
-------- ---------- --------- ------------
Investments and other assets $2,781,357 $2,835,797 $546,784 $11,163,169
Deferred policy acquisition costs 1,240 106,557 10 960,092
------------- ----------- ----------- -------------
Total assets $2,782,597 $2,942,354 $546,794 $12,123,261
========== ========== ======== ===========
OPERATING SEGMENT ASSETS
DECEMBER 31, 1998
---------------------------------------------------------------------------
(IN THOUSANDS)
SPECIALTY INSURANCE
LIFE INSURANCE PRODUCTS
DENTAL AND
INDIVIDUAL CONSUMER FINANCIAL
LIFE WEST COAST ACQUISITIONS BENEFITS INSTITUTIONS
---------- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Investments and other assets $1,076,202 $1,149,642 $1,600,123 $197,337 $645,909
Deferred policy acquisition costs 301,941 144,455 255,347 23,836 39,212
----------- ----------- ----------- --------- ---------
Total assets $1,378,143 $1,294,097 $1,855,470 $221,173 $685,121
========== ========== ========== ======== ========
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
STABLE CORPORATE
VALUE INVESTMENT AND TOTAL
PRODUCTS PRODUCTS OTHER CONSOLIDATED
-------- ---------- -------- ------------
Investments and other assets $2,869,304 $2,542,536 $700,417 $10,781,470
Deferred policy acquisition costs 1,448 75,177 9 841,425
------------ ------------ ------------ -------------
Total assets $2,870,752 $2,617,713 $700,426 $11,622,895
========== ========== ======== ===========
</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, 1999, and for the nine months then ended,
Protective Life and its life insurance subsidiaries had consolidated
share-owner's equity and net income prepared in conformity with statutory
reporting practices of $534.9 million and $49.1 million, respectively.
NOTE E - INVESTMENTS
As prescribed by Statement of Financial Accounting Standards ("SFAS")
No. 115, certain investments are recorded at their market values with the
resulting net unrealized gains and losses reduced by a related adjustment to
deferred policy acquisition costs, net of income tax, recorded as a component of
share-owner'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 share-owner's equity
will fluctuate significantly as interest rates change.
Protective Life's balance sheets at September 30, 1999 and December 31,
1998, prepared on the basis of reporting investments at amortized cost rather
than at market values, are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
(IN THOUSANDS)
<S> <C> <C>
Total investments $ 8,695,275 $ 8,412,167
Deferred policy acquisition costs 951,627 857,949
All other assets 2,606,108 2,268,076
------------ ------------
$12,253,010 $11,538,192
=========== ===========
Deferred income taxes $ 29,577 $ 22,089
All other liabilities 11,116,506 10,501,789
----------- -----------
11,146,083 10,523,878
Share-owner's equity 1,106,927 1,014,314
------------ ------------
$12,253,010 $11,538,192
=========== ===========
</TABLE>
NOTE F - ACCOUNTING POLICIES FOR DERIVATIVE FINANCIAL INSTRUMENTS
Protective Life does not currently use derivative financial instruments
for trading purposes. Combinations of swaps, options and futures contracts are
sometimes used as hedges against changes in interest rates for certain
investments, primarily outstanding mortgage loan commit ments, mortgage loans,
and mortgage-backed securities, and liabilities arising from interest-sensitive
products. Realized investment gains and losses on such contracts are deferred
and amortized over the life of the hedged asset. No realized investment gains or
losses were deferred in 1999 or 1998. At September 30, 1999, open option and
open futures contracts with a notional amount of $400.0 million were in a $1.1
million net unrealized loss position. Additionally,
10
<PAGE>
Protective Life uses interest rate swap contracts, swaptions (options to enter
into interest rate swap contracts), caps, and floors to convert certain
investments from a variable to a fixed rate of interest and from a fixed rate of
interest to a variable rate of interest. At September 30, 1999, related open
interest rate swap contracts with a notional amount of $868.0 million were in a
$1.7 million net unrealized gain position.
NOTE G - COMPREHENSIVE INCOME (LOSS)
The following table sets forth Protective Life's comprehensive income
(loss) for the three and nine months ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------------------------------------------
(IN THOUSANDS)
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $27,023 $30,362 $ 92,563 $ 86,906
Increase (decrease) in net unrealized gains
on investments (net of income tax:
three months: 1999 - $3,072; 1998 - $23,220
nine months: 1999 - $(74,899); 1998 - $24,181) 5,704 43,123 (139,099) 44,909
Reclassification adjustment for amounts included
in net income (net of income tax: three months:
1999 - $1,123; 1998 - $(144) nine months:
1999 - $(159); 1998 - $(511)) 2,087 (267) (295) (949)
-------- -------- -------- ---------
Comprehensive income (loss) $34,814 $73,218 $(46,831) $130,866
======== ======== ======== =========
</TABLE>
NOTE H - ACQUISITIONS
In September 1999, Protective Life acquired a block of credit life and
disability policies which it had ceded to NationsCredit Insurance Corporation.
The transaction has been accounted for as a purchase, and the results of the
transaction have been included in the accompanying financial statements since
its effective date.
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 share- owner's equity.
NOTE J - SUBSEQUENT EVENTS
On October 20, 1999, PLC announced that Protective Life has agreed to
acquire the Lyndon Insurance Group ("Lyndon") from the Frontier Insurance Group,
Inc. Headquartered in St. Louis, Lyndon manufactures and markets a variety of
specialty insurance products, including
11
<PAGE>
credit life and disability insurance, and vehicle and marine service agreements.
Lyndon distributes products on a national basis through financial institutions
and automobile dealers. The transaction is subject to regulatory approval and
certain customary closing conditions.
12
<PAGE>
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF THE
RESULTS OF OPERATIONS
Protective Life Insurance Company ("Protective Life") is a wholly-owned
subsidiary of Protective Life Corporation ("PLC"), an insurance holding company
whose common stock is traded on the New York Stock Exchange under the symbol
"PL". Founded in 1907, Protective Life provides financial services through the
production, distribution, and administration of insurance and investment
products. Unless the context otherwise requires "Protective Life" refers to the
consolidated group of Protective Life Insurance Company and its subsidiaries.
In accordance with General Instruction H(2)(a), Protective Life
includes the following analysis with the reduced disclosure format.
Protective Life operates seven divisions whose principal strategic
focuses can be grouped into three general categories: life insurance, specialty
insurance products, and retirement savings and investment products. The life
insurance category includes the Individual Life, West Coast, and Acquisitions
Divisions. The specialty insurance products category includes the Dental and
Consumer Benefits ("Dental") and Financial Institutions Divisions. The
retirement savings and investment products category includes the Stable Value
Products and Investment Products Divisions. Protective Life also has an
additional business segment which is described herein as Corporate and Other.
The Stable Value Products Division (formerly known as the Guaranteed
Investment Products ("GIC") Division) was renamed during the second quarter of
1999 to reflect its broader product offerings and customer base.
This report includes "forward-looking statements" which express the
expectations of future events and/or results. The words "believe", "expect",
"anticipate" and similar expressions identify forward-looking statements which
are based on future expectations rather than on historical facts and are
therefore subject to a number of risks and uncertainties, and Protective Life
cannot give assurance that such statements will prove to be correct. Please
refer to Exhibit 99 herein 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 30 (DECREASE)
--------------------------------------------------
(IN THOUSANDS)
1999 1998
---- ----
<S> <C> <C> <C>
Premiums and policy fees $458,121 $420,914 8.8 %
Net investment income 462,982 450,229 2.8
Realized investment gains 454 1,460 (68.9)
Other income 19,846 14,107 40.7
-------- ---------
$941,403 $886,710
</TABLE>
13
<PAGE>
Premiums and policy fees increased $37.2 million or 8.8% in the first
nine months of 1999 over the first nine months of 1998. Premiums and policy fees
in the Individual Life Division decreased $23.4 million in the first nine months
of 1999 as compared to the same period in 1998 primarily due to an increase in
the use of reinsurance by this Division. Premiums and policy fees in the West
Coast Division increased $0.5 million in the first nine months of 1999 as
compared to the same period in 1998. In the Acquisitions Division, decreases in
older acquired blocks resulted in a $5.0 million decrease in premiums and policy
fees. The coinsurance of a block of policies from Lincoln National Corporation
("Lincoln National") in October 1998 resulted in a $23.3 million increase in
premiums and policy fees. In the Dental Division premiums and policy fees
related to dental indemnity insurance increased $27.2 million in the first nine
months of 1999 as compared to the same period in 1998. Premiums and policy fees
related to the Dental Division's other businesses increased $17.0 million in the
first nine months of 1999 as compared to the same period in 1998. Premiums and
policy fees from the Financial Institutions Division decreased $6.2 million in
the first nine months of 1999 as compared to the first nine months of 1998.
Decreases of $8.9 million related to the normal decrease in premiums on closed
blocks of policies acquired in prior years. Premiums and policy fees related to
the Financial Institutions Division's other businesses increased $2.7 million in
the first nine months of 1999 as compared to the same period in 1998. The
increase in premiums and policy fees from the Investment Products Division was
$3.8 million.
Net investment income in the first nine months of 1999 increased by
$12.8 million over the corresponding period of the preceding year primarily due
to an increase in the average amount of invested assets.
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 proper
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 1999 were $0.5
million as compared to $1.5 million in the corresponding period of 1998.
Other income consists primarily of fees from the sale of automobile
service contracts, administrative-services-only types of group accident and
health insurance contracts, and from rental of space in its administrative
building to PLC and affiliates. Other income from all sources increased $5.7
million in the first nine months of 1999 as compared with the first nine months
of 1998. Revenues from Protective Life's automobile service contract business
increased $4.1 million in the first nine months of 1999 as compared to the same
period of 1998.
14
<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)
1999 1998
---- ----
<S> <C> <C>
Operating Income (Loss)1
Life Insurance
Individual Life $ 24,182 $ 21,476
West Coast 19,434 15,673
Acquisitions 52,464 38,198
Specialty Insurance Products
Dental and Consumer Benefits 12,132 6,537
Financial Institutions 16,419 13,586
Retirement Savings and Investment Products
Stable Value Products 21,080 23,786
Investment Products 8,529 7,125
Corporate and Other (7,636) 7,643
--------- ---------
Total operating income 146,604 134,024
-------- --------
Realized Investment Gains (Losses)
Stable Value Products (82) (895)
Investment Products 892 678
Unallocated Realized Investment Gains (Losses) (356) 1,677
Related Amortization of Deferred Policy Acquisition Costs
Investment Products (892) (367)
--------- ----------
Total net (438) 1,093
--------- ---------
Income (Loss) Before Income Tax
Life Insurance
Individual Life 24,182 21,476
West Coast 19,434 15,673
Acquisitions 52,464 38,198
Specialty Insurance Products
Dental and Consumer Benefits 12,132 6,537
Financial Institutions 16,419 13,586
Retirement Savings and Investment Products
Stable Value Products 20,998 22,891
Investment Products 8,529 7,436
Corporate and Other (7,636) 7,643
Unallocated Realized Investment Gains (Losses) (356) 1,677
---------- ----------
Total income before income tax $146,166 $135,117
======== ========
</TABLE>
1 Income before income tax excluding realized investment gains and losses and
related amortization of deferred acquisition costs.
15
<PAGE>
The Individual Life Division's pretax operating income was $24.2
million in the first nine months of 1999 compared to $21.5 million in the same
period of 1998. The Division's 1999 results include a $4.1 million loss relating
to a venture to sell term and term-like products through direct response. The
Division has reinsured most of its mortality risk such that mortality
fluctuations have been significantly reduced.
West Coast had pretax operating income of $19.4 million for the first
nine months of 1999 compared to $15.7 million for the same period last year.
This increase reflects the Division's growth through sales.
Pretax operating income from the Acquisitions Division was $52.5
million in the first nine months of 1999 as compared to $38.2 million in the
same period of 1998. The Division's mortality experience was approximately $6.2
million better than expected in the first nine months of 1999 as compared to
being approximately $2.1 million worse than expected in the first nine months of
1998. Earnings from the Acquisitions Division are normally expected to decline
over time (due to the lapsing of policies resulting from deaths of insureds or
terminations of coverage) unless new acquisitions are made. In October 1998, the
Company coinsured a block of policies from Lincoln National. Earnings relating
to this acquisition were $7.0 million in the first nine months of 1999.
The Dental Division's pretax operating income was $12.1 million in the
first nine months of 1999 compared to $6.5 million in the same period last year.
The increase was primarily due to more favorable claims experience in the first
nine months of 1999 as compared to the same period in 1998.
Pretax operating income of the Financial Institutions Division was
$16.4 million in the first nine months of 1999 as compared to $13.6 million last
year. In September 1999, Protective Life reacquired a block of credit life and
disability policies which it had ceded to NationsCredit Insurance Corporation.
This transaction resulted in $1.0 million of earnings in the third quarter of
1999. In addition, the Division's other lines of business improved in the first
nine months of 1999 as compared to the same period of 1998.
The Stable Value Products Division had pretax operating income of $21.1
million in the first nine months of 1999 and $23.8 million in the corresponding
period of 1998. This decrease was primarily due to lower interest rate spreads.
Realized investment losses associated with this Division in the first nine
months of 1999 were $0.1 million as compared to losses of $0.9 million in the
same period last year. As a result, total pretax earnings were $21.0 million in
the first nine months of 1999 compared to $22.9 million for the same period last
year.
Investment Products Division pretax operating income was $8.5 million
in the first nine months of 1999 compared to $7.1 million in the same period of
1998. The Division had no realized investment gains (net of related amortization
of deferred policy acquisition costs) in the first nine months of 1999 as
compared to gains of $0.3 million in the same period of 1998. Total pretax
earnings were $8.5 million in the first nine months of 1999 as compared to $7.4
million in the same period of 1998.
16
<PAGE>
The Corporate and Other segment consists of several small insurance
lines of business, net investment income on unallocated capital and other
operating expenses not identified with the preceding operating divisions
(including management fees paid to PLC and interest on substantially all debt),
and the on substantially all debt), and the operations of a small noninsurance
subsidiary. The pretax loss for this segment was $7.6 million in the first nine
months of 1999 compared to income of $7.6 million in the first nine months of
1998. The decrease in earnings relates primarily to the allocation of capital to
the block of policies coinsured from Lincoln National and to a decrease in
unallocated capital resulting from a $60 million dividend paid to PLC in the
third quarter of 1998.
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
------------ -------------------
1998 35.7 %
1999 36.7
The effective income tax rate for the full year of 1998 was 35%.
Management's estimate of the effective income tax rate for 1999 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
1998 $86,906 16.7 %
1999 92,563 6.5
Compared to the same period in 1998, net income in the first nine
months of 1999 increased $5.7 million, reflecting improved operating earnings in
the Individual Life, West Coast, Acquisitions, Dental, Financial Institutions,
and Investment Products Divisions which were partially offset by lower operating
earnings in the Stable Value Products Division and the Corporate and Other
segment and higher realized investment losses (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. 133, "Accounting for Derivative
17
<PAGE>
Instruments and Hedging Activities." SFAS No. 133 will require Protective Life
to report derivative financial instruments on the balance sheet and to carry
such derivatives at fair value. The fair values of derivatives increase or
decrease as interest rates change. Under SFAS No. 133, changes in fair value are
reported as a component of net income or as a change to share-owner's equity,
depending upon the nature of the derivative. Although the adoption of SFAS No.
133 will not affect Protective Life's operations, adoption will introduce
volatility into Protective Life's reported net income and share-owner's equity
as interest rates change. SFAS No. 133 is effective January 1, 2001.
The FASB has also issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise," and the American Institute of Certified Public
Accountants has issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." The adoption of these
accounting standards in 1999 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 1999 often is denoted by such hardware
and software as "99." It is probable that such hardware and software will
malfunction when calculations involving the year 2000 are attempted because the
hardware and/or software will interpret "00" as representing the year 1900
rather than the year 2000. This "Year 2000" issue potentially affects all
individuals and companies (including 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,
PLC, and other affiliates of PLC. PLC began work on the Year 2000 problem in
1995. At that time, PLC identified and assessed its critical mainframe systems,
and prioritized the remediation efforts that were to follow. During 1998 all
other hardware and software, including non-information technology (non-IT)
related hardware and software, were included in the process. PLC's Year 2000
plan includes all subsidiaries.
PLC estimates that Year 2000 remediation is complete for its insurance
administration systems and general administration systems. All remediated
systems are currently in production.
Mainframe application remediation was completed December 31, 1998.
Personal computer network hardware, software, and operating systems have been
reviewed, with upgrades implemented where necessary. In March 1999 a personal
computer test lab was established to facilitate client server system testing.
That testing is now materially complete and the lab facility is being used for
desktop application testing. With respect to non-IT equipment and processes, the
assessment and remediation is progressing on schedule and all known issues are
expected to be remediated before December 31, 1999.
18
<PAGE>
Future date tests are complete for PLC's mission critical systems.
Integrated tests involve multiple system testing and are used to verify the Year
2000 readiness of interfaces and connectivity across multiple systems. PLC used
its mainframe computer to simulate a Year 2000 production environment and to
facilitate integrated testing. Integrated tests were completed during August
1999. Additional testing will be conducted whenever changing circumstances
warrant additional testing.
Significant business partners and suppliers that provide products or
services critical to PLC operations are being reviewed for year 2000 readiness.
To date, no significant partners or suppliers have reported that they expect to
be unable to continue supplying products and services after January 1, 2000.
PLC cannot specifically identify all of the costs to develop and
implement its Year 2000 plan. The costs of new systems to replace non-compliant
systems have been capitalized in the ordinary course of business. Other costs
have been expensed as incurred. Through August 31, 1999, costs that have been
specifically identified as relating to the Year 2000 problem total $4.9 million,
with an additional $0.3 million estimated to be required to support continued
Year 2000 preparations. PLC's Year 2000 efforts have not adversely affected its
normal procurement and development of information technology.
Although PLC believes that a process is in place to successfully
address Year 2000 issues, there can be no assurance that PLC's efforts will be
successful, that interactions with other service providers with Year 2000 issues
will not impair PLC's or Protective Life's operations, or that the Year 2000
issue will not otherwise adversely affect PLC or Protective Life.
A formal contingency plan has been prepared and approved by senior
management. Systems and functions identified as mission critical are included in
the contingency plan.
Should some of PLC's systems not be available due to Year 2000
problems, in a reasonably likely worst case scenario, Protective Life may
experience significant delays in its ability to perform certain functions, but
does not expect to be unable to perform critical functions or to otherwise
conduct business.
19
<PAGE>
PART II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial data schedule
Exhibit 99 - Safe Harbor for Forward-Looking Statements
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PROTECTIVE LIFE INSURANCE COMPANY
Date: November 12, 1999 /s/ Jerry W. DeFoor
-------------------
Jerry W. DeFoor
Vice President and Controller,
and Chief Accounting Officer
(Duly authorized officer)
20
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 6,233,825
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 19,867
<MORTGAGE> 1,895,574
<REAL-ESTATE> 16,201
<TOTAL-INVEST> 8,557,061
<CASH> 24,763
<RECOVER-REINSURE> 802,808
<DEFERRED-ACQUISITION> 960,092
<TOTAL-ASSETS> 12,123,261
<POLICY-LOSSES> 4,400,823
<UNEARNED-PREMIUMS> 519,934
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 119,399
<NOTES-PAYABLE> 2,346
2
0
<COMMON> 5,000
<OTHER-SE> 1,017,588
<TOTAL-LIABILITY-AND-EQUITY> 12,123,261
458,121
<INVESTMENT-INCOME> 462,982
<INVESTMENT-GAINS> 454
<OTHER-INCOME> 19,846
<BENEFITS> 573,596
<UNDERWRITING-AMORTIZATION> 82,315
<UNDERWRITING-OTHER> 139,326
<INCOME-PRETAX> 146,166
<INCOME-TAX> 53,603
<INCOME-CONTINUING> 92,563
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 92,563
<EPS-BASIC> 0<F1>
<EPS-DILUTED> 0<F1>
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Protective Life 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 nine months
ended September 30, 1999
Safe Harbor for Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the "Act")
encourages companies to make "forward-looking statements" by creating a safe
harbor to protect the companies from securities law liability in connection with
forward-looking statements. Forward-looking statements can be identified by use
of words such as "expect," "estimate," "project," "budget," "forecast,"
"anticipated," "plan," and similar expressions. Protective Life 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. Unless the context otherwise requires, "Protective Life" refers to the
consolidated group of Protective Life Insurance Company and its affiliates.
WE OPERATE IN A MATURE, HIGHLY COMPETITIVE INDUSTRY, WHICH COULD LIMIT OUR
ABILITY TO GAIN OR MAINTAIN OUR POSITION IN THE INDUSTRY.
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. Additionally, the United States Congress has approved
<PAGE>
legislation that would permit commercial banks, insurance companies and
investment banks to combine, provided certain requirements are satisfied.
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 financial strength and claims-paying-ability ratings from rating
agencies.
Protective Life competes against other insurance companies and
financial institutions in the origination of commercial mortgage loans.
A RATINGS DOWNGRADE COULD ADVERSELY AFFECT OUR ABILITY TO COMPETE.
Ratings are an important factor in Protective Life's competitive
position. Rating organizations periodically review the financial performance and
condition of insurers, including Protective Life. A downgrade in the ratings of
Protective Life 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 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.
OUR POLICY CLAIMS FLUCTUATE FROM YEAR TO YEAR.
Protective Life's results may fluctuate from year to year on account of
fluctuations in policy claims received by Protective Life.
WE COULD BE FORCED TO SELL ILLIQUID INVESTMENTS AT A LOSS TO COVER POLICYHOLDER
WITHDRAWALS.
Many of the products offered by Protective Life allow policyholders and
contract holders to withdraw their funds under defined circumstances. Protective
Life designs products and configures 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 owns a significant amount of liquid
assets, many of its assets are relatively illiquid. Significant unanticipated
withdrawal or surrender activity could, under some circumstances, compel
Protective Life to dispose of illiquid assets on unfavorable terms, which could
have a material adverse effect on Protective Life.
INTEREST-RATE FLUCTUATIONS COULD NEGATIVELY AFFECT OUR SPREAD INCOME.
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
<PAGE>
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.
INSURANCE COMPANIES ARE HIGHLY REGULATED.
Protective Life is subject to government regulation in each of the
states in which it conducts business. Such regulation is vested in state
agencies having broad administrative power dealing with many aspects of the
insurance business, which may include premium rates, marketing practices,
advertising, policy forms, and capital adequacy, and is concerned primarily with
the protection of policyholders rather than share owners. Protective Life cannot
predict the form of any regulatory initiatives.
Protective Life acts as a fiduciary and is subject to regulation by the
United States Department of Labor when providing a variety of products and
services to employee benefit plans governed by ERISA. Severe penalties are
imposed by ERISA on fiduciaries that breach their duties to the plans under
ERISA's prohibited transaction provisions.
Certain policies, contracts and annuities offered by Protective Life
are subject to regulation under the federal securities laws administered by the
Securities and Exchange Commission. The federal securities laws contain
regulatory restrictions and criminal, administrative and private remedial
provisions.
A TAX LAW CHANGE COULD ADVERSELY AFFECT OUR ABILITY TO COMPETE WITH
NON-INSURANCE PRODUCTS.
Under the Internal Revenue Code of 1986, as amended, 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 Internal Revenue 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, would be adversely affected with
respect to their ability to sell such products, and, depending on grandfathering
provisions, the surrenders of existing annuity contracts and life insurance
policies. In addition, life insurance products are often used to fund estate tax
obligations. If the estate tax was eliminated, the demand for certain life
insurance products would be adversely affected. Protective Life cannot predict
what future tax initiatives may be proposed which could affect Protective Life.
<PAGE>
INDUSTRYWIDE LITIGATION CONCERNING SALES PRACTICES, AGENT MISCONDUCT, FAILURE TO
SUPERVISE AGENTS, AND OTHER MATTERS COULD RESULT IN SUBSTANTIAL JUDGEMENTS
AGAINST US.
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 (where Protective Life maintains its headquarters), juries
have substantial discretion in awarding punitive and non-economic compensatory
damages, which creates the potential for unpredictable material adverse
judgments in any given lawsuit. Protective Life, like other insurers, in the
ordinary course of business, is involved in such litigation or alternatively in
arbitration. The outcome of any such litigation or arbitration cannot be
predicted with certainty. In addition, in some class action and other lawsuits
involving insurers' sales practices, insurers have made material settlement
payments.
OUR INVESTMENTS ARE SUBJECT TO RISKS.
Protective Life's invested assets (including derivative financial
instruments) 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.
OUR ACQUISITION STRATEGY INVOLVES RISKS.
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. Protective
Life has also from time to time acquired other companies and continued to
operate them as subsidiaries. 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.
WE ARE DEPENDENT ON THE PERFORMANCE OF OTHERS.
Protective Life's results may be affected by the performance of others
because 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; and a portion of the sales in the Individual
Life, West Coast, Dental, and Financial Institutions Divisions comes from
arrangements with unrelated marketing organizations.
<PAGE>
YEAR 2000 COMPUTER COMPLIANCE ISSUES MAY ADVERSELY AFFECT US.
Computer hardware and software often denote the year using two digits
rather than four; for example, the year 1999 often is denoted by such hardware
and software as "99." It is probable that such hardware and software will
malfunction when calculations involving the year 2000 are attempted because the
hardware and/or software will interpret "00" as representing the year 1900
rather 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.
Because 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 or Protective Life's operations, or that the Year 2000
issue will not otherwise adversely affect PLC or Protective Life.
Should some of PLC's systems not be available due to Year 2000
problems, in a reasonable likely worst case scenario, PLC or Protective Life 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.
OUR REINSURANCE PROGRAM INVOLVES RISKS.
Protective Life cedes insurance to other insurance companies through
reinsurance. However, Protective Life 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.
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
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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.
