- -------------------------------------------------------------------------------
FORM 10-Q
------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File 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 May 7, 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 Months
ended March 31, 1999 and 1998 (unaudited)
Consolidated Condensed Balance Sheets as of March 31, 1999
(unaudited) and December 31, 1998
Consolidated Condensed Statements of Cash Flows for the
Three Months ended March 31, 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 March 31, 1999, and the
related consolidated condensed statements of income and cash flows for the
three-month periods ended March 31, 1999 and 1998. These financial statements
are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the 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, 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.
PricewaterhouseCoopers LLP
Birmingham, Alabama
April 23, 1999
2
<PAGE>
<TABLE>
<CAPTION>
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in thousands)
(Unaudited)
THREE MONTHS ENDED
MARCH 31
-----------------------
1999 1998
---- -----
REVENUES
<S> <C> <C>
Premiums and policy fees $ 269,738 $230,514
Reinsurance ceded (117,952) (93,647)
--------- ---------
Premiums and policy fees, net of reinsurance ceded 151,786 136,867
Net investment income 149,454 149,241
Realized investment gains 1,449 11
Other income 3,371 3,840
---------- ---------
306,060 289,959
---------- ---------
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance ceded:
1999 - $63,686; 1998 - $57,363) 185,436 180,390
Amortization of deferred policy acquisition costs 30,952 24,827
Other operating expenses (net of reinsurance ceded:
1999 - $30,404; 1998 - $31,709) 43,288 42,755
--------- ---------
259,676 247,972
INCOME BEFORE INCOME TAX 46,384 41,987
Income tax expense 16,499 15,244
--------- ---------
NET INCOME $ 29,885 $ 26,743
========= ========
</TABLE>
See notes to consolidated condensed financial statements
3
<PAGE>
<TABLE>
<CAPTION>
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
MARCH 31 DECEMBER 31
1999 1998
------------- ------------
(Unaudited)
ASSETS
Investments:
<S> <C> <C>
Fixed maturities $ 6,335,576 $ 6,400,262
Equity securities 12,395 12,258
Mortgage loans on real estate 1,782,972 1,623,603
Investment in real estate, net of accumulated depreciation 15,160 14,868
Policy loans 231,976 232,670
Other long-term investments 76,088 70,078
Short-term investments 75,236 159,655
-------------- ------------
Total investments 8,529,403 8,513,394
Accrued investment income 99,041 100,395
Accounts and premiums receivable, net of allowance for
uncollectible amounts 39,076 31,265
Reinsurance receivables 769,703 756,370
Deferred policy acquisition costs 867,232 841,425
Property and equipment, net 46,472 42,374
Other assets 35,699 34,632
Assets related to separate accounts
Variable Annuity 1,365,035 1,285,952
Variable Universal Life 17,752 13,606
Other 3,478 3,482
-------------- --------------
$11,772,891 $11,622,895
============== ==============
LIABILITIES
Policy liabilities and accruals:
Future policy benefits and claims $ 4,233,530 $ 4,140,003
Unearned premiums 382,063 389,294
------------ ------------
4,615,593 4,529,297
Guaranteed investment contract deposits 2,729,461 2,691,697
Annuity deposits 1,529,189 1,519,820
Other policyholders' funds 214,020 219,356
Other liabilities 205,030 226,310
Accrued income taxes 4,212 (10,992)
Deferred income taxes 22,588 51,735
Notes payable 2,363 2,363
Indebtedness to related parties 18,000 20,898
Liabilities related to separate accounts
Variable Annuity 1,365,035 1,285,952
Variable Universal Life 17,752 13,606
Other 3,478 3,482
-------------- -------------
Total liabilities 10,726,721 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 716,404 686,519
Accumulated other comprehensive income
Net unrealized gains on investments
(net of income tax: 1999 - $1,033; 1998 - $29,646) 1,920 55,057
-------------- -------------
Total share-owner's equity 1,046,170 1,069,371
------------ ------------
$11,772,891 $11,622,895
============== =============
See notes to consolidated condensed financial statements
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
THREE MONTHS ENDED
MARCH 31
------------------------------
1999 1998
------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 29,885 $ 26,743
Adjustments to reconcile net income to net cash provided by operating activities:
Realized investment gains (1,449) (11)
Amortization of deferred policy acquisition costs 30,953 24,827
Capitalization of deferred policy acquisition costs (48,557) (43,930)
Depreciation expense 1,739 1,917
Deferred income tax (534) (4,247)
Accrued income tax 15,204 11,868
Interest credited to universal life and investment products 85,361 84,729
Policy fees assessed on universal life and investment products (36,243) (34,045)
Change in accrued investment income and other receivables (24,999) 7,339
Change in policy liabilities and other policyholders'
funds of traditional life and health products 36,010 114,125
Change in other liabilities (20,396) (46,790)
Other (net) 2,298 (20,811)
------------- ------------
Net cash provided by operating activities 69,272 121,714
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reductions of investments
Investments available for sale 3,682,197 1,742,067
Other 59,209 76,911
Sale of investments
Investments available for sale 214,724 145,772
Other 47,959 234,645
Cost of investments acquired
Investments available for sale (3,947,000) (1,974,390)
Other (163,781) (281,863)
Purchase of property and equipment (5,543) (2,684)
Sale of property and equipment 0 4
-------------- --------------
Net cash used in investing activities (112,236) (59,538)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings under line of credit arrangements and debt 270,100 304,500
Principal payments on line of credit arrangements and debt (270,100) (304,500)
Investment product deposits and change in universal life deposits 401,145 330,148
Investment product withdrawals (358,180) (431,521)
----------- -----------
Net cash provided by financing activities 42,965 101,373
------------ -----------
INCREASE (DECREASE) IN CASH 0 (39,197)
CASH AT BEGINNING OF PERIOD 0 39,197
-------------- ------------
CASH AT END OF PERIOD $ 0 $ 0
============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period:
Interest on debt $ 517 $ 856
Income taxes $ 0 $ 9,995
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Reduction of principal on note from ESOP $ 183 $ 179
See notes to consolidated condensed financial statements
</TABLE>
5
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements
of Protective Life Insurance Company ("Protective Life") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the disclosures required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation have been included. Operating
results for the three month period ended March 31, 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), 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 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
Three Months Ended March 31, 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 64,420 $18,328 $41,105 $73,718 $66,753
Reinsurance ceded (37,469) (12,788) (8,597) (17,535) (41,563)
------- ------- -------- ------- -------
Net of reinsurance ceded 26,951 5,540 32,508 56,183 25,190
Net investment income 15,553 18,042 33,316 3,593 5,795
Realized investment gains (losses) 0 0 0 0 0
Other income (1,029) (6) (9) 365 2,833
------- --------- --------- -------- --------
Total revenues 41,475 23,576 65,815 60,141 33,818
------- ------- ------- ------- -------
Benefits and settlement expenses 18,922 14,589 35,523 40,244 11,310
Amortization of deferred policy
acquisition costs 8,826 1,405 6,094 2,538 6,515
Other operating expenses 5,082 2,000 6,426 13,986 11,023
------- ------ ------- ------- -------
Total benefits and expenses 32,830 17,994 48,043 56,768 28,848
------- ------- ------- -------- -------
Income before income tax 8,645 5,582 17,772 3,373 4,970
Retirement Savings and
Investment Products
---------------------------
Guaranteed Corporate
Investment Investment and Total
Contracts Products Other Adjustments Consolidated
----------- ---------- ---------- ----------- ------------
Premiums and policy fees $ 5,382 $ 32 $269,738
Reinsurance ceded (117,952)
---------- ---------- --------
Net of reinsurance ceded 5,382 32 151,786
--------
Net investment income $51,650 25,566 (4,061) 149,454
Realized investment gains (losses) 3,070 648 0 $(2,269) 1,449
Other income 0 748 469 3,371
---------- -------- -------- ---------- ---------
Total revenues 54,720 32,344 (3,560) (2,269) 306,060
------- ------- ------- ------- --------
Benefits and settlement expenses 43,927 20,859 62 185,436
Amortization of deferred
acquisition costs 192 5,379 3 30,952
Other operating expenses 741 3,159 871 43,288
-------- ------- ------- ---------
Total benefits and expenses 44,860 29,397 936 259,676
------- ------- ------- --------
Income before income tax 9,860 2,947 (4,494) 46,384
Income tax expense 16,499 16,499
---------
Net income $ 29,885
=========
7
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Operating Segment Income for the
Three Months Ended March 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>
Premiums and policy fees $52,300 $17,686 $28,566 $64,438 $63,370
Reinsurance ceded (18,275) (10,466) (4,322) (25,326) (35,258)
------- ------- -------- ------- -------
Net of reinsurance ceded 34,025 7,220 24,244 39,112 28,112
Net investment income 14,020 15,012 26,732 3,857 6,244
Realized investment gains (losses)
Other income (3) 599 2,790
---------- ----------- ----------- --------- --------
Total revenues 48,042 22,232 50,976 43,568 37,146
------- -------- ------- ------- -------
Benefits and settlement expenses 27,197 15,395 29,105 28,318 15,167
Amortization of deferred policy
acquisition costs 7,172 (12) 4,541 2,970 5,649
Other operating expense 7,566 2,391 5,458 10,205 12,271
-------- -------- --------- ------- -------
Total benefits and expenses 41,935 17,774 39,104 41,493 33,087
------- ------- -------- ------- -------
Income before income tax 6,107 4,458 11,872 2,075 4,059
Retirement Savings and
Investment Products
-------------------------------
Guaranteed Corporate
Investment Investment and Total
Contracts Products Other Adjustments Consolidated
------------ ----------- ---------- ----------- ------------
Premiums and policy fees $ 4,062 $ 92 $230,514
Reinsurance ceded (93,647)
---------- -------- ---------
Net of reinsurance ceded 4,062 92 136,867
Net investment income $53,435 26,218 3,723 149,241
Realized investment gains (losses) (433) (87) $ 531 11
Other income (63) 517 3,840
----------- --------- ------- ---------- ---------
Total revenues 53,002 30,130 4,332 531 289,959
------- ------- ------ -------- --------
Benefits and settlement expenses 44,656 20,269 283 180,390
Amortization of deferred policy
acquisition costs 174 4,330 3 24,827
Other operating expenses 185 3,641 1,038 42,755
-------- ------- ------ --------
Total benefits and expenses 45,015 28,240 1,324 247,972
------- ------- ------ --------
Income before income tax 7,987 1,890 3,008 41,987
Income tax expense 15,244 15,244
--------
Net income $ 26,743
========
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Operating Segment Assets
March 31, 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 $1,102,110 $1,162,824 $1,551,514 $205,024 $644,087
Deferred policy acquisition costs 316,898 152,029 249,252 25,286 37,612
----------- ----------- ----------- --------- ---------
Total assets $1,419,008 $1,314,853 $1,800,766 $230,310 $681,699
========== ========== ========== ======== ========
Retirement Savings and
Investment Products
----------------------------------
Guaranteed Corporate
Investment Investment and Total
Contracts Products Other Consolidated
Investments and other assets $2,888,250 $2,848,469 $503,381 $10,905,659
Deferred policy acquisition costs 1,453 84,696 6 867,232
------------ ------------ ------------ -------------
Total assets $2,889,703 $2,933,165 $503,387 $11,772,891
========== ========== ======== ===========
Operating Segment Assets
December 31, 1998
(In Thousands)
Specialty Insurance
Life Insurance Products
Dental and
Individual Consumer Financial
Life West Coast Acquisitions Benefits Institutions
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
---------------------------------
Guaranteed Corporate
Investment Investment and Total
Contracts 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 March 31, 1999, and for the three 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
$538.9 million and $32.2 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 March 31, 1999 and December 31,
1998, prepared on the basis of reporting investments at amortized cost rather
than at market values, are as follows:
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Total investments $ 8,519,449 $ 8,412,167
Deferred policy acquisition costs 875,518 857,949
All other assets 2,376,256 2,268,076
------------ ------------
$11,771,223 $11,538,192
=========== ===========
Deferred income taxes $ 22,840 $ 22,089
All other liabilities 10,704,133 10,501,789
----------- -----------
10,726,973 10,523,878
Share-owner's equity 1,044,250 1,014,314
------------ -----------
$11,771,223 $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 options and futures contracts are
sometimes used as hedges against changes in interest rates for certain
investment, primarily outstanding mortgage loan commitments, 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 March 31, 1999, open option and open
futures contracts with a notional amount of $600.0 million were in a $0.5
million net unrealized loss position. Additionally, Protective Life uses
interest rate
10
<PAGE>
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
March 31, 1999, related open interest rate swap contracts with a notional amount
of $677.0 million were in a $4.9 million net unrealized gain position.
NOTE G - COMPREHENSIVE INCOME (LOSS)
The following table sets forth Protective Life's comprehensive income
(loss) for the three months ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended
March 31
----------------------------
(In Thousands)
1999 1998
---- ----
<S> <C> <C>
Net income $29,885 $26,743
Increase (decrease) in net unrealized gains
on investments (net of income tax:
1999 - $(29,120); 1998 - $83) (52,195) 107
Reclassification adjustment for amounts included
in net income (net of income tax:
1999 - $(507); 1998 - $(4)) (942) (7)
---------- ----------
Comprehensive income (loss) $(23,252) $26,843
======== =======
</TABLE>
NOTE H - 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.
11
<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 (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 Guaranteed
Investment Contracts and Investment Products Divisions. Protective Life also has
an additional business segment which is described herein as Corporate and Other.
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 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>
THREE MONTHS PERCENTAGE
ENDED INCREASE/
MARCH 31 (DECREASE)
---------------------------- -------------
(IN THOUSANDS)
1999 1998
---- ----
<S> <C> <C> <C>
Premiums and policy fees $151,786 $136,867 10.9 %
Net investment income 149,454 149,241 0.1
Realized investment gains 1,449 11 ---
Other income 3,371 3,840 (12.2)
---------- ----------
$306,060 $289,959
======== ========
</TABLE>
12
<PAGE>
Premiums and policy fees increased $14.9 million or 10.9% in the first
three months of 1999 over the first three months of 1998. Premiums and policy
fees in the Individual Life and West Coast Divisions decreased $7.1 million and
$1.7 million, respectively in the first three months of 1999 as compared to the
same period in 1998 primarily due to an increase in the use of reinsurance by
these Divisions. In the Acquisitions Division, decreases in older acquired
blocks resulted in a $1.1 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 $9.4 million increase in premiums and
policy fees. In the Dental Division premiums and policy fees related to dental
indemnity insurance increased $15.5 million in the first three months of 1999 as
compared to the same period in 1998. Premiums and policy fees related to the
Dental Division's other businesses increased $1.6 million in the first three
months of 1999 as compared to the same period in 1998. Premiums and policy fees
from the Financial Institutions Division decreased $2.9 million in the first
three months of 1999 as compared to the first three months of 1998 of which $3.5
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 other businesses increased $0.6 million in the first three months
of 1999 as compared to the same period in 1998. The increase in premiums and
policy fees from the Investment Products Division was $1.3 million.
Net investment income in the first three months of 1999 increased by
$0.2 million over the corresponding period of the preceding year. The average
yield on investments was down slightly in the first quarter of 1999 as compared
to 1998 due to having greater liquidity in the investment portfolio to fund GIC
withdrawals.
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 three months of 1999 were $1.4
million as compared to less than $0.1 million in the corresponding period of
1998.
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. Other income from all sources decreased $0.5 million in the first
three months of 1999 as compared with the first three months of 1998.
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
THREE MONTHS ENDED MARCH 31
(IN THOUSANDS)
1999 1998
---- ----
Operating Income (Loss)(1)
Life Insurance
<S> <C> <C>
Individual Life $ 8,645 $ 6,107
West Coast 5,582 4,458
Acquisitions 17,772 11,872
Specialty Insurance Products
Dental and Consumer Benefits 3,373 2,075
Financial Institutions 4,970 4,059
Retirement Savings and Investment Products
Guaranteed Investment Contracts 6,789 8,420
Investment Products 2,947 1,934
Corporate and Other (4,495) 3,008
-------- --------
Total operating income 45,583 41,933
-------- -------
Realized Investment Gains (Losses)
Guaranteed Investment Contracts 3,070 (433)
Investment Products 648 (87)
Unallocated Realized Investment Gains (Losses) (2,269) 531
Related Amortization of Deferred Policy Acquisition Costs
Investment Products (648) 43
--------- ----------
Total net 801 54
--------- ----------
Income (Loss) Before Income Tax
Life Insurance
Individual Life 8,645 6,107
West Coast 5,582 4,458
Acquisitions 17,772 11,872
Specialty Insurance Products
Dental and Consumer Benefits 3,373 2,075
Financial Institutions 4,970 4,059
Retirement Savings and Investment Products
Guaranteed Investment Contracts 9,859 7,987
Investment Products 2,947 1,890
Corporate and Other (4,495) 3,008
Unallocated Realized Investment Gains (Losses) (2,269) 531
-------- ---------
Total income before income tax $46,384 $41,987
======= =======
1 Income before income tax excluding realized investment gains and losses and
related amortization of deferred acquisition costs.
</TABLE>
14
<PAGE>
The Individual Life Division's pretax earnings of $8.6 million in the
first three months of 1999 were $2.5 million above the same period of 1998. The
Division's 1999 results include $1.6 million of expenses relating to a venture
to sell term and term-like products through direct response print, radio, and
television advertising. The Division has reinsured most of its mortality risk
such that mortality fluctuations have been significantly reduced. In the first
quarter last year, the Division's mortality experience was approximately $1.8
million worse than expected.
West Coast had pretax earnings of $5.6 million for the first three
months of 1999 compared to $4.5 million for the period ended March 31, 1998.
This increase reflects the Division's growth through sales.
Pretax earnings from the Acquisitions Division increased $5.9 million
in the first three months of 1999 as compared to the same period of 1998. The
Division's mortality experience was approximately $1.9 million better than
expected in the first three months of 1999 as compared to being approximately
$2.6 million worse than expected in the first three 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 $1.7 million in the first three
months of 1999.
The Dental Division's pretax operating earnings of $3.4 million in the
first three months of 1999 were $1.3 million higher than the same period last
year primarily due to more favorable claims experience in the first three months
of 1999 as compared to the same period in 1998.
Pretax earnings of the Financial Institutions Division were $0.9
million higher in the first three months of 1999 as compared to the same period
in 1998. The increase was primarily due to improved credit disability earnings.
Service contract earnings for the first quarter of 1999 were slightly lower than
the same period last year.
The GIC Division had pretax operating earnings of $6.8 million in the
first three months of 1999 and $8.4 million in the corresponding period of 1998.
Operating earnings during the first quarter of 1999 were lower than the same
period in 1998 due to having greater liquidity in the asset portfolio to fund
maturing contracts. Realized investment gains associated with this Division in
the first three months of 1999 were $3.1 million as compared to losses of $0.4
million in the same period last year. As a result, total pretax earnings were
$9.9 million in the first three months of 1999 compared to $8.0 million for the
same period last year.
Investment Products Division pretax operating earnings of $2.9 million
were $1.0 million higher in the first three months of 1999 compared to the same
period of 1998. Revenue growth has been partially offset by the rising cost of
interest rate incentives. The Division had no realized investment gains (net of
related amortization of deferred policy acquisition costs) in the first three
months of 1999 as compared to losses of less than $0.1 million in the same
period of 1998. Total pretax earnings were $2.9 million in the first three
months of 1999 as compared to $1.9 million in the same period of 1998.
15
<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 interest on substantially all debt), and the operations of a small
noninsurance subsidiary. The pretax loss for this segment was $4.5 million in
the first three months of 1999 compared to income of $3.0 million in the first
three 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:
THREE MONTHS
ENDED ESTIMATED EFFECTIVE
MARCH 31 INCOME TAX RATES
---------------- -------------------
1998 36.3 %
1999 35.6
The effective income tax rate for the full year of 1998 was 35.0%.
Management's estimate of the effective income tax rate for 1999 is approximately
35.6%.
Net Income
The following table sets forth net income for the periods shown, and
the percentage change from the prior period:
NET INCOME
THREE MONTHS ---------------------------------------
ENDED TOTAL PERCENTAGE
MARCH 31 (IN THOUSANDS) INCREASE
- -------------- -------------- ----------
1998 $26,743 20.6 %
1999 29,885 11.7
Compared to the same period in 1998, net income in the first three
months of 1999 increased $3.1 million, reflecting improved operating earnings in
the Individual Life, West Coast, Acquisitions, Dental, Financial Institutions,
and Investment Products Divisions and higher realized investment gains (net of
related amortization of deferred policy acquisition costs), which were partially
offset by lower operating earnings in the Guaranteed Investment Contracts
Division and the Corporate and Other segment.
Recently Issued Accounting Standards
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 will require Protective Life
to report derivative financial instruments
16
<PAGE>
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, 2000.
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,
Protective Corporation ("PLC"), and other affiliates of PLC. Protective Life
Corporation ("PLC") began work on the Year 2000 problem in 1995. At that time,
PLC identified and assessed PLC's critical mainframe systems, and prioritized
the remediation efforts that were to follow. During 1998 all other hardware and
software, including non-information technology (non-IT) related hardware and
software, were included in the process. PLC's Year 2000 plan includes all
subsidiaries.
PLC estimates that Year 2000 remediation is complete for most of its
insurance administration and general administration systems. Of the general
administration systems that are not yet remediated, the majority are new systems
that were implemented during 1998 and are scheduled to be upgraded to the
current release of the system during the second quarter of 1999. All remediated
systems are currently in production. Personal computer network hardware and
software have been reviewed, with upgrades implemented where necessary. A review
of personal computer desktop software is in progress, but not complete. All Year
2000 personal computer preparations are expected to be completed by June 30,
1999. With respect to non-IT equipment and processes, the assessment and
remediation is progressing on schedule and all known issues are expected to be
remediated before December 31, 1999.
One insurance administration system, a personal computer database
system that processes member information for one subsidiary, has been identified
as mission critical and is not yet fully remediated. This effort is on schedule
and targeted to be complete by June 30, 1999.
17
<PAGE>
Future date tests are used to verify a system's ability to process
transactions dated up to and beyond January 1, 2000. Future date tests are
complete or in-progress for the majority of PLC's mission-critical systems. A
large portion of the testing is conducted by a contract programming staff
dedicated full time to Year 2000 preparations. These resources have been part of
PLC's Year 2000 project since 1995.
Integrated tests involve multiple system testing and are used to verify
the Year 2000 readiness of interfaces and connectivity across multiple systems.
PLC is using its mainframe computer to simulate a Year 2000 production
environment and to facilitate integrated testing.
Integrated testing will continue throughout 1999.
Business partners and suppliers that provide products or services
critical to PLC's operations are being reviewed and in some cases their Year
2000 preparations are being monitored by PLC. To date, no partners or suppliers
have reported that they expect to be unable to continue supplying products and
services after January 1, 2000. Monitoring and testing of critical partners and
suppliers will continue throughout 1999. Formal contingency planning began in
March 1999 and will continue throughout the year. These plans will augment PLC's
existing disaster recovery plans.
PLC cannot specifically identify all of the costs to develop and
implement its Year 2000 plan. The cost of new systems to replace non-compliant
systems have been capitalized in the ordinary course of business. Other costs
have been expensed as incurred. Through February 28, 1999, costs that have been
specifically identified as relating to the Year 2000 problem total $4.1 million,
with an additional $1.1 million estimated to be required to support continued
testing activity. PLC's Year 2000 efforts have not adversely affected its normal
procurement and development of information technology.
Although PLC believes that a process is in place to successfully
address Year 2000 issues, there can be no assurances that PLC's efforts will be
successful, that interactions with other service providers with Year 2000 issues
will not impair Protective Life's operations, or that the Year 2000 issue will
not otherwise adversely affect Protective Life.
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.
18
<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: May 14, 1999 /s/ Jerry W. DeFoor
-------------------
Jerry W. DeFoor
Vice President and Controller,
and Chief Accounting Officer
(Duly authorized officer)
19
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 6,335,576
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 12,395
<MORTGAGE> 1,782,972
<REAL-ESTATE> 15,160
<TOTAL-INVEST> 8,529,403
<CASH> 0
<RECOVER-REINSURE> 769,703
<DEFERRED-ACQUISITION> 867,232
<TOTAL-ASSETS> 11,772,891
<POLICY-LOSSES> 4,233,530
<UNEARNED-PREMIUMS> 382,063
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 214,020
<NOTES-PAYABLE> 2,363
0
2
<COMMON> 5,000
<OTHER-SE> 1,041,168
<TOTAL-LIABILITY-AND-EQUITY> 11,772,891
151,786
<INVESTMENT-INCOME> 149,454
<INVESTMENT-GAINS> 1,449
<OTHER-INCOME> 3,371
<BENEFITS> 185,436
<UNDERWRITING-AMORTIZATION> 30,952
<UNDERWRITING-OTHER> 43,288
<INCOME-PRETAX> 46,384
<INCOME-TAX> 16,499
<INCOME-CONTINUING> 29,885
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,885
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F1>
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Protective Life Insurance Company is a wholly-owned subsidiary of Protective
Life Corporation (NYSE:PL) and is not required to present EPS information.
</FN>
</TABLE>
Exhibit 99
to
Form 10-Q
of
Protective Life Insurance Company
for the three months
ended March 31, 1999
Safe Harbor for Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the "Act")
encourages companies to make "forward-looking statements" by creating a safe
harbor to protect the companies from securities law liability in connection with
forward-looking statements. Forward-looking statements can be identified by use
of words such as "expect," "estimate," "project," "budget," "forecast,"
"anticipated," "plan," and similar expressions. Protective Life 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 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 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 share-owner's. Protective Life cannot predict the form
of any future regulatory initiatives.
Under the Internal Revenue Code of 1986, as amended (the Code), income
tax payable by policyholders on investment earnings is deferred during the
accumulation period of certain life insurance and annuity products. This
favorable tax treatment may give certain of Protective Life's
<PAGE>
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 or alternatively in arbitration. The outcome of
any such litigation or arbitration cannot be predicted with certainty. In
addition, in some class action and other lawsuits involving insurers' sales
practices, insurers have made material settlement payments.
INVESTMENT RISKS. Protective Life's invested assets and 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.
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. 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.
RELIANCE UPON 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; 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.
YEAR 2000. Computer hardware and software often denote the year using
two digits rather than four; for example, the year 1998 often is denoted by such
hardware and software as "98." It is probable that such hardware and software
will malfunction when calculations involving the year 2000 are attempted because
the hardware and/or software will interpret "00" as
<PAGE>
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. The majority
of the modifications necessary for PLC's mainframe systems to be able to process
transactions rated beyond 1999 have been completed. PLC currently anticipates
that its remaining systems with Year 2000 issues will have been addressed and
appropriate action taken before December 31, 1999.
Due to the fact that PLC does not control all of the factors that could
impact its Year 2000 readiness, there can be no assurances that PLC's efforts
will be successful, that interactions with other service providers with Year
2000 issues will not impair PLC's operations, or that the Year 2000 issue will
not otherwise adversely affect PLC.
Should some of PLC's systems not be available due to Year 2000
problems, in a reasonably likely worst case scenario, PLC may experience
significant delays in its ability to perform certain functions, but does not
expect an inability to perform critical functions or to otherwise conduct
business. However, other worst case scenarios, depending upon their duration,
could have a material adverse effect on of PLC and Protective Life and their
operations.
REINSURANCE. Protective Life's insurance subsidiaries cede insurance to
other insurance companies. 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 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.
