<PAGE>
- - -------------------------------------------------------------------------------
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----- -----
Commission File Number 0-9924
PROTECTIVE LIFE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-2492236
(State of incorporation) (IRS Employer Identification Number)
2801 HIGHWAY 280 SOUTH
BIRMINGHAM, ALABAMA 35223
(Address of principal executive offices)
(205) 879-9230
(Registrant's telephone number)
-------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Number of shares of Common Stock, $.50 par value, outstanding as of May 6, 1994:
13,698,752 shares.
<PAGE>
PROTECTIVE LIFE CORPORATION
INDEX
Page Number
-----------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Report of Independent Accountants . . . . . . . . . . . . . . . . . . 2
Consolidated Condensed Statements of Income for the Three Months
ended March 31, 1994 and 1993 (unaudited) . . . . . . . . . . . . . 3
Consolidated Condensed Balance Sheets as of March 31, 1994
(unaudited) and December 31, 1993 . . . . . . . . . . . . . . . . . 4
Consolidated Condensed Statements of Cash Flows for the Three Months
ended March 31, 1994 and 1993 (unaudited) . . . . . . . . . . . . . 5
Notes to Consolidated Condensed Financial Statements (unaudited). . . 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . 10
PART II. OTHER INFORMATION:
Item 4. Results of Votes of Security Holders. . . . . . . . . . . . . . 19
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . 20
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Stockholders
Protective Life Corporation
Birmingham, Alabama
We have reviewed the accompanying consolidated condensed balance sheet of
Protective Life Corporation and subsidiaries as of March 31, 1994, and the
related consolidated condensed statements of income and cash flows for the
three-month periods ended March 31, 1994 and 1993. These financial statements
are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated condensed financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1993, and the
related consolidated statements of income, stockholders' equity, and cash flows
for the year then ended (not presented herein); and in our report dated February
14, 1994, we expressed an unqualified opinion which contains an explanatory
paragraph regarding the changes in accounting for certain investments in debt
and equity securities in 1993 and postretirement benefits other than pensions in
1992 on those consolidated financial statements. In our opinion, the
information set forth in the accompanying consolidated condensed balance sheet
as of December 31, 1993, is fairly stated in all material respects in relation
to the consolidated balance sheet from which it has been derived.
COOPERS & LYBRAND
Birmingham, Alabama
April 26, 1994, except for Note G
as to which the date is May 2, 1994.
2
<PAGE>
PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
--------------------
1994 1993
----- -----
<S> <C> <C>
REVENUES
Premiums and policy fees (net of premiums
ceded: 1994 - $34,126; 1993 - $29,504) $ 89,437 $ 85,848
Net investment income 100,248 81,196
Realized investment gains 2,297 125
Other income 3,562 4,930
-------- --------
195,544 172,099
-------- --------
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance:
1994 - $24,111; 1993 - $22,552) 115,876 108,737
Amortization of deferred policy
acquisition costs 20,047 17,025
Other operating expenses (net of reinsurance:
1994 - $2,729; 1993 - $2,030) 35,242 29,042
-------- --------
171,165 154,804
-------- --------
INCOME BEFORE INCOME TAX AND MINORITY
INTEREST 24,379 17,295
Income tax expense 7,801 5,361
-------- --------
INCOME BEFORE MINORITY INTEREST 16,578 11,934
Minority interest in net income
of consolidated subsidiaries 15
-------- --------
NET INCOME $ 16,578 $ 11,919
-------- --------
-------- --------
NET INCOME PER SHARE $1.21 $0.87
-------- --------
-------- --------
DIVIDENDS PAID PER SHARE $0.26 $0.23
-------- --------
-------- --------
Average shares outstanding 13,694,896 13,689,861
</TABLE>
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
3
<PAGE>
PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1994 1993
----------- -----------
ASSETS (Unaudited)
Investments:
<S> <C> <C>
Fixed maturities $3,101,454 $3,051,292
Equity securities 72,458 40,596
Mortgage loans on real estate 1,357,324 1,407,744
Investment real estate, net 28,591 22,061
Policy loans 139,284 141,135
Other long-term investments 16,744 20,191
Short-term investments 83,268 83,692
---------- ---------
Total investments 4,799,123 4,766,711
Cash 18,965 27,119
Accrued investment income 53,418 51,337
Accounts and premiums receivable, net 13,950 26,315
Reinsurance receivables 103,148 102,559
Deferred policy acquisition costs 311,909 299,584
Property and equipment, net 34,600 35,664
Other assets 11,280 3,316
Assets held in separate accounts 3,862 3,400
---------- ----------
TOTAL ASSETS $5,350,255 $5,316,005
---------- ----------
---------- ----------
LIABILITIES
Policy liabilities and accruals $1,496,042 $1,469,630
Guaranteed investment contract deposits 2,065,102 2,015,075
Annuity deposits 1,036,828 1,005,742
Other policyholders' funds 141,008 141,975
Other liabilities 95,936 96,682
Accrued income taxes 8,658 6,381
Deferred income taxes 37,815 69,269
Debt 146,099 147,118
Liabilities related to separate accounts 3,862 3,400
---------- ----------
TOTAL LIABILITIES 5,031,350 4,955,272
---------- ----------
STOCKHOLDERS' EQUITY
Preferred Stock, $1 par value
Shares authorized: 850,000; Issued: none
Junior Participating Cumulative Preferred Stock, $1 par value
Shares authorized: 150,000; Issued: none
Common Stock, $0.50 par value
Shares authorized: 20,000,000
Issued: 1994 and 1993 - 15,668,231 7,834 7,834
Additional paid-in capital 70,807 70,469
Net unrealized gains (losses) on investments
(net of income tax: 1994 - $(8,753); 1993 - $19,774) (16,256) 39,284
Retained earnings 280,381 267,361
Treasury stock (1994 - 1,965,273 shares; 1993 - 1,974,987 shares) (18,269) (18,359)
Unallocated stock in Employee Stock Ownership Plan
(1994 - 422,073 shares; 1993 - 442,000 shares) (5,592) (5,856)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 318,905 360,733
---------- ----------
$5,350,255 $5,316,005
---------- ----------
---------- ----------
</TABLE>
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
4
<PAGE>
PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
------------------
1994 1993
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 16,578 $ 11,919
Adjustments to reconcile net income to net cash provided by
operating activities:
Net change in deferred policy acquisition costs (12,325) (5,688)
Depreciation expense 1,007 956
Deferred income taxes (31,454) (642)
Accrued income taxes 2,277 995
Interest credited to universal life and investment products 58,460 50,344
Policy fees assessed on universal life and investment products (19,089) (13,657)
Change in accrued investment income and other receivables 10,809 (86,934)
Change in policy liabilities and other policyholders' funds
of traditional life and health products 6,574 97,068
Change in other liabilities (1,923) 7,602
Other (net) (7,744) 332
-------- --------
Net cash provided by operating activities 23,170 62,295
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Cost of investments acquired
Investments available for sale (304,422)
Other (100,649) (579,960)
Maturities and principal reductions of investments
Investments available for sale 166,705
Other 88,091 204,926
Sale of investments
Investments available for sale 60,609
Other 2,249 112,381
Acquisitions and bulk reinsurance assumptions (27)
Purchase of property and equipment (1,147) (1,757)
Sale of property and equipment 1,204 1
-------- --------
Net cash used in investing activities (87,360) (264,436)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings under line of credit
arrangements and long-term debt 4,000 156,700
Principal payments on line of credit arrangements
and long-term debt (5,019) (101,108)
Dividends to stockholders (3,558) (3,149)
Change in universal life, annuity, and guaranteed
investment contract product deposits 60,613 136,774
-------- --------
Net cash provided by financing activities 56,036 189,217
-------- --------
DECREASE IN CASH (8,154) (12,924)
CASH AT BEGINNING OF PERIOD 27,119 14,959
-------- --------
CASH AT END OF PERIOD $ 18,965 $ 2,035
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period:
Interest on debt $ (2,703) $ (1,252)
Income taxes $ (7,072) $ 5,000)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Change in minority interest in consolidated subsidiary $ (1,311)
Reissuance of treasury stock to ESOP $ 3 $ 3
Unallocated stock in ESOP $ 264 $ 344
Reissuance of treasury stock $ 425
Acquisitions and bulk reinsurance assumptions
Assets acquired $ 27
Liabilities assumed 0
-----
Net $ 27
-----
-----
</TABLE>
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
5
<PAGE>
PROTECTIVE LIFE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements of
Protective Life Corporation (the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the disclosures required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation have been included. Operating results for the
three month period ended March 31, 1994 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1994. For further
information, refer to the consolidated financial statements and notes thereto
included in the Company's annual report on Form 10-K for the year ended
December 31, 1993.
NOTE B - CONTINGENT LIABILITIES AND COMMITMENTS
At March 31, 1994, the Company's life insurance subsidiaries were committed
to fund approximately $222.5 million of long-term investments. Also, the
Company has issued a guarantee in connection with the sale of certain tax exempt
mortgage loans which may be put to the Company in the event of default. At
March 31, 1994, the loans totaled $25.7 million.
At March 31, 1994, the Company was contingently liable as a guarantor of
$8.1 million in mortgage debt in the name of a joint venture in which the
Company is a partner. Should the joint venture become unable to meet its
obligation on this debt, the Company would assume title to the real estate
development along with the debt.
The Company is contingently liable to obtain a $20 million letter of credit
under indemnity agreements with its directors. Such agreements provide
insurance protection in excess of the directors' and officers' liability
insurance in force at the time up to $20 million. Should certain events occur
constituting a change in control of the Company, the Company must obtain the
letter of credit upon which directors may draw for defense or settlement of any
claim relating to performance of their duties as directors. The Company has
similar agreements with certain of its officers providing up to $10 million in
indemnification which are not secured by the obligation to obtain a letter of
credit.
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. The Company 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.
6
<PAGE>
The Company and its subsidiaries, like other life and health insurers, from
time to time are involved in litigation. To date, no such lawsuit has resulted
in the award of any significant amount of damages against the Company. There
are currently four lawsuits pending against the Company in Alabama involving the
sales practices of agents, three of which involve allegations concerning the
sale of credit insurance. Although the outcome of any litigation cannot be
predicted with certainty, the Company believes that such litigation will not
have a material adverse effect on the financial position of the Company.
NOTE C - BUSINESS SEGMENTS
The Company operates predominantly in the life and accident and health
insurance industry. The following table sets forth total revenues, income
(loss) before income tax, and identifiable assets of the Company's business
segments.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
-------------------------------------------------
1994 1993
--------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT
-------- -------- -------- --------
(dollars in thousands)
TOTAL REVENUES:
<S> <C> <C> <C> <C>
Agency $ 29,172 14.9% $ 26,331 15.3%
Group 35,491 18.1 34,773 20.2
Financial Institutions 22,829 11.7 18,718 10.9
Investment Products 20,898 10.7 17,892 10.4
Guaranteed Investment
Contracts 45,602 23.3 39,697 23.1
Acquisitions 36,326 18.6 23,881 13.9
Corporate and Other 5,083 2.6 10,386 6.0
Unallocated Realized
Investment Gains (Losses) 143 0.1 421 0.2
-------- ------ -------- ------
$195,544 100.0% $172,099 100.0%
-------- ------ -------- ------
-------- ------ -------- ------
INCOME (LOSS) BEFORE INCOME TAX:
Agency $ 5,042 20.7% $ 4,278 24.7%
Group 1,865 7.6 2,464 14.2
Financial Institutions 2,316 9.5 2,069 12.0
Investment Products 1,173 4.8 890 5.2
Guaranteed Investment
Contracts 9,361 38.4 4,900 28.3
Acquisitions 8,966 36.8 5,931 34.3
Corporate and Other (4,487) (18.4) (3,658) (21.1)
Unallocated Realized
Investment Gains (Losses) 143 0.6 421 2.4
-------- ------ -------- ------
$ 24,379 100.0% $ 17,295 100.0%
-------- ------ -------- ------
-------- ------ -------- ------
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
MARCH 31, 1994 DECEMBER 31, 1993
--------------------- -----------------------
AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- -------
(dollars in thousands)
IDENTIFIABLE ASSETS:
<S> <C> <C> <C> <C>
Agency $ 663,145 12.4% $ 642,325 12.1%
Group 209,671 3.9 208,968 3.9
Financial Institutions 188,632 3.5 192,486 3.6
Investment Products 903,654 16.9 879,365 16.6
Guaranteed Investment
Contracts 2,056,884 38.4 2,041,564 38.4
Acquisitions 1,116,459 20.9 1,145,357 21.5
Corporate and Other 211,810 4.0 205,940 3.9
---------- ------ ---------- ------
$5,350,255 100.0% $5,316,005 100.0%
---------- ------ ---------- ------
---------- ------ ---------- ------
</TABLE>
NOTE D - STATUTORY REPORTING PRACTICES
Financial statements prepared in conformity with generally accepted
accounting principles ("GAAP") differ in some respects from the statutory
accounting practices prescribed or permitted by insurance regulatory
authorities. At March 31, 1994 the Company's life insurance subsidiaries had
net income and stockholder's equity prepared in conformity with statutory
reporting practices of $13.5 million and $274.9 million, respectively.
NOTE E - RECENTLY ADOPTED ACCOUNTING STANDARDS
At December 31, 1993, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." For purposes of adopting SFAS No. 115 the Company has
classified all of its investments in fixed maturities, equity securities, and
short-term investments as "available for sale." As prescribed by SFAS No. 115,
these investments are recorded at their market values with the resulting net
unrealized gain or loss, net of income tax, recorded as an component of
stockholders' equity. The effect of adopting SFAS No. 115 at December 31, 1993
was to increase fixed maturities by $65.6 million, decrease deferred policy
acquisition costs by $12.4 million, increase the liability for deferred income
taxes by $18.6 million, and increase stockholders' equity by $34.6 million. The
effect of having adopted SFAS No. 115 at March 31, 1994 (compared to financial
statements prepared under previous accounting standards) was to decrease fixed
maturities by $28.7 million, decrease the liability for deferred income taxes by
$10.0 million, and decrease stockholders' equity by $18.7 million.
NOTE F - CONSOLIDATED PRO FORMA RESULTS
Summarized below are the consolidated results of operations for the three
months ended March 31, 1993, on an unaudited pro forma basis, as if the
Wisconsin National acquisition had occurred as of January 1, 1993. The pro
forma information is based on the Company's historical consolidated results
of operations for the three months ended March 31, 1993 and on data provided
by Wisconsin National, using financial statement classifications consistent
with those used by the Company after giving effect to certain pro forma
adjustments. The pro forma financial information does not purport to be
indicative of results of operations that would have
8
<PAGE>
occurred had the transactions occurred on the basis assumed above nor are they
indicative of the future operations of the combined enterprises.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1993
--------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<S> <C>
Total revenues $188,048
Net income $ 12,967
Net income per share $ 0.95
</TABLE>
NOTE G - SUBSEQUENT EVENT
On May 2, 1994, the Company's stockholders approved an increase in the
number of authorized shares of Common Stock from 20 million to 80 million and of
Preferred Stock from 1 million to 4 million.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Protective Life Corporation provides financial services through the
production, distribution, and administration of insurance and investment
products. Founded in 1907, Protective Life Insurance Company ("Protective
Life") is the Company's principal operating subsidiary.
Unless the context otherwise requires, the "Company" refers to the
consolidated group of Protective Life Corporation and its subsidiaries.
RESULTS OF OPERATIONS
PREMIUMS AND POLICY FEES
The following table sets forth for the periods shown the amount of premiums
and policy fees and the percentage change from the prior period:
<TABLE>
<CAPTION>
THREE MONTHS PREMIUMS AND POLICY FEES
------------------------
ENDED AMOUNT PERCENTAGE
MARCH 31 (IN THOUSANDS) INCREASE
----------- -------------- ----------
<S> <C> <C>
1993 $85,848 15.4%
1994 89,437 4.2
</TABLE>
Premiums and policy fees increased $11.4 million or 15.4% in the first
three months of 1993 over the first three months of 1992. Increases in premiums
and policy fees from the Agency, Group, and Financial Institutions Divisions
represent increases of $2.9 million, $2.2 million and $8.9 million,
respectively. Effective July 1, 1992, the Financial Institutions Division
assumed Durham Life Insurance Company's credit business which represented $6.0
million of the Division's $8.9 million increase. Decreases in older acquired
blocks of ordinary policies represent a $1.6 million decrease in premiums and
policy fees. Lower premiums of Southeast Health Plan of Alabama, Inc. ("SEHP"),
a Birmingham-based health maintenance organization in which the Company was an
80% owner, represent a $1.8 million decrease.
Premiums and policy fees increased $3.6 million or 4.2% in the first three
months of 1994 over the first three months of 1993. Increases in premiums and
policy fees from the Agency, Group, and Financial Institutions Divisions
represent increases of $2.1 million, $1.0 million, and $3.9 million,
respectively. On July 30, 1993, the Company completed its acquisition of
Wisconsin National Life Insurance Company ("Wisconsin National"). The
acquisition resulted in a $5.0 million increase in premiums and policy fees. The
reinsurance in 1993 of a block of universal life policies resulted in a $1.8
million increase. Decreases in older acquired blocks of policies represented a
$0.6 million decrease in premiums and policy fees. On August 6, 1993, the
Company completed the sale of its ownership interest in SEHP. The sale of SEHP
decreased premiums and policy fees $9.6 million.
10
<PAGE>
NET INVESTMENT INCOME
The following table sets forth for the periods shown the amount of net
investment income and the percentage change from the prior period:
<TABLE>
<CAPTION>
NET INVESTMENT INCOME
THREE MONTHS -----------------------
ENDED AMOUNT PERCENTAGE
MARCH 31 (IN THOUSANDS) INCREASE
----------- -------------------------
<S> <C> <C>
1993 $ 81,196 24.5%
1994 100,248 23.5
</TABLE>
Net investment income in the first three months of 1993 was $16.0 million
or 24.5% higher, and in the first three months of 1994 was $19.1 million or
23.5% higher, than the corresponding period of the preceding year, primarily due
to increases in the average amount of invested assets. Invested assets have
increased primarily due to receiving annuity and guaranteed investment contract
("GIC") deposits and to acquisitions. Annuity and GIC deposits are not
considered revenues in accordance with generally accepted accounting principles.
These deposits are included in the liability section of the balance sheet. The
Wisconsin National acquisition and the reinsurance of a block of universal life
policies resulted in an increase in net investment income of $9.2 million in the
first quarter of 1994.
REALIZED INVESTMENT GAINS
The Company generally purchases its investments with the intent to hold to
maturity by purchasing investments that match future cash-flow needs. The sales
of investments that have occurred result from portfolio management decisions to
maintain proper matching of assets and liabilities.
The following table sets forth realized investment gains for the periods
shown:
<TABLE>
<CAPTION>
THREE MONTHS REALIZED
ENDED INVESTMENT GAINS
MARCH 31 (IN THOUSANDS)
----------- ----------------
<S> <C>
1993 $ 125
1994 2,297
</TABLE>
Realized investment gains for the first three months of 1994 was $2.2
million higher than the corresponding period of 1993. Realized investment gains
were lower in the 1993 first quarter primarily due to a $2.2 million increase in
the Company's allowance for uncollectible accounts on investments (primarily
relating to mortgage loans) which was recorded as a realized investment loss.
11
<PAGE>
Recently, rising interest rates have caused market values to fall below
amortized cost for many of the Company's fixed maturity investments. Therefore,
some realized investment losses may be incurred upon future sales of investments
to maintain proper matching of assets and liabilities. The Company does not
anticipate such realized investment losses will be material.
OTHER INCOME
The following table sets forth other income for the periods shown:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED OTHER INCOME
MARCH 31 (IN THOUSANDS)
------------ ---------------
<S> <C>
1993 $4,930
1994 3,562
</TABLE>
Other income consists primarily of revenues of the Company's broker-dealer
subsidiary, fees from administrative-services-only types of group accident and
health insurance contracts, and revenues of the Company's wholly-owned insurance
marketing organizations and other small noninsurance subsidiaries. The sale of
SEHP reduced other income approximately $0.9 million in the 1994 first quarter.
Other income from all other sources decreased $0.5 million in the first three
months of 1994 as compared to the first three months of 1993.
INCOME BEFORE INCOME TAX
The following table sets forth income or loss before income tax by business
segment for the periods shown:
<TABLE>
<CAPTION>
INCOME (LOSS) BEFORE INCOME TAX
THREE MONTHS ENDED MARCH 31
-------------------------------
(IN THOUSANDS)
BUSINESS SEGMENT 1993 1994
- - ---------------- ----- -----
<S> <C> <C>
Agency $ 4,278 $ 5,042
Group 2,464 1,865
Financial Institutions 2,069 2,316
Investment Products 890 1,173
Guaranteed Investment Contracts 4,900 9,361
Acquisitions 5,931 8,966
Corporate and Other (3,658) (4,487)
Unallocated Realized Investment Gains (Losses) 421 143
------- -------
$17,295 $24,379
------- -------
------- -------
Percentage Increase 25.5% 41.0%
</TABLE>
12
<PAGE>
Agency pretax earnings increased $0.8 million in the first three months of
1994 as compared to the first three months of 1993 primarily due to improvements
in mortality.
Group pretax earnings were $0.6 million lower in the first three months of
1994 as compared to the first three months of 1993 due to lower traditional
group health earnings and lower life and annuity earnings, partially offset by
improved earnings in cancer and dental products.
Pretax earnings of the Financial Institutions Division were $0.2 million
higher in the first three months of 1994 as compared to the same period in 1993.
Increased earnings in certain lines of business were partially offset by
decreases in other lines.
Investment Products Division pretax earnings were $0.3 million higher in
the first three months of 1994 compared to the same period of 1993. The
Division's earnings have increased due to the growth in annuity deposits, though
the increase was largely offset by increased expenses of $0.9 million related to
the development of new investment products.
The Guaranteed Investment Contract ("GIC") Division had pretax earnings of
$9.4 million in the first three months of 1994 and $4.9 million in the
corresponding period of 1993. Realized investment gains associated with this
Division were $2.6 million higher in the 1994 first quarter as compared to the
same period last year. GIC earnings have also increased due to improved
investment results and to the growth in GIC deposits placed with the Company. At
March 31, 1994, GIC deposits totaled $2.1 billion compared to $1.8 billion one
year earlier.
Pretax earnings from the Acquisitions Division increased $3.0 million in
the first three months of 1994 as compared to the same period of 1993. Earnings
from the Acquisitions Division are 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. As previously discussed, the
Company completed its acquisition of Wisconsin National and reinsured a block of
universal life policies during the 1993 third quarter. These two acquisitions
represent approximately $2.8 million of the increase. The Division also
experienced improved results in its other blocks of acquired policies due to
improved mortality which more than offset earnings declines due to lapsing of
policies. Additionally, the Company recently agreed to reinsure a small block
of payroll deduction policies.
The Corporate and Other segment consists of several small insurance lines
of business, net investment income and expenses not identified with the
preceding operating divisions (including interest on substantially all debt),
and the operations of several small noninsurance subsidiaries. Pretax earnings
for this segment were $0.8 million lower in the first three months of 1994 as
compared to the first three months of 1993 due to higher expenses partially
offset by higher investment income.
13
<PAGE>
INCOME TAXES
The following table sets forth the effective tax rates for the periods
shown:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED ESTIMATED
MARCH 31 EFFECTIVE TAX RATES
------------ -------------------
<S> <C>
1993 31%
1994 32
</TABLE>
The effective income tax rate for the first three months of 1993 was 31%.
In August 1993, the corporate income tax rate was increased from 34% to 35%.
Management's estimate of the effective income tax rate for 1994 is 32%.
NET INCOME
The following table sets forth net income and the net income per share for
the periods shown:
<TABLE>
<CAPTION>
NET INCOME
THREE MONTHS -------------------------------------
ENDED TOTAL PERCENTAGE
MARCH 31 (IN THOUSANDS) PER SHARE INCREASE
------------ -------------- --------- ----------
<S> <C> <C> <C>
1993 $11,919 $0.87 33.9%
1994 16,578 1.21 39.1
</TABLE>
Compared to the same period in 1993, net income per share in the first
three months of 1994 increased 39.1%, reflecting improved earnings in the
Agency, Financial Institutions, Investment Products, GIC, and Acquisitions
Divisions, and higher realized investment gains which were partially offset by
lower earnings in the Group Division and the Corporate and Other segment.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Company recently adopted Statement of Financial Accounting Standards
("SFAS") No. 115 which requires the Company to carry its investment in fixed
maturities and certain other securities at market value instead of amortized
cost. Under SFAS No. 115, unrealized gains and losses, net of income tax, on
such investments are reported as a component of stockholders' equity. The
market values of fixed maturities increase or decrease as interest rates fall or
rise. Therefore, SFAS No. 115 will cause reported stockholders' equity to
fluctuate as interest rates change.
During the 1994 first quarter, interest rates rose approximately one
percentage point. Even though the Company believes its asset/liability matching
practices and certain product features provide significant protection for the
Company against the effects of changes in interest
14
<PAGE>
rates, the new accounting rule required reporting a $53.3 million decrease in
stockholders' equity.
Although the adoption of SFAS No. 115 will not affect the Company's
operations, its reported stockholders' equity may be materially affected.
In May 1993, the Financial Accounting Standards Board issued SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan." The Company anticipates
that the impact of adopting SFAS No. 114 on its financial condition will be
immaterial.
The American Institute of Certified Public Accountants has issued Statement
of Position 93-6, "Employers' Accounting For Employee Stock Ownership Plans"
("ESOP"). Under certain "grandfathering" provisions in the Statement, employers
may elect not to apply the new accounting rules to shares acquired by ESOPs
before December 31, 1992. The Company does not plan to apply the new rules to
its existing ESOP.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations usually produce a positive cash flow. This cash
flow is used to fund an investment portfolio to finance future benefit payments
including those arising from various types of deposit contracts. Since future
benefit payments largely represent long-term obligations reserved using certain
assumed interest rates, the Company's investments are predominantly in long-
term, fixed-rate investments such as bonds and mortgage loans which provide a
sufficient return to cover these obligations.
Many of the Company's products contain surrender charges and other features
which reward persistency and penalize the early withdrawal of funds. With
respect to such products, surrender charges are generally sufficient to cover
the Company's unamortized deferred policy acquisition costs with respect to the
policy being surrendered. GICs and certain annuity contracts have market-value
adjustments which protect the Company against investment losses if interest
rates are higher at the time of surrender as compared to interest rates at the
time of issue.
The Company has adopted Statement of Financial Accounting Standards No.
115, "Accounting For Certain Investments In Debt And Equity Securities."
Accordingly, the Company's investments in debt and equity securities are
reported in the financial statements at market value, and investments in
mortgage loans are reported at amortized cost. At March 31, 1994, the fixed
maturity investments (bonds, bank loan participations, and redeemable preferred
stocks) had a market value of $3,101.5 million, which is 1.0% below amortized
cost (less allowances for uncollectible amounts on investments) of $3,130.2
million. The Company had $1,357.3 million in mortgage loans at March 31, 1994.
While the Company's mortgage loans do not have quoted market values, at March
31, 1994, the Company estimates the market value of its mortgage loans to be
$1,434.2 million (using discounted cash flows from the next call date) which is
5.6% in excess of amortized book value. Most of the Company's mortgage loans
have significant prepayment penalties. These assets are invested for terms
approximately corresponding to anticipated future benefit payments. Thus,
market fluctuations should not adversely affect liquidity.
15
<PAGE>
At March 31, 1994, delinquent mortgage loans and foreclosed real estate
were 0.4% of assets. Bonds rated less than investment grade were 1.6% of
assets. Additionally, the Company had bank loan participations that were less
than investment grade representing 3.4% of assets. The Company does not expect
these investments to adversely affect its liquidity or ability to hold its other
investments to maturity. The Company's allowance for uncollectible amounts on
investments was $35.9 million at March 31, 1994.
Policy loans at March 31, 1994 were $139.3 million, a decrease of $1.9
million from December 31, 1993. Policy loan rates are generally in the 4.5% to
8.0% range. Such rates at least equal the assumed interest rates used for
future policy benefits.
The Company believes its asset/liability matching practices and certain
product features provide significant protection for the Company against the
effects of changes in interest rates. However, approximately one-fourth of the
Company's liabilities relate to products (primarily whole life insurance) the
profitability of which may be affected by changes in interest rates. The effect
of such changes in any one year is not expected to be material. Additionally,
the Company believes its asset/liability matching practices provide sufficient
liquidity to enable it to fulfill its obligation to pay benefits under its
various insurance and deposit contracts.
The Company's asset/liability matching practices involve the monitoring of
asset and liability durations for various product lines; cash flow testing under
various interest rate scenarios; and the continuous rebalancing of assets and
liabilities with respect to yield, risk, and cash flow characteristics.
Rising interest rates during the 1994 first quarter caused the duration of
the Company's assets to increase somewhat above the duration of its liabilities.
During the 1994 first quarter, interest rates rose approximately one percentage
point. As a result, the duration of the Company's corporate bonds and
collateralized mortgage obligations increased from approximately 3.0 years to
3.5 years while the duration of its mortgages and liabilities increased only
slightly. The Company responded to the duration mismatch by adjusting the
composition of its assets to bring the durations of assets and liabilities back
into balance. Such rebalancing was substantially complete as of the filing of
this report.
A combination of futures contracts and options on treasury notes are
currently being used as hedges for asset/liability management of certain
investments, primarily mortgage loans on real estate, and liabilities arising
from interest-sensitive products such as GICs and annuities. Realized
investment gains and losses of such contracts are deferred and amortized over
the life of the hedged asset. The Company also uses interest rate swap
contracts to convert certain investments from a variable to a fixed rate of
interest.
In anticipation of receiving GIC and annuity deposits, the life insurance
subsidiaries were committed at March 31, 1994 to fund mortgage loans and to
purchase fixed maturity and other long-term investments in the amount of $222.5
million. The Company's subsidiaries held $101.9 million in cash and short-term
investments at March 31, 1994. Protective Life Corporation had an additional
$0.3 million in cash and short-term investments available for general corporate
purposes.
While the Company generally anticipates that the cash flows of its
subsidiaries will be sufficient to meet their investment commitments and
operating cash needs, the Company
16
<PAGE>
recognizes that investment commitments scheduled to be funded may from time to
time exceed the funds then available. Therefore, the Company has arranged
sources of credit for its insurance subsidiaries to utilize to fund investments
in such circumstances. The Company expects that the rate received on its
investments will equal or exceed its borrowing rate. Additionally, the Company
may from time to time sell short-duration GICs to complement its cash management
practices.
At March 31, 1994, Protective Life Corporation had borrowed $117 million of
its $138 million revolving line of credit on short-term notes bearing interest
rates averaging 4.3%. In addition, Protective Life Corporation has borrowed $29
million under a four-year installment note at a rate of 4.4%. Management
expects to register under the Securities Act of 1933, on a delayed (or "shelf")
basis, preferred stock and debt securities of Protective Life Corporation, and
preferred securities of a special purpose finance subsidiary, to reduce existing
bank borrowings and to give the Company flexibility in connection with future
acquisition opportunities.
Protective Life Corporation's cash flow is dependent on cash dividends from
its subsidiaries, payments on surplus notes, revenues from investment, data
processing, legal, and management services rendered to the subsidiaries, and
investment income. At December 31, 1993, approximately $172 million of
consolidated stockholders' equity represented net assets of the Company's
insurance subsidiaries that cannot be transferred to the Company in the form of
dividends, loans, or advances. In addition, the states in which the Company's
insurance subsidiaries are domiciled impose certain restrictions on the
insurance subsidiaries' ability to pay dividends to Protective Life Corporation.
Also, distributions, including cash dividends to Protective Life Corporation
from its life insurance subsidiaries, in excess of approximately $184 million,
would be subject to federal income tax at rates then effective. The Company
does not anticipate involuntarily making distributions that would be subject to
tax.
For the foregoing reasons and due to the expected growth of the Company's
insurance sales, the Company will retain substantial portions of the earnings of
its life insurance subsidiaries in those companies primarily to support their
future growth. Because Protective Life Corporation's cash disbursements have
from time to time exceeded its cash receipts, such shortfalls have been funded
through various external financings. Therefore, Protective Life Corporation may
from time to time require additional external financing.
A life insurance company's statutory capital is computed according to rules
prescribed by the National Association of Insurance Commissioners (NAIC), as
modified by the insurance company's state of domicile. Statutory accounting
rules are different from generally accepted accounting principles and are
intended to reflect a more conservative view by, for example, requiring
immediate expensing of policy acquisition costs. The achievement of long-term
growth will require growth in the statutory capital of the Company's insurance
subsidiaries. The subsidiaries may secure additional statutory capital through
various sources, such as internally generated statutory earnings or equity
contributions by the Company from funds generated through debt or equity
offerings.
The NAIC's risk-based capital requirements require insurance companies to
calculate and report information under a risk-based capital formula. These
requirements are intended to allow insurance regulators to identify inadequately
capitalized insurance companies based upon the types and mixtures of risks
inherent in the insurer's operations. The formula includes
17
<PAGE>
components for asset risk, liability risk, interest rate exposure, and other
factors. Based upon the March 31, 1994 statutory financial reports of the
Company's insurance subsidiaries, the Company's insurance subsidiaries are
adequately capitalized under the formula.
Under insurance guaranty fund laws, in most states, insurance companies
doing business in a participating state can be assessed up to prescribed limits
for policyholder losses incurred by insolvent companies. The Company does not
believe that any such assessments will be materially different from amounts
already provided for in the financial statements.
A number of civil jury verdicts have been returned against life and health
insurers in the state of Alabama and other jurisdictions in which the Company
does business involving the insurers' sales practices, alleged agent misconduct,
failure to properly supervise agents, and other matters. Some of the lawsuits
have resulted in the award of substantial judgments against the insurer,
including material amounts of punitive damages. In Alabama and some other
states, juries have substantial discretion in awarding punitive damages in these
circumstances. The Company and its subsidiaries, like other life and health
insurers, from time to time are involved in such litigation. To date, no such
lawsuit has resulted in the award of any significant amount of damages against
the Company. There are currently four lawsuits pending against the Company in
Alabama involving the sales practices of agents, three of which involve
allegations concerning the sale of credit insurance. Although the outcome of
any litigation cannot be predicted with certainty, the Company believes that
such litigation will not have a material adverse effect on the financial
position of the Company.
The Company is not aware of any material pending or threatened regulatory
action with respect to the Company or any of its subsidiaries.
18
<PAGE>
PART II
Item 4. RESULTS OF VOTES OF SECURITY HOLDERS
The Annual Meeting of Stockholders was held on May 2, 1994. Shares
entitled to vote at the Annual Meeting totaled 13,693,244, of which 12,350,334
shares were represented at the meeting including 221,672 abstentions and broker
non-votes.
At the Annual Meeting the following 13 directors were elected. Also shown
are the number of shares cast for and authorization withheld for each nominee.
<TABLE>
<CAPTION>
AUTHORIZATION
WITHHELD, ABSTENTIONS
FOR AND BROKER NON-VOTES
---------- ---------------------
<S> <C> <C>
William J. Rushton III 12,221,739 128,595
John W. Woods 12,221,709 128,625
Crawford T. Johnson III 12,220,779 129,555
William J. Cabaniss, Jr. 12,238,454 111,880
H. G. Pattillo 12,221,414 128,920
Drayton Nabers, Jr. 12,222,239 128,095
Edward L. Addison 12,221,864 128,470
John J. McMahon, Jr. 12,221,229 129,105
A. W. Dahlberg 12,221,129 129,205
John W. Rouse, Jr. 12,220,879 129,455
Robert T. David 12,238,093 112,241
Ronald L. Kuehn, Jr. 12,218,277 132,057
Herbert A. Sklenar 12,128,662 221,672
</TABLE>
Additionally, at the Annual Meeting stockholders approved two resolutions
which amended the Company's Certificate of Incorporation. The first resolution
increased the number of authorized shares of Common Stock of the Company from 20
million to 80 million. The second resolution increased the number of authorized
shares of Preferred Stock of the Company from 1 million to 4 million. Shares
voting for the first resolution were 9,805,419, shares voting against were
2,432,145, and shares abstaining were 112,770. Shares voting for the second
resolution were 8,714,793, shares voting against were 2,730,665, shares
abstaining were 58,758, and there were 846,123 broker non-votes.
With regards to the transaction of such other business as might properly
come before the Annual Meeting or any adjournment thereof, 183,384 shares were
cast as authorization withheld, including abstentions and broker non-votes. No
other matters came before the Annual Meeting or any adjournment thereof.
19
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a). Exhibit 3(a)(5) - Certificate of Amendment to Restated Certificate of
Incorporation of the Company filed with the Secretary of State of
Delaware on May 3, 1994.
(b). Exhibit 15 - Letter re: unaudited interim financial statements
(c). A report on Form 8-K was filed February 14, 1994, concerning the
Company's 1993 fourth quarter earnings press release.
20
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PROTECTIVE LIFE CORPORATION
Date: May 16, 1994 /s/ Jerry W. DeFoor
-----------------------------------
Jerry W. DeFoor
Vice President and Controller,
and Chief Accounting Officer
(Duly authorized officer)
21
<PAGE>
Exhibit 3(a)(5)
CERTIFICATE OF AMENDMENT
OF
1985 RESTATED CERTIFICATE OF INCORPORATION
OF PROTECTIVE LIFE CORPORATION
Protective Life Corporation, a corporation organized and existing under and
by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY
CERTIFY:
FIRST: That at a meeting of the Board of Directors of Protective Life
Corporation duly called and held, a resolution was duly adopted setting forth a
proposed amendment to the 1985 Restated Certificate of Incorporation of said
Corporation, in the form set forth below, declaring said amendment to be
advisable and directing the same to be submitted to a vote of the stockholders
of said Corporation at the Annual Meeting of Stockholders to be held on May 2,
1994 or at any adjournment thereof.
SECOND: That thereafter, the said Annual Meeting of Stockholders was duly
called and held, upon notice in accordance with Section 222 of the General
Corporation Law of the State of Delaware, at which meeting the necessary number
of shares of Common Stock as required by statute were voted in favor of the
following amendment to the 1985 Restated Certificate of Incorporation:
By deleting the first sentence of Section 4.1 of Article IV in its
entirety and inserting in lieu thereof the following:
4.1 The total number of shares of all classes of capital stock which the
Corporation shall have authority to issue is eighty-four million
(84,000,000), of which eighty million (80,000,000) shares of the par
value of $0.50 per share are to be of a class designated "Common
Stock", and four million (4,000,000) shares of the par value of $1.00
per share are to be of a class designated "Preferred Stock".
THIRD: That the said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
22
<PAGE>
FOURTH: That the capital of the Corporation will not be reduced under or
by reason of said amendment.
IN WITNESS WHEREOF, said Protective Life Corporation has caused its
corporate seal to be hereunto affixed and this Certificate of Amendment to be
signed by Drayton Nabers, Jr., its Chairman of the Board, President and Chief
Executive Officer, and John K. Wright, its Secretary, hereby declaring and
certifying that this is its act and deed and the facts herein stated are true,
this 3rd day of May, 1994.
PROTECTIVE LIFE CORPORATION
By: /s/ Drayton Nabers, Jr.
-------------------------------
Drayton Nabers, Jr.
Its Chairman of the Board, President
and Chief Executive Officer
ATTEST:
/s/ John K. Wright
- - ------------------------
John K. Wright
Secretary
23
<PAGE>
Exhibit 15
Securities and Exchange Commission
500 North Capitol Street
Washington, D.C. 10549
Re: Protective Life Corporation
Registration on Form S-8
We are aware that our report dated April 26, 1994, except for Note G, as to
which the date is May 2, 1994, on our review of interim consolidated financial
information of Protective Life Corporation and subsidiaries for the period ended
March 31, 1994, and included in the Company's quarterly report on Form 10-Q for
the quarter then ended, is incorporated by reference in the Company's
registration statements on Form S-8. Pursuant to Rule 436(c) under the
Securities Act of 1933, this report should not be considered a part of the
registration statements prepared or certified by us within the meaning of
Sections 7 and 11 of that Act.
COOPERS & LYBRAND
Birmingham, Alabama
April 26, 1994
24
