<PAGE>
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
FORM 10-Q
---------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 5,
1994: 13,702,340 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
and Six Months ended June 30, 1994 and 1993 (unaudited) . . . . . 3
Consolidated Condensed Balance Sheets as of June 30, 1994
(unaudited) and December 31, 1993 . . . . . . . . . . . . . . . . 4
Consolidated Condensed Statements of Cash Flows for the
Six Months ended June 30, 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. . . . 11
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . 21
Signature. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
<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 June 30, 1994, and the
related consolidated condensed statements of income and cash flows for the
three-month and six-month periods ended June 30, 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
July 26, 1994
2
<PAGE>
PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------- -------------------
1994 1993 1994 1993
------ ------ ------ ------
<S> <C> <C> <C> <C>
REVENUES
Premiums and policy fees (net of reinsurance ceded:
three months: 1994 - $36,622; 1993 - $31,378 $ 98,049 $ 93,340 $187,486 $179,188
six months: 1994 - $70,748; 1993 - $60,882)
Net investment income 98,637 85,180 198,885 166,376
Realized investment gains (losses) (564) 677 1,733 802
Other income 7,647 5,392 11,209 10,322
-------- -------- -------- --------
203,769 184,589 399,313 356,688
-------- -------- -------- --------
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance ceded:
three months: 1994 - $25,313; 1993 - $20,143
six months: 1994 - $49,424; 1993 - $42,695) 126,452 115,890 242,328 224,627
Amortization of deferred policy acquisition costs 19,678 16,263 39,725 33,288
Other operating expenses (net of reinsurance ceded:
three months: 1994 - $3,318; 1993 - $3,365
six months: 1994 - $6,048; 1993 - $5,247) 33,186 32,331 68,428 61,373
-------- -------- -------- --------
179,316 164,484 350,481 319,288
-------- -------- -------- --------
INCOME BEFORE INCOME TAX AND MINORITY
INTEREST 24,453 20,105 48,832 37,400
Income tax expense 7,825 6,607 15,626 11,968
-------- -------- -------- --------
INCOME BEFORE MINORITY INTEREST 16,628 13,498 33,206 25,432
Minority interest in net income
of consolidated subsidiaries 188 4 188 19
-------- -------- -------- --------
NET INCOME $ 16,440 $ 13,494 $ 33,018 $ 25,413
-------- -------- -------- --------
-------- -------- -------- --------
NET INCOME PER SHARE $ 1.20 $ 0.99 $ 2.41 $ 1.86
-------- -------- -------- --------
-------- -------- -------- --------
DIVIDENDS PAID PER SHARE $ 0.28 $ 0.26 $ 0.54 $ 0.49
-------- -------- -------- --------
-------- -------- -------- --------
Average shares outstanding 13,699,631 13,689,901 13,692,939 13,689,881
</TABLE>
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
3
<PAGE>
PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1994 1993
----------- -----------
ASSETS (Unaudited)
<S> <C> <C>
Investments:
Fixed maturities $3,194,415 $3,051,292
Equity securities 68,179 40,596
Mortgage loans on real estate 1,362,691 1,407,744
Investment real estate, net 28,299 22,061
Policy loans 139,535 141,135
Other long-term investments 22,465 20,191
Short-term investments 139,956 83,692
---------- ----------
Total investments 4,955,540 4,766,711
Cash 18,009 27,119
Accrued investment income 54,388 51,337
Accounts and premiums receivable, net 15,331 26,315
Reinsurance receivables 105,778 102,559
Deferred policy acquisition costs 350,655 299,584
Property and equipment, net 33,431 35,664
Other assets 12,891 3,316
Assets held in separate accounts 40,641 3,400
---------- ----------
TOTAL ASSETS $5,586,664 $5,316,005
---------- ----------
---------- ----------
LIABILITIES
Policy liabilities and accruals $1,586,639 $1,469,630
Guaranteed investment contract deposits 2,138,550 2,015,075
Annuity deposits 1,114,811 1,005,742
Other policyholders' funds 158,106 141,975
Other liabilities 105,380 96,682
Accrued income taxes (1,106) 6,381
Deferred income taxes 9,942 69,269
Debt 97,080 147,118
Liabilities related to separate accounts 40,641 3,400
Minority interest in consolidated subsidiaries 55,000
---------- ----------
TOTAL LIABILITIES 5,305,043 4,955,272
---------- ----------
COMMITMENTS AND CONTINGENCIES - NOTE C
STOCKHOLDERS' EQUITY
Preferred Stock, $1 par value
Shares authorized: 3,850,000; Issued: none
Junior Participating Cumulative Preferred Stock, $1 par value
Shares authorized: 150,000; Issued: none
Common Stock, $0.50 par value
Shares authorized: 80,000,000
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 - $(35,513); 1993 - $19,774) (65,953) 39,284
Retained earnings 292,984 267,361
Treasury stock (1994 - 1,969,479 shares; 1993 - 1,974,987 shares) (18,459) (18,359)
Unallocated stock in Employee Stock Ownership Plan
(1994 - 422,073 shares; 1993 - 442,000 shares) (5,592) (5,856)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 281,621 360,733
---------- ----------
$5,586,664 $ 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>
SIX MONTHS ENDED
JUNE 30
------------------------
1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES --------- ----------
<S> <C> <C>
Net income $ 33,018 $ 25,413
Adjustments to reconcile net income to net cash provided by
operating activities:
Net change in deferred policy acquisition costs (43,840) (14,104)
Depreciation expense 3,168 2,080
Deferred income taxes (59,327) (3,995)
Accrued income taxes (7,487) (822)
Interest credited to universal life and investment products 119,559 101,468
Policy fees assessed on universal life and investment products (38,727) (27,815)
Change in accrued investment income and other receivables 4,714 (87,376)
Change in policy liabilities and other policyholders' funds
of traditional life and health products 48,391 118,589
Change in other liabilities 8,248 22,944
Other (net) (6,404) 1,814
--------- ----------
Net cash provided by operating activities 61,313 138,196
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cost of investments acquired
Investments available for sale (786,785)
Other (65,223) (1,035,417)
Maturities and principal reductions of investments
Investments available for sale 259,447
Other 118,561 535,973
Sale of investments
Investments available for sale 177,506
Other 2,249 164,988
Acquisitions and bulk reinsurance assumptions 39,328 (27)
Purchase of property and equipment (2,199) (2,675)
Sale of property and equipment 1,264 33
--------- ----------
Net cash used in investing activities (255,852) (337,125)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings under line of credit
arrangements and long-term debt 8,000 222,950
Principal payments on line of credit arrangements
and long-term debt (58,038) (205,467)
Proceeds from issuance of Monthly Income Preferred Securities 55,000
Dividends to stockholders (7,395) (6,708)
Change in universal life, annuity, and guaranteed
investment contract product deposits 187,862 216,445
--------- ----------
Net cash provided by financing activities 185,429 227,220
--------- ----------
INCREASE (DECREASE) IN CASH (9,110) 28,291
CASH AT BEGINNING OF PERIOD 27,119 14,959
--------- ----------
CASH AT END OF PERIOD $ 18,009 $ 43,250
--------- ----------
--------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period:
Interest on debt $ (5,664) $ (2,569)
Income taxes $ (25,673) $ (16,841)
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 $ 41,818 $ 27
Liabilities assumed (49,049) 0
--------- ----------
Net $ (7,231) $ 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
six month period ended June 30, 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 - MONTHLY INCOME PREFERRED SECURITIES
On June 10, 1994, a special purpose finance subsidiary of the Company, PLC
Capital L.L.C. ("PLC Capital"), issued $55 million of 9% Cumulative Monthly
Income Preferred Securities, Series A ("MIPS"), guaranteed by the Company. PLC
Capital was formed solely to issue MIPS and other securities and lend the
proceeds thereof to the Company in exchange for subordinated debentures of the
Company. The Company has the right under the subordinated debentures to extend
interest payment periods up to 60 months, and, as a consequence, monthly
dividends on the MIPS may be deferred (but will continue to accumulate, together
with additional dividends on any accumulated but unpaid dividends at the
dividend rate) by PLC Capital during any such extended interest payment period.
The MIPS are redeemable by PLC Capital at any time on or after June 30, 1999.
The MIPS and dividends thereon are reported in the accompanying financial
statements as "minority interest in consolidated subsidiaries."
NOTE C - COMMITMENTS AND CONTINGENT LIABILITIES
At June 30, 1994, the Company's life insurance subsidiaries were committed
to fund approximately $252.6 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
June 30, 1994, the loans totaled $21.7 million.
6
<PAGE>
At June 30, 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.
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 several lawsuits pending against the Company in Alabama, one of
which is a class action 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.
7
<PAGE>
NOTE D - 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>
SIX MONTHS ENDED JUNE 30
-------------------------------------------
1994 1993
------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
(dollars in thousands)
<S> <C> <C> <C> <C>
TOTAL REVENUES:
Agency $ 59,571 14.9% $ 53,607 15.0%
Group 71,630 17.9 70,902 19.9
Financial Institutions 50,786 12.7 42,322 11.9
Investment Products 42,039 10.5 38,276 10.7
Guaranteed Investment
Contracts 92,519 23.2 78,944 22.1
Acquisitions 75,433 18.9 46,561 13.1
Corporate and Other 8,985 2.3 24,751 6.9
Unallocated Realized
Investment Gains (Losses) (1,650) (0.4) 1,325 0.4
-------- ------ --------- ------
$399,313 100.0% $356,688 100.0%
-------- ------ --------- ------
-------- ------ --------- ------
INCOME (LOSS) BEFORE INCOME TAX:
Agency $ 8,899 18.2% $ 9,290 24.8%
Group 4,625 9.5 5,422 14.5
Financial Institutions 4,012 8.2 3,992 10.7
Investment Products 2,113 4.3 2,219 5.9
Guaranteed Investment
Contracts 18,096 37.1 8,918 23.9
Acquisitions 19,429 39.8 12,883 34.5
Corporate and Other (6,692) (13.7) (6,649) (17.8)
Unallocated Realized
Investment Gains (Losses) (1,650) (3.4) 1,325 3.5
-------- ------ --------- ------
$ 48,832 100.0% $ 37,400 100.0%
-------- ------ --------- ------
-------- ------ --------- ------
<CAPTION>
JUNE 30, 1994 December 31, 1993
----------------- ------------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
(dollars in thousands)
<S> <C> <C> <C> <C>
IDENTIFIABLE ASSETS:
Agency $ 674,176 12.1% $ 642,325 12.1%
Group 211,570 3.8 208,968 3.9
Financial Institutions 197,618 3.5 192,486 3.6
Investment Products 1,017,977 18.2 879,365 16.6
Guaranteed Investment
Contracts 2,093,623 37.5 2,041,564 38.4
Acquisitions 1,136,376 20.3 1,145,357 21.5
Corporate and Other 255,324 4.6 205,940 3.9
---------- ------ ---------- -----
$5,586,664 100.0% $5,316,005 100.0%
---------- ------ ---------- -----
---------- ------ ---------- -----
</TABLE>
8
<PAGE>
NOTE E - 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 June 30, 1994 and for the six months then ended, the Company's
life insurance subsidiaries had stockholder's equity and net income prepared in
conformity with statutory reporting practices of $262.4 million and
$17.9 million, respectively.
NOTE F - 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 June 30, 1994 (compared to financial
statements prepared under previous accounting standards) was to decrease fixed
maturities by $120.6 million, increase deferred policy acquisition costs by
$17.0 million, decrease the liability for deferred income taxes by
$36.3 million, and decrease stockholders' equity by $67.3 million.
NOTE G - CONSOLIDATED PRO FORMA RESULTS
On July 30, 1993, the Company's subsidiary Protective Life Insurance
Company, acquired Wisconsin National Life Insurance Company ("Wisconsin
National"). Summarized below are the consolidated results of operations for the
six months ended June 30, 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 six months ended June 30, 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 occurred had the transactions occurred on the
basis assumed above nor are they indicative of the future operations of the
combined enterprises.
9
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1993
----------------
(In thousands, except per share amounts)
(Unaudited)
<S> <C>
Total revenues $ 388,447
Net income $ 27,291
Net income per share $ 1.99
</TABLE>
NOTE H - SUBSEQUENT EVENT
On July 1, 1994, the Company issued $75.0 million of 7.95% Senior Notes due
July 1, 2004. Net proceeds of $74.4 million were used to repay bank borrowings.
10
<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 consoli-
dated 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>
PREMIUMS AND POLICY FEES
SIX MONTHS ----------------------------------
ENDED AMOUNT PERCENTAGE
JUNE 30 (IN THOUSANDS) INCREASE
---------- -------------- --------
<S> <C> <C>
1993 $179,188 18.3%
1994 187,486 4.6
</TABLE>
Premiums and policy fees increased $27.7 million or 18.3% in the first six
months of 1993 over the first six months of 1992. Increases in premiums and
policy fees from the Agency, Group, and Financial Institutions Divisions
represent increases of $6.2 million, $6.4 million, and $19.8 million,
respectively. Effective July 1, 1992, the Financial Institutions Division
assumed Durham Life Insurance Company's credit business which represented $13.1
million of the Division's $19.8 million increase in 1993. Decreases in older
acquired blocks of ordinary policies represent a $3.0 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 $2.4 million decrease.
Premiums and policy fees increased $8.3 million or 4.6% in the first six
months of 1994 over the first six months of 1993. Increases in premiums and
policy fees from the Agency and Financial Institutions Divisions represent
increases of $4.1 million and $8.3 million, respectively. On July 30, 1993, the
Company completed its acquisition of Wisconsin National Life Insurance Company
("Wisconsin National"). The acquisition resulted in a $9.9 million increase in
premiums and policy fees in 1994. The reinsurance in 1993 of a block of
universal life policies resulted in a $3.6 million increase in premiums and
policy fees in 1994. The reinsurance of a block of payroll deduction policies
effective April 2, 1994 resulted in a $3.2 million increase. Decreases in older
acquired blocks of
11
<PAGE>
policies represented a $1.4 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 1994 premiums and policy fees $19.3 million.
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
SIX MONTHS ----------------------------------
ENDED AMOUNT PERCENTAGE
JUNE 30 (IN THOUSANDS) INCREASE
---------- -------------- --------
<S> <C> <C>
1993 $166,376 24.4%
1994 198,885 19.5
</TABLE>
Net investment income in the first six months of 1993 was $32.7 million or
24.4% higher, and in the first six months of 1994 was $32.5 million or 19.5%
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 and a block of payroll deduction policies resulted in an increase in
net investment income of $16.2 million in the first six months 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>
SIX MONTHS REALIZED
ENDED INVESTMENT GAINS
JUNE 30 (IN THOUSANDS)
----------- ----------------
<S> <C>
1993 $ 802
1994 1,733
</TABLE>
Realized investment gains for the first six months of 1994 were $0.9
million higher than the corresponding period of 1993. Realized investment gains
in the first six months of 1993 were reduced by a $4.4 million increase in the
Company's allowance for
12
<PAGE>
uncollectible accounts on investments (primarily related to mortgage loans)
which was recorded as a realized investment loss. In 1994, realized investment
gains have been reduced by realized investment losses incurred from sales of
investments that occurred to maintain proper matching of assets and liabilities.
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>
SIX MONTHS
ENDED OTHER INCOME
JUNE 30 (IN THOUSANDS)
---------- --------------
<S> <C>
1993 $10,322
1994 11,209
</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 $2.9 million in 1994, which was more
than offset by the Company receiving the final payment of $4.2 million relating
to the sale of SEHP. Other income from all other sources decreased $0.4 million
in the first six months of 1994 as compared to the first six months of 1993.
13
<PAGE>
INCOME BEFORE INCOME TAX
The following table sets forth income or loss before income tax by business
segment for the periods shown:
<TABLE>
<CAPTION>
INCOME (LOSS) BEFORE INCOME TAX
SIX MONTHS ENDED JUNE 30
-------------------------------
(in thousands)
BUSINESS SEGMENT 1993 1994
---- ----
<S> <C> <C>
Agency $ 9,290 $ 8,899
Group 5,422 4,625
Financial Institutions 3,992 4,012
Investment Products 2,219 2,113
Guaranteed Investment Contracts 8,918 18,096
Acquisitions 12,883 19,429
Corporate and Other (6,649) (6,692)
Unallocated Realized Investment Gains (Losses) 1,325 (1,650)
------- --------
$37,400 $48,832
------- --------
------- --------
Percentage Increase 28.9% 30.6%
</TABLE>
Agency pretax earnings decreased $0.4 million in the first six months of
1994 as compared to the first six months of 1993 primarily due to higher
expenses.
Group pretax earnings were $0.8 million lower in the first six months of
1994 as compared to the first six months of 1993 due to start up expenses of
approximately $0.9 million related to the establishment of a special marketing
unit to sell dental plans through mail and telephone solicitations. Lower
traditional group life and health earnings were offset by improved earnings from
dental products.
Pretax earnings of the Financial Institutions Division were virtually
unchanged in the first six months of 1994 as compared to the same period in
1993. Increased earnings in certain lines of business were offset by decreases
in other lines.
Investment Products Division pretax earnings were slightly lower in the
first six 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 more than offset by realized investment losses from the sale of
investments to maintain proper matching of assets and liabilities, and increased
expenses of approximately $1.0 million related to the development and
introduction of a variable annuity. Variable annuity deposits are reported in
the accompanying financial statements as "Liabilities related to separate
accounts."
The Guaranteed Investment Contract ("GIC") Division had pretax earnings of
$18.1 million in the first six months of 1994 and $8.9 million in the
corresponding period of 1993. Realized investment gains associated with this
Division were $5.2 million higher in the first six months of 1994 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
14
<PAGE>
placed with the Company. At June 30, 1994, GIC deposits totaled $2.1 billion
compared to $1.9 billion one year earlier.
Pretax earnings from the Acquisitions Division increased $6.5 million in
the first six 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 acquired by
reinsurance a block of universal life policies during the 1993 third quarter.
These two acquisitions represent approximately $6.3 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. On April 2, 1994 the Division acquired by reinsurance a
small block of payroll deduction policies which is expected to add slightly to
earnings in 1994. As of the filing of this report, the Division is awaiting
regulatory approval to acquire another block of policies via a 100% coinsurance
transaction involving approximately $100 million of policy liabilities.
In the ordinary course of business, the Acquisitions Division regularly
considers acquisitions of smaller insurance companies or blocks of policies.
Among potential transactions, the Division is currently discussing the
possible purchase of a closely-held stock life insurance company having assets
in excess of $300 million that is primarily involved in ordinary and universal
life insurance, annuities and accident and health insurance. The Company is
considering using a combination of debt and equity to finance such acquisition
if it were to be consummated. Completion of this transaction is contingent
on resolution of outstanding business issues with the prospective transferor,
satisfactory completion of due diligence, negotiation of definitive
documentation, receipt of board of directors and regulatory approvals, and
other conditions, and no assurances can be given that the transaction will be
consummated.
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 virtually unchanged in the first six months of 1994 as
compared to the first six months of 1993.
Unallocated realized investment gains (losses) decreased due to realized
investment losses incurred in the first six months of 1994 from sales of
investments that occurred to maintain proper matching of assets and liabilities.
Such rebalancing was substantially complete as of June 30, 1994.
15
<PAGE>
INCOME TAXES
The following table sets forth the effective income tax rates for the
periods shown:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED ESTIMATED
JUNE 30 EFFECTIVE INCOME TAX RATES
---------- --------------------------
<S> <C>
1993 32%
1994 32
</TABLE>
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
SIX MONTHS ----------------------------------------------
ENDED TOTAL PERCENTAGE
JUNE 30 (IN THOUSANDS) PER SHARE INCREASE
---------- -------------- --------- ----------
<S> <C> <C> <C>
1993 $25,413 $1.86 30.1%
1994 33,018 2.41 29.6
</TABLE>
Compared to the same period in 1993, net income per share in the first six
months of 1994 increased 29.6%, reflecting improved earnings in the GIC and
Acquisitions Divisions which were partially offset by lower earnings in the
Agency and Group Divisions.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 115 at December 31, 1993 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, although the adoption of SFAS No. 115 will not affect
the Company's operations, its reported stockholders' equity may fluctuate
significantly as interest rates change.
During the first six months of 1994, interest rates rose approximately 1.7
percentage points. 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 rates, the new
accounting rule required reporting a $101.9 million decrease in stockholders'
equity at June 30, 1994 as compared to December 31, 1993.
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<PAGE>
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 medium
and 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 June 30, 1994, the fixed
maturity investments (bonds, bank loan participations, and redeemable preferred
stocks) had a market value of $3,194.4 million, which is 2.7% below amortized
cost (less allowances for uncollectible amounts on investments) of
$3,282.1 million. The Company had $1,362.7 million in mortgage loans at June
30, 1994. While the Company's mortgage loans do not have quoted market values,
at June 30, 1994, the Company estimates the market value of its mortgage loans
to be $1,420.1 million (using discounted cash flows from the next call date)
which is 4.2% 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.
At June 30, 1994, delinquent mortgage loans and foreclosed real estate were
0.5% of assets. Bonds rated less than investment grade were 1.4% of assets.
Additionally, the Company had bank loan participations that were less than
investment grade representing 3.7% of assets. The Company does not expect these
investments to adversely affect its
17
<PAGE>
liquidity or ability to hold its other investments to maturity. The Company's
allowance for uncollectible amounts on investments was $35.9 million at June 30,
1994.
Policy loans at June 30, 1994 were $139.5 million, a decrease of $1.6
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 first six months of 1994 caused the
duration of the Company's assets to increase somewhat above the duration of its
liabilities. During the first six months of 1994, interest rates rose
approximately 1.7 percentage points. As a result, the estimated modified
duration of the Company's corporate bonds and collateralized mortgage
obligations increased from approximately 3.0 years to 3.6 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 June 30, 1994 to fund mortgage loans and to
purchase fixed maturity and other long-term investments in the amount of $252.6
million. The Company's subsidiaries held $157.2 million in cash and short-term
investments at June 30, 1994. Protective Life Corporation had an additional
$0.8 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 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
18
<PAGE>
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.
On June 10, 1994, a special purpose finance subsidiary of the Company, PLC
Capital L.L.C. ("PLC Capital"), issued $55 million of 9% Cumulative Monthly
Income Preferred Securities, Series A ("MIPS"), guaranteed by the Company. PLC
Capital was formed solely to issue MIPS and other securities and lend the
proceeds thereof to the Company in exchange for subordinated debentures of the
Company. The Company has the right under the subordinated debentures to extend
interest payment periods up to 60 months, and, as a consequence, monthly
dividends on the MIPS may be deferred (but will continue to accumulate, together
with additional dividends on any accumulated but unpaid dividends at the
dividend rate) by PLC Capital during any such extended interest payment period.
The MIPS are redeemable by PLC Capital at any time on or after June 30, 1999.
The MIPS and dividends thereon are reported in the accompanying financial
statements as "minority interest in consolidated subsidiaries." In related
transactions, the Company entered into interest-rate swap agreements with two
financial institutions which effectively converted the cost of the MIPS from a
fixed dividend rate to the floating 30 day London Interbank Offered Rate
("LIBOR") plus 60.5 basis points, approximately 5.17% at June 30, 1994. Net
proceeds of approximately $52.3 million were used to repay a term note and other
bank borrowings.
At June 30, 1994, Protective Life Corporation had borrowed $97.0 million of
its $138 million revolving line of credit on short-term notes bearing interest
rates averaging 5.3%.
On July 1, 1994, the Company issued $75 million of 7.95% Senior Notes due
July 1, 2004. The notes are not redeemable by the Company prior to maturity.
Net proceeds of $74.4 million were used to repay bank borrowings. In related
transactions, the Company has entered into interest-rate swap agreements to swap
$20 million of the notes from a fixed rate of interest to the floating 30 day
LIBOR plus 52.5 basis points, and has sold interest-rate swap options, which if
exercised by the purchasers, will convert an additional $20 million to a
floating rate of interest. On July 5, 1994, the Company reduced its revolving
line of credit to $53 million.
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
income tax.
19
<PAGE>
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 components for asset
risk, liability risk, interest rate exposure, and other factors. Based upon the
June 30, 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 several lawsuits pending against the Company
in Alabama, one of which is a class action 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.
20
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a). Exhibit 15 - Letter re: unaudited interim financial statements
(b). A report on Form 8-K was filed April 26, 1994, concerning the
Company's 1994 first quarter earnings press release.
A second report on Form 8-K was filed June 17, 1994, concerning the
filing of certain exhibits to the Registration Statement on Form S-3
of the Company and PLC Capital L.L.C. ("PLC Capital"), with regard to
PLC Capital's 9% Cumulative Monthly Income Preferred Securities,
Series A.
A report on Form 8-K/A was filed June 20, 1994, concerning corrections
of typographical errors on the cover and signature pages of the report
on Form 8-K filed June 17, 1994.
21
<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: August 12, 1994 /s/ Jerry W. DeFoor
-----------------------------------
Jerry W. DeFoor
Vice President and Controller,
and Chief Accounting Officer
(Duly authorized officer)
22
<PAGE>
Exhibit 15
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Protective Life Corporation
We are aware that our report dated July 26, 1994 on our review of interim
consolidated financial information of Protective Life Corporation and
subsidiaries for the period ended June 30, 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 and Form S-3.
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
July 26, 1994
