<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, 1995
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 4,
1995: 28,775,118 shares.
<PAGE>
PROTECTIVE LIFE CORPORATION
INDEX
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Report of Independent Accountants
Consolidated Condensed Statements of Income for the Three and Six
Months ended June 30, 1995 and 1994 (unaudited)
Consolidated Condensed Balance Sheets as of June 30, 1995
(unaudited) and December 31, 1994
Consolidated Condensed Statements of Cash Flows for the
Six Months ended June 30, 1995 and 1994 (unaudited)
Notes to Consolidated Condensed Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K
Signature
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and 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, 1995, and the
related consolidated condensed statements of income for the three-month and six-
month periods ended June 30, 1995 and 1994 and consolidated condensed statements
of cash flows for the six-month periods ended June 30, 1995 and 1994. 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, 1994, 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
13, 1995, 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, 1994, is fairly stated in all material respects in relation
to the consolidated balance sheet from which it has been derived.
COOPERS & LYBRAND L.L.P.
Birmingham, Alabama
July 25, 1995 except for Note H,
as to which the date is August 7, 1995
<PAGE>
<TABLE>
PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in thousands except per share amounts)
(Unaudited)
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1995 1994 1995 1994
<S> <C> <C> <C> <C>
REVENUES
Premiums and policy fees (net of reinsurance ceded:
three months: 1995 - $80,312; 1994 - $36,622 $ 93,685 $ 98,049 $184,247 $187,486
six months: 1995 - $142,444; 1994 - $70,748)
Net investment income 118,046 98,637 230,709 198,885
Realized investment gains (losses) (555) (564) 2,064 1,733
Other income 11,752 7,647 16,671 11,209
-------- -------- -------- --------
222,928 203,769 433,691 399,313
-------- -------- -------- --------
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance ceded:
three months: 1995 - $62,213; 1994 - $25,313 124,987 126,452 248,928 242,328
six months: 1995 - $105,122; 1994 - $49,424)
Amortization of deferred policy acquisition costs 25,233 19,678 45,566 39,725
Other operating expenses (net of reinsurance ceded:
three months: 1995 - $24,204; 1994 - $3,318 44,838 33,186 81,755 68,428
six months: 1995 - $35,473; 1994 - $6,048)
-------- -------- -------- --------
195,058 179,316 376,249 350,481
-------- -------- -------- --------
INCOME BEFORE INCOME TAX AND MINORITY
INTEREST 27,870 24,453 57,442 48,832
Income tax expense 9,197 7,825 18,956 15,626
-------- -------- -------- --------
INCOME BEFORE MINORITY INTEREST 18,673 16,628 38,486 33,206
Minority interest in net income
of consolidated subsidiaries 804 188 1,609 188
-------- -------- -------- --------
NET INCOME $ 17,869 $ 16,440 $ 36,877 $ 33,018
======== ======== ======== ========
NET INCOME PER SHARE $ 0.62 $ 0.60 $ 1.31 $ 1.21
DIVIDENDS PAID PER SHARE $ 0.16 $ 0.14 $ 0.30 $ 0.27
Average shares outstanding 28,766,664 27,399,262 28,186,516 27,385,878
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
</TABLE>
<PAGE>
<TABLE>
PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
<CAPTION>
JUNE 30 DECEMBER 31
1995 1994
(Unaudited)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities $3,831,333 $3,493,646
Equity securities 46,934 45,005
Mortgage loans on real estate 1,621,278 1,487,795
Investment real estate, net 21,275 20,303
Policy loans 147,243 147,608
Other long-term investments 46,406 48,013
Short-term investments 148,172 59,541
---------- ----------
Total investments 5,862,641 5,301,911
Cash 4,468
Accrued investment income 61,283 55,637
Accounts and premiums receivable, net 20,910 30,472
Reinsurance receivables 161,378 122,175
Deferred policy acquisition costs 409,801 434,444
Property and equipment, net 37,950 36,323
Other assets 52,959 20,709
Assets held in separate accounts 213,018 124,145
---------- ----------
TOTAL ASSETS $6,819,940 $6,130,284
========== ==========
LIABILITIES
Policy liabilities and accruals $1,943,441 $1,797,774
Guaranteed investment contract deposits 2,435,414 2,281,673
Annuity deposits 1,299,517 1,251,318
Other policyholders' funds 144,690 144,461
Other liabilities 111,539 127,873
Accrued income taxes (7,577) (6,238)
Deferred income taxes 47,987 (14,095)
Debt 122,000 98,000
Liabilities related to separate accounts 213,018 124,145
Minority interest in consolidated subsidiaries 55,000 55,000
---------- ----------
TOTAL LIABILITIES 6,365,029 5,859,911
---------- ----------
COMMITMENTS AND CONTINGENT LIABILITIES - 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: 1995 and 1994 - 31,336,462 15,668 15,668
Additional paid-in capital 96,371 71,295
Net unrealized gains (losses) on investments
(net of income tax: 1995 - $8,712; 1994 - ($57,902)) 16,870 (107,532)
Retained earnings 343,269 314,857
Treasury stock (1995 - 2,561,344 shares;
1994 - 3,909,944 shares) (12,008) (18,323)
Unallocated stock in Employee Stock Ownership Plan
(1995 - 793,804 shares; 1994 - 844,146 shares) (5,259) (5,592)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 454,911 270,373
---------- ----------
$6,819,940 $6,130,284
========== ==========
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
</TABLE>
<PAGE>
<TABLE>
PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<CAPTION>
SIX MONTHS ENDED
JUNE 30
1995 1994
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 36,877 $ 33,018
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of deferred policy acquisition costs 45,567 39,725
Capitalization of deferred policy acquisition costs (39,292) (54,164)
Depreciation expense 2,811 3,168
Deferred income taxes (4,903) (2,661)
Accrued income taxes (1,339) (7,487)
Interest credited to universal life and investment products 140,650 119,559
Policy fees assessed on universal life and investment products (48,472) (38,727)
Change in accrued investment income and other receivables (33,347) 4,714
Change in policy liabilities and other policyholders' funds
of traditional life and health products 72,907 48,391
Change in other liabilities (36,258) 8,248
Other (net) 617 (6,404)
---------- ----------
Net cash provided by operating activities 135,818 147,380
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reductions of investments
Investments available for sale 110,715 259,447
Other 36,281 118,561
Sale of investments
Investments available for sale 715,811 177,506
Other 3,062 2,249
Cost of investments acquired
Investments available for sale (1,057,739) (872,852)
Other (129,153) (65,223)
Acquisitions and bulk reinsurance assumptions (7,550) 39,328
Purchase of property and equipment (4,373) (2,199)
Sale of property and equipment 104 1,264
----------- ---------
Net cash used in investing activities (332,842) (341,919)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings under line of credit
arrangements and debt 728,300 295,186
Principal payments on line of credit arrangements
and debt (704,300) (345,224)
Proceeds from issuance of Monthly Income Preferred Securities 55,000
Dividends to stockholders (8,465) (7,395)
Purchase of treasury stock (3)
Investment product deposits and change in universal life deposits 447,884 691,524
Investment product withdrawals (270,860) (503,662)
----------- ----------
Net cash provided by financing activities 192,556 185,429
----------- ----------
DECREASE IN CASH (4,468) (9,110)
CASH AT BEGINNING OF PERIOD 4,468 27,119
---------- ----------
CASH AT END OF PERIOD $ 0 $ 18,009
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period:
Interest on debt $ (5,512) $ (5,664)
Income taxes $ (24,499) $ (25,673)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Reissuance of treasury stock to ESOP $ 350 $ 3
Unallocated stock in ESOP $ 333 $ 264
Reissuance of treasury stock $ 362 $ 425
Acquisitions
Assets acquired $ 10,394 $ 41,818
Liabilities assumed (25,651) (49,049)
Reissuance of treasury stock (30,681)
---------- -----------
Net $ (45,938) $ (7,231)
========== ===========
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
</TABLE>
<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, 1995 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1995. 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, 1994.
NOTE B - ACQUISITION
On March 20, 1995 the Company acquired National Health Care Systems of
Florida, Inc. The purchase price was $38.3 million and was paid with a
combination of the Company's Common Stock ($30.7 million) and cash ($7.6
million). In connection with the acquisition, the Company reissued 1,316,458
shares of its Common Stock previously held as Treasury Stock.
NOTE C - COMMITMENTS AND CONTINGENT LIABILITIES
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 lawsuits, in which the plaintiff may seek
punitive damage awards in addition to compensatory damage awards. To date,
no such lawsuit has resulted in the award of any material amount of damages
against the Company. Among the litigation currently pending 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.
<PAGE>
<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 minority interest, and identifiable assets of
the Company's business segments.
SIX MONTHS ENDED JUNE 30
1995 1994
AMOUNT PERCENT AMOUNT PERCENT
(dollars in thousands)
TOTAL REVENUES:
Acquisitions $ 96,169 22.2% $ 75,433 18.9%
Financial Institutions 20,227 4.7 50,786 12.7
Group 88,002 20.3 71,630 17.9
Guaranteed Investment
Contracts 99,372 22.9 92,519 23.2
Individual Life 71,517 16.5 59,571 14.9
Investment Products 54,174 12.5 42,039 10.5
Corporate and Other 6,227 1.4 8,985 2.3
Unallocated Realized
Investment Gains (Losses) (1,997) (0.5) (1,650) (0.4)
-------- ----- -------- -----
$433,691 100.0% $399,313 100.0%
======== ===== ======== =====
INCOME (LOSS) BEFORE INCOME
TAX AND MINORITY INTEREST:
Acquisitions $ 24,184 42.1% $ 19,429 39.8%
Financial Institutions 4,333 7.5 4,012 8.2
Group 5,967 10.4 4,625 9.5
Guaranteed Investment
Contracts 16,016 27.9 18,096 37.1
Individual Life 9,163 16.0 8,899 18.2
Investment Products 5,511 9.6 2,113 4.3
Corporate and Other (5,735) (10.0) (6,692) (13.7)
Unallocated Realized
Investment Gains (Losses) (1,997) (3.5) (1,650) (3.4)
-------- ----- -------- -----
$ 57,442 100.0% $ 48,832 100.0%
======== ===== ======== =====
JUNE 30, 1995 DECEMBER 31, 1994
AMOUNT PERCENT AMOUNT PERCENT
(dollars in thousands)
IDENTIFIABLE ASSETS:
Acquisitions $1,364,382 20.0% $1,282,478 20.9%
Financial Institutions 242,018 3.6 215,878 3.5
Group 267,515 3.9 215,997 3.5
Guaranteed Investment
Contracts 2,463,838 36.1 2,211,181 36.1
Individual Life 816,372 12.0 731,026 11.9
Investment Products 1,255,437 18.4 1,162,599 19.0
Corporate and Other 410,378 6.0 311,125 5.1
---------- ----- ---------- -----
$6,819,940 100.0% $6,130,284 100.0%
========== ===== ========== =====
<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, 1995 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 $310.4 million
and $55.5 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 and
a related adjustment to deferred policy acquisition costs, recorded as a
component of stockholders' equity.
The Company's balance sheets at June 30, 1995 and December 31, 1994,
prepared on the basis of reporting investments at amortized cost rather than
at market values, are as follows:
JUNE 30, 1995 DECEMBER 31, 1994
(IN THOUSANDS)
Total investments $5,830,852 $5,501,064
Deferred policy acquisition costs 416,078 400,724
All other assets 550,904 393,929
---------- ----------
$6,797,834 $6,295,717
========== ==========
Deferred income taxes $ 35,010 $ 43,806
All other liabilities 6,324,783 5,874,006
---------- ----------
6,359,793 5,917,812
Stockholders' equity 438,041 377,905
---------- ----------
$6,797,834 $6,295,717
========== ==========
On January 1, 1995 the Company adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures".
Under the new standards, a loan is considered impaired, based on current
information and events, if it is probable that the Company will be unable to
collect the scheduled payments of principal or interest when due according to
the contractual terms of the loan agreement. The measurement of impaired
loans is generally based on the present value of expected future cash flows
discounted at the historical effective interest rate, except that all
collateral-dependent loans are measured for impairment based on the fair
value of the collateral.
Since the Company's mortgage loans are collateralized by real estate,
any assessment of impairment is based upon the estimated fair value of the
real estate. Based on the Company's evaluation of its mortgage loan
portfolio, the Company does not expect any material losses on its mortgage
loans, and therefore no allowance for losses is required under SFAS No. 114
at January 1, 1995 or June 30, 1995.
<PAGE>
NOTE G - STOCK SPLIT
On May 1, 1995, the Company's Board of Directors approved a two-for-one
split of the Company's Common Stock in the form of a 100% stock dividend
distributed on June 1, 1995. Stockholders' equity has been restated to give
retroactive recognition to the stock split for all periods presented by
reclassifying from retained earnings to common stock the par value of the
additional shares arising from the stock split. In addition, all references
to number of shares and per share amounts included herein have been restated
to reflect the stock split.
NOTE H - SUBSEQUENT EVENT
On August 7, 1995, the Company's Board of Directors adopted a new
stockholder rights plan. The new rights plan will replace the Company's
existing rights plan, which was adopted in 1987. On August 7, 1995, the
Company filed a Form 8-K with the Securities and Exchange Commission which
describes the new stockholder rights plan.
<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:
PREMIUMS AND POLICY FEES
SIX MONTHS PERCENTAGE
ENDED AMOUNT INCREASE
JUNE 30 (IN THOUSANDS) (DECREASE)
1994 $187,486 4.6%
1995 184,247 (1.7)
Premiums and policy fees decreased $3.2 million or 1.7% in the first six
months of 1995 over the first six months of 1994. Premiums and policy fees
from the Financial Institutions Division decreased $32.8 million in the first
six months of 1995 as compared to the first six months of 1994. This
resulted from a reinsurance arrangement begun in the 1995 first quarter
whereby a significant portion of the Division's new sales are being ceded to
a reinsurer. Increases in premiums and policy fees from the Group and
Individual Life Divisions represent increases of $8.8 million and $7.5
million, respectively. The assumption of a block of payroll deduction
policies in the second quarter of 1994 resulted in a $1.9 million increase in
premiums and policy fees in 1995. The assumption of a block of policies in
the fourth quarter of 1994 resulted in a $11.4 million increase in premiums
and policy fees in 1995. On June 15, 1995, the Company coinsured a block of
policies which resulted in a $3.3 million increase in premiums and policy
fees in 1995. Decreases in older acquired blocks resulted in a $4.6 million
decrease in premiums and policy fees.
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:
SIX MONTHS NET INVESTMENT INCOME
ENDED AMOUNT PERCENTAGE
JUNE 30 (IN THOUSANDS) INCREASE
1994 $198,885 19.5%
1995 230,709 16.0
<PAGE>
Net investment income in the first six months of 1995 was $31.8 million
or 16.0% 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 assumption of two blocks of policies in 1994 and one
block of policies in the second quarter of 1995 resulted in an increase in
net investment income of $6.7 million in the first six months of 1995.
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.
However, the Company may sell any of its investments to maintain proper
matching of assets and liabilities. Accordingly, the Company has classified
its fixed maturities and certain other securities as "available for sale."
The sales of investments that have occurred have largely resulted from
portfolio management decisions to maintain proper matching of assets and
liabilities.
The following table sets forth realized investment gains for the periods
shown:
SIX MONTHS REALIZED
ENDED INVESTMENT GAINS
JUNE 30 (IN THOUSANDS)
1994 $1,733
1995 2,064
Realized investment gains for the first six months of 1995 were $0.3
million higher than the corresponding period of 1994.
OTHER INCOME
The following table sets forth other income for the periods shown:
SIX MONTHS
ENDED OTHER INCOME
JUNE 30 (IN THOUSANDS)
1994 $11,209
1995 16,671
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. Other income in the first six months of 1995 was $5.5 million
higher than the corresponding period of 1994. Other income for the first six
months of 1994 included $4.2 million related to the sale of a subsidiary. On
March 20, 1995, the Company completed its acquisition of National Health Care
Systems of Florida, Inc. ("NHCS"), a dental health maintenance organization
based in Jacksonville, Florida, known as "DentiCare". NHCS currently has
over 260,000 members located primarily in Florida, Tennessee, Georgia and
Alabama. The acquisition resulted in a $8.2 million increase in other income
in the first six months of 1995. Other income from all other sources
increased $1.4 million in the first six months of 1995 as compared with the
first six months of 1994.
<PAGE>
INCOME BEFORE INCOME TAX AND MINORITY INTEREST
The following table sets forth income or loss before income tax and
minority interest by business segment for the periods shown:
INCOME (LOSS) BEFORE INCOME TAX
AND MINORITY INTEREST
SIX MONTHS ENDED JUNE 30
(IN THOUSANDS)
BUSINESS SEGMENT 1994 1995
Acquisitions $19,429 $24,184
Financial Institutions 4,012 4,333
Group 4,625 5,967
Guaranteed Investment Contracts 18,096 16,016
Individual Life 8,899 9,163
Investment Products 2,113 5,511
Corporate and Other (6,692) (5,735)
Unallocated Realized Investment Losses (1,650) (1,997)
------- -------
$48,832 $57,442
======= =======
Percentage Increase 30.6% 17.6%
Pretax earnings from the Acquisitions Division increased $4.8 million in
the first six months of 1995 as compared to the same period of 1994.
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 assumed two blocks of policies during 1994 and one
block of policies during the second quarter of 1995. These acquisitions
represent $4.1 million of the increase. Improved results related to
Wisconsin National Life Insurance Company (a company acquired in 1993)
represent a $1.3 million increase. Decreases in older acquired blocks of
policies represented a $0.7 million decrease in pretax earnings in the first
six months of 1995 as compared to the first six months of 1994.
Pretax earnings of the Financial Institutions Division were $0.3 million
higher in the first six months of 1995 as compared to the same period in
1994. Increased earnings in certain lines of business were partially offset
by decreases in other lines. The Division has entered into a reinsurance
arrangement whereby a significant portion of the Division's new sales are
being ceded to a reinsurer. In the 1995 second quarter the Division also
reinsured a block of older policies. Though the Division's future earnings
will be slightly reduced, these reinsurance transactions are expected to
improve the Division's return on investment.
Group pretax earnings were $1.3 million higher in the first six months
of 1995 as compared to the first six months of 1994 due to improved earnings
from accident and health products and dental products which were partially
offset by lower earnings from life and cancer products. NHCS represented
$0.7 million of the increase.
The Guaranteed Investment Contract ("GIC") Division had pretax operating
earnings of $15.8 million in the first six months of 1995 and $13.6 million
in the corresponding period of 1994. This increase was due to the growth in
GIC deposits placed with the Company. At June 30, 1995, GIC deposits totaled
$2.4 billion compared to $2.1 billion one year earlier. Realized investment
gains associated with this Division in the first six months of 1995 were $0.2
million, $4.3 million lower than the same period last year. As a result,
total pretax earnings were $16.0 million in the first six months of 1995
compared to $18.1 million for the same period last year.
<PAGE>
Individual Life pretax earnings increased $0.3 million in the first six
months of 1995 as compared to the first six months of 1994. At December 31,
1994 the Company reduced certain statutory policy liabilities for certain
term-like products to be more consistent with current regulation and industry
practice. This reduced investment income allocated to the Division in the
first six months of 1995 by approximately $1.5 million when compared to the
same period in 1994. Additionally, expenses to develop new marketing
ventures were $1.0 million higher in the first six months of 1995 as compared
to the first six months of 1994. Also reflected in the Division's operating
results for 1995 is a $1.1 million loss related to the Company's broker-
dealer (previously reported within the Investment Products Division). These
decreases were offset by earnings from a growing amount of business in force.
Investment Products Division pretax earnings were $3.4 million higher in
the first six months of 1995 compared to the same period of 1994. Realized
investment gains associated with the Division, net of related amortization of
deferred policy acquisition costs, were $2.1 million higher than the same
period last year. During 1994 the Division completed the amortization of the
deferred policy acquisition costs related to its book value annuities.
Accordingly, 1995 operating earnings were $4.1 million higher due to lower
amortization. This increase was largely offset by higher expenses related to
the Company's variable annuity which was introduced in early 1994, and to
increases in other expenses.
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 improved $1.0 million in the first six months of
1995 as compared to the first six months of 1994 due to a decrease in
reported pretax expenses. Reflected in the decrease in expenses are $2.5
million of dividends on the Company's Monthly Income Preferred Securities
(the proceeds of which were used to repay debt) which are reported as
minority interest in net income of consolidated subsidiaries rather than
pretax expenses of the Corporate and Other segment. The decrease was
partially offset by higher other expenses, including interest on debt.
Unallocated realized investment losses occurred due to sales of
investments that occurred to maintain proper matching of assets and
liabilities.
INCOME TAXES
The following table sets forth the effective income tax rates for the
periods shown:
SIX MONTHS
ENDED ESTIMATED EFFECTIVE
JUNE 30 INCOME TAX RATES
1994 32%
1995 33
The effective income tax rate for 1994 was 32%. Management's estimate of the
effective income tax rate for 1995 is 33%.
NET INCOME
The following table sets forth net income and the net income per share
for the periods shown:
SIX MONTHS NET INCOME
ENDED TOTAL PERCENTAGE
JUNE 30 (IN THOUSANDS) PER SHARE INCREASE
1994 $33,018 $1.21 29.9%
1995 36,877 1.31 11.7
<PAGE>
Compared to the same period in 1994, net income per share in the first
six months of 1995 increased 11.7%, reflecting improved operating earnings in
the Acquisitions, Financial Institutions, Group, Guaranteed Investment
Contracts, Individual Life, and Investment Products Divisions, which were
partially offset by lower earnings in the Corporate and Other segment.
RECENTLY ISSUED ACCOUNTING STANDARDS
In January 1995, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 120,
"Accounting and Reporting by Mutual Life Insurance Enterprises and by
Insurance Enterprises for Certain Long-Duration Participating Contracts." In
March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The Company
anticipates that the impact of adopting SFAS Nos. 120 and 121 will be
immaterial to its financial condition.
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, 1995, the fixed
maturity investments (bonds, bank loan participations, and redeemable
preferred stocks) had a market value of $3,831.3 million, which is 0.8% above
amortized cost (less allowances for uncollectible amounts on investments) of
$3,800.6 million. The Company had $1,621.3 million in mortgage loans at June
30, 1995. While the Company's mortgage loans do not have quoted market
values, at June 30, 1995, the Company estimates the market value of its
mortgage loans to be $1,778.4 million (using discounted cash flows from the
next call date) which is 9.7% 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 value fluctuations should not adversely
affect liquidity.
At June 30, 1995, delinquent mortgage loans and foreclosed real estate
were 0.4% of assets. Bonds rated less than investment grade were 1.1% of
assets. Additionally, the Company had bank loan participations that were
less than investment grade representing 3.3% 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 June 30, 1995.
Policy loans at June 30, 1995 were $147.2 million, a decrease of $0.4
million from December 31, 1994. 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.
<PAGE>
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. It is the Company's policy to maintain asset and liability
durations within 10% of one another.
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 and from a fixed to a variable rate of interest and to convert its
Senior Notes and Monthly Income Preferred Securities from a fixed rate to a
variable rate of interest. At June 30, 1995, related open interest rate swap
contracts with a notional amount of $205 million were in a $0.2 million net
unrealized gain position.
The Company entered the GIC market in late 1989. Most GIC contracts
written by the Company have maturities of 3 to 5 years. Prior to 1993, few
GIC contracts were maturing because the contracts were newly written.
Beginning in 1993, GIC contracts began to mature as contemplated when the
contracts were sold. Withdrawals related to GIC contracts were approximately
$700 million during 1994. Withdrawals related to GIC contracts are estimated
to be approximately $600 million in 1995. The Company's asset/liability
matching practices take into account maturing contracts. Accordingly, the
Company does not expect maturing contracts to have an unusual effect on the
future operations and liquidity of the Company.
In anticipation of receiving GIC and annuity deposits, the life
insurance subsidiaries were committed at June 30, 1995 to fund mortgage loans
and to purchase fixed maturity and other long-term investments in the amount
of $368.2 million. The Company's subsidiaries held $144.9 million in cash
and short-term investments at June 30, 1995. Protective Life Corporation had
an additional $3.3 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 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.
<PAGE>
At June 30, 1995, Protective Life Corporation had borrowed $36.5 million
of its $60 million revolving line of credit and an additional $10.5 million
of short-term bank borrowings, all on notes bearing interest rates averaging
6.3%. The Company's bank borrowings have increased $24 million since
December 31, 1994. Proceeds have been primarily used to contribute
additional statutory capital to the Company's insurance subsidiaries, and for
general corporate purposes.
On March 20, 1995, the Company acquired National Health Care Systems of
Florida, Inc. In connection with the acquisition, the Company reissued
1,316,458 shares of its Common Stock previously held as Treasury Stock.
On November 7, 1994, the Company's Board of Directors authorized a
program for the repurchase of up to 600,000 shares of Company Common Stock
for an aggregate purchase price not to exceed $15 million. No shares have
been repurchased under the program. The program expires December 31, 1995.
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, 1994, approximately $196 million of
consolidated stockholders' equity, excluding net unrealized losses on
investments, represented net assets of the Company's insurance subsidiaries
that cannot be transferred in the form of dividends, loans, or advances to
the parent company. 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 $248 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.
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.
To give the Company flexibility in connection with future acquisition
opportunities, the Company has registered debt securities, preferred and
common stock of Protective Life Corporation, and additional preferred
securities of PLC Capital L.L.C., under the Securities Act of 1933 on a
delayed (or "shelf") basis.
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.
<PAGE>
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, 1995 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 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 insurers,
including material amounts of punitive damages. In some 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. Among the litigation currently pending 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.
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a). Exhibit 15 - Letter re: unaudited interim financial statements
(b). Exhibit 27 - Financial data schedule
(c). A report on Form 8-K was filed April 26, 1995, concerning the
Company's 1995 first quarter earnings press release.
<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 10, 1995 /S/ JERRY W. DEFOOR
Jerry W. DeFoor
Vice President and Controller,
and Chief Accounting Officer
(Duly authorized officer)
<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 25, 1995, except for Note H, as to which
the date is August 7, 1995, on our review of interim consolidated financial
information of Protective Life Corporation and subsidiaries for the period ended
June 30, 1995, 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 L.L.P.
Birmingham, Alabama
July 25, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of Protective Life Corporation and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<DEBT-HELD-FOR-SALE> 3,831,333
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 46,934
<MORTGAGE> 1,621,278
<REAL-ESTATE> 21,275
<TOTAL-INVEST> 5,862,641
<CASH> 0
<RECOVER-REINSURE> 161,378
<DEFERRED-ACQUISITION> 409,801
<TOTAL-ASSETS> 6,819,940
<POLICY-LOSSES> 1,807,604
<UNEARNED-PREMIUMS> 135,837
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 144,690
<NOTES-PAYABLE> 122,000
<COMMON> 15,668<F1>
0
0
<OTHER-SE> 439,243
<TOTAL-LIABILITY-AND-EQUITY> 6,819,940
184,247
<INVESTMENT-INCOME> 230,709
<INVESTMENT-GAINS> 2,064
<OTHER-INCOME> 16,671
<BENEFITS> 248,928
<UNDERWRITING-AMORTIZATION> 45,566
<UNDERWRITING-OTHER> 81,755
<INCOME-PRETAX> 57,442
<INCOME-TAX> 18,956
<INCOME-CONTINUING> 36,877<F2>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36,877
<EPS-PRIMARY> 1.31<F1>
<EPS-DILUTED> 1.31<F1>
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Reflects two for one stock split effective June 1, 1995.
<F2>Net of minority interest in income of consolidated subsidiaries of $1,609.
</FN>
</TABLE>
