<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 SEPTEMBER 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 November 10,
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 Nine
Months ended September 30, 1995 and 1994 (unaudited)
Consolidated Condensed Balance Sheets as of September 30, 1995
(unaudited) and December 31, 1994
Consolidated Condensed Statements of Cash Flows for the Nine Months ended
September 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 September 30, 1995, and the
related consolidated condensed statements of income for the three-month and
nine-month periods ended September 30, 1995 and 1994 and consolidated condensed
statements of cash flows for the nine-month periods ended September 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
October 25, 1995
<PAGE>
<TABLE>
PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in thousands except per share amounts)
(Unaudited)
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1995 1994 1995 1994
<S> <C> <C> <C> <C>
REVENUES
Premiums and policy fees (net of reinsurance ceded:
three months: 1995 - $79,908; 1994 - $50,714 $ 93,213 $101,876 $277,460 $289,362
nine months: 1995 - $222,351; 1994 - $121,462)
Net investment income 123,894 105,762 354,603 304,647
Realized investment gains (losses) 1,337 3,122 3,401 4,855
Other income 9,637 2,185 26,308 13,394
-------- -------- -------- --------
228,081 212,945 661,772 612,258
-------- -------- -------- --------
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance ceded:
three months: 1995 - $54,638; 1994 - $31,118 134,111 134,208 383,039 376,536
six months: 1995 - $159,760; 1994 - $80,541)
Amortization of deferred policy acquisition costs 17,652 20,493 63,218 60,218
Other operating expenses (net of reinsurance ceded:
three months: 1995 - $23,173; 1994 - $3,793 42,614 29,610 124,369 98,038
-------- -------- -------- --------
nine months: 1995 - $58,645; 1994 - $9,842)
194,377 184,311 570,626 534,792
-------- -------- -------- --------
INCOME BEFORE INCOME TAX AND MINORITY INTEREST 33,704 28,634 91,146 77,466
Income tax expense 12,034 9,163 30,990 24,789
-------- -------- -------- --------
INCOME BEFORE MINORITY INTEREST 21,670 19,471 60,156 52,677
Minority interest in net income of consolidated subsidiaries 804 804 2,413 992
-------- -------- -------- --------
NET INCOME $ 20,866 $ 18,667 $ 57,743 $ 51,685
========= ========= ========= ========
NET INCOME PER SHARE $ 0.72 $ 0.68 $ 2.03 $ 1.89
========= ========= ========= ========
DIVIDENDS PAID PER SHARE $ 0.16 $ 0.14 $ 0.46 $ 0.41
========= ========= ========= ========
Average shares outstanding 28,775,118 27,402,166 28,384,873 27,388,228
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
</TABLE>
<PAGE>
<TABLE>
PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1995 1994
(Unaudited)
<S>
ASSETS
Investments: <C> <C>
Fixed maturities $3,909,950 $3,493,646
Equity securities 47,456 45,005
Mortgage loans on real estate 1,718,200 1,487,795
Investment real estate, net 21,173 20,303
Policy loans 145,655 147,608
Other long-term investments 44,108 48,013
Short-term investments 97,124 59,541
---------- ----------
Total investments 5,983,666 5,301,911
Cash 5,748 4,468
Accrued investment income 61,704 55,637
Accounts and premiums receivable, net 41,244 30,472
Reinsurance receivables 223,457 122,175
Deferred policy acquisition costs 412,504 434,444
Property and equipment, net 37,362 36,323
Other assets 52,842 20,709
Assets held in separate accounts 277,493 124,145
---------- ----------
TOTAL ASSETS $7,096,020 $6,130,284
========== ==========
LIABILITIES
Policy liabilities and accruals $2,023,998 $1,797,774
Guaranteed investment contract deposits 2,483,669 2,281,673
Annuity deposits 1,298,167 1,251,318
Other policyholders' funds 144,468 144,461
Other liabilities 141,833 127,873
Accrued income taxes 4,850 (6,238)
Deferred income taxes 49,029 (14,095)
Debt 140,500 98,000
Liabilities related to separate accounts 277,493 124,145
Minority interest in consolidated subsidiaries 55,000 55,000
---------- ----------
TOTAL LIABILITIES 6,619,007 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 - $12,189 1994 - ($57,902) 22,637 (107,532)
Retained earnings 359,604 314,857
Treasury stock (1995 - 2,561,344 shares; 1994 - 3,909,994 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 477,013 270,373
---------- ----------
$7,096,020 $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>
NINE MONTHS ENDED
SEPTEMBER 30
1995 1994
<S>
CASH FLOWS FROM OPERATING ACTIVITIES <C> <C>
Net income $ 57,743 $ 51,685
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred policy acquisition costs 63,218 60,219
Capitalization of deferred policy acquisition costs (61,287) (89,296)
Depreciation expense 4,277 4,388
Deferred income taxes (6,966) (9,909)
Accrued income taxes 11,088 (3,772)
Interest credited to universal life and investment products 213,303 183,642
Policy fees assessed on universal life and investment products (74,772) (58,887)
Change in accrued investment income and other receivables (116,181) 13,656
Change in policy liabilities and other policyholders' funds
of traditional life and health products 131,345 84,215
Change in other liabilities (5,964) 12,777
Other (net) (1,381) (9,588)
----------- ----------
Net cash provided by operating activities 214,423 239,130
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reductions of investments
Investments available for sale 219,760 317,959
Other 49,536 129,296
Sale of investments
Investments available for sale 863,479 349,944
Other 4,243 16,183
Cost of investments acquired
Investments available for sale (1,322,651) (1,336,274)
Other (243,788) (112,964)
Acquisitions and bulk reinsurance assumptions (7,550) 39,328
Purchase of property and equipment (5,283) (4,380)
Sale of property and equipment 136 1,832
----------- ----------
Net cash used in investing activities (442,118) (599,076)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings under line of credit arrangements and debt 1,032,400 460,186
Principal payments on line of credit arrangements and debt (989,900) (505,258)
Proceeds from issuance of Monthly Income Preferred Securities 55,000
Dividends to stockholders (12,995) (11,232)
Purchase of treasury stock (3) (190)
Investment product deposits and change in universal life deposits 734,707 1,064,910
Investment product withdrawals (535,234) (728,070)
----------- ----------
Net cash provided by financing activities 228,975 335,346
----------- ----------
INCREASE (DECREASE) IN CASH 1,280 (24,600)
CASH AT BEGINNING OF PERIOD 4,468 27,119
----------- ----------
CASH AT END OF PERIOD $ 5,748 $ 2,519
=========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period:
Interest on debt $ (9,740) $ (4,176)
Income taxes $ (25,648) $ (37,937)
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 $ 578
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
nine month period ended September 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. 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>
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.
NINE MONTHS ENDED SEPTEMBER 30
1995 1994
AMOUNT PERCENT AMOUNT PERCENT
(dollars in thousands)
TOTAL REVENUES:
Acquisitions $144,712 21.9% $114,123 18.6%
Financial Institutions 29,189 4.4 81,249 13.3
Group 134,909 20.4 108,407 17.7
Guaranteed Investment Contracts 150,221 22.7 138,972 22.7
Individual Life 108,553 16.4 90,949 14.9
Investment Products 80,975 12.2 64,413 10.5
Corporate and Other 12,604 1.9 13,671 2.2
Unallocated Realized
Investment Gains (Losses) 609 0.1 474 0.1
-------- ----- -------- -----
$661,772 100.0% $612,258 100.0%
======== ===== ======== =====
INCOME (LOSS) BEFORE INCOME
TAX AND MINORITY INTEREST:
Acquisitions $ 36,295 39.8% $ 28,605 36.9%
Financial Institutions 6,564 7.2 6,825 8.8
Group 9,403 10.3 7,045 9.1
Guaranteed Investment Contracts 24,146 26.5 25,276 32.6
Individual Life 13,582 14.9 12,590 16.3
Investment Products 7,403 8.1 3,186 4.1
Corporate and Other (6,856) (7.5) (6,535) (8.4)
Unallocated Realized
Investment Gains (Losses) 609 0.7 474 0.6
-------- ----- -------- -----
$ 91,146 100.0% $ 77,466 100.0%
======== ===== ======== =====
SEPTEMBER 30, 1995 DECEMBER 31, 1994
AMOUNT PERCENT AMOUNT PERCENT
(dollars in thousands)
IDENTIFIABLE ASSETS:
Acquisitions $1,372,676 19.3% $1,131,722 19.4%
Financial Institutions 237,054 3.4 207,511 3.5
Group 268,951 3.8 212,070 3.6
Guaranteed Investment Contracts 2,533,920 35.7 2,187,962 37.4
Individual Life 847,674 11.9 683,013 11.7
Investment Products 1,539,824 21.7 1,122,218 19.2
Corporate and Other 295,921 4.2 302,071 5.2
---------- ----- ---------- -----
$7,096,020 100.0% $5,846,567 100.0%
========== ===== ========== =====
<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 September 30, 1995 and for the nine months then ended, the
Company's life insurance subsidiaries had stockholder's equity and net income
prepared in conformity with statutory reporting practices of $325.5 million and
$74.0 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 September 30, 1995 and December 31, 1994,
prepared on the basis of reporting investments at amortized cost rather than at
market values, are as follows:
SEPTEMBER 30, 1995 DECEMBER 31, 1994
(IN THOUSANDS)
Total investments $5,941,364 $5,501,064
Deferred policy acquisition costs 419,980 400,724
All other assets 699,850 393,929
---------- ----------
$7,061,194 $6,295,717
========== ==========
Deferred income taxes $ 36,840 $ 43,806
All other liabilities 6,569,978 5,874,006
---------- ----------
6,606,818 5,917,812
Stockholders' equity 454,376 377,905
---------- ----------
$7,061,194 $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.
<PAGE>
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
September 30, 1995.
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 - STOCKHOLDER RIGHTS PLAN
On August 7, 1995, the Company's Board of Directors adopted a new
stockholder rights plan. The new rights plan replaced 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 through its subsidiaries 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
NINE MONTHS PERCENTAGE
ENDED AMOUNT INCREASE
SEPTEMBER 30 (IN THOUSANDS) (DECREASE)
1994 $289,362 5.8%
1995 277,460 (4.1)
Premiums and policy fees decreased $11.9 million or 4.1% in the first nine
months of 1995 over the first nine months of 1994. Premiums and policy fees
from the Financial Institutions Division decreased $54.6 million in the first
nine months of 1995 as compared to the first nine 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 $12.6 million and $10.2 million, respectively.
Policy fees related to the Company's variable annuity increased $2.1 million in
the first nine months of 1995 as compared to the same period in 1994. The
assumption of a block of payroll deduction policies in the second quarter of
1994 resulted in a $1.8 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 $17.0 million increase in premiums and policy fees in 1995. On June 15, 1995,
the Company coinsured a block of policies which resulted in a $4.7 million
increase in premiums and policy fees in 1995. Decreases in older acquired
blocks resulted in a $5.8 million decrease in premiums and policy fees.
<PAGE>
NET INVESTMENT INCOME
The following table sets forth for the periods shown the amount of net
investment income and the percentage change from the prior period:
NINE MONTHS NET INVESTMENT INCOME
ENDED AMOUNT PERCENTAGE
SEPTEMBER 30 (IN THOUSANDS) INCREASE
1994 $304,647 16.2%
1995 354,603 16.4
Net investment income in the first nine months of 1995 was $50.0 million or
16.4% 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 $10.1
million in the first nine 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:
NINE MONTHS REALIZED
ENDED INVESTMENT GAINS
SEPTEMBER 30 (IN THOUSANDS)
1994 $4,855
1995 3,401
Realized investment gains for the first nine months of 1995 were $1.5
million lower than the corresponding period of 1994.
<PAGE>
OTHER INCOME
The following table sets forth other income for the periods shown:
NINE MONTHS
ENDED OTHER INCOME
SEPTEMBER 30 (IN THOUSANDS)
1994 $13,394
1995 26,308
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 nine months of 1995 was $12.9 million higher than the corresponding
period of 1994. Other income for the first nine 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"), based in Jacksonville, Florida. NHCS operates prepaid dental plans
(also referred to as dental health maintenance organizations or dental
capitation plans). NHCS, known as "Denticare", currently has
over 283,000 members located primarily in Florida, Tennessee, Georgia, and
Alabama. The acquisition resulted in a $14.4 million increase in other income
in the first nine months of 1995. Other income from all other sources decreased
$1.5 million in the first nine months of 1995 as compared with the first nine
months of 1994.
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
NINE MONTHS ENDED SEPTEMBER 30
(IN THOUSANDS)
BUSINESS SEGMENT 1994 1995
Acquisitions $28,605 $36,295
Financial Institutions 6,825 6,564
Group 7,045 9,403
Guaranteed Investment Contracts 25,276 24,146
Individual Life 12,590 13,582
Investment Products 3,186 7,403
Corporate and Other (6,535) (6,856)
Unallocated Realized Investment Gains 474 609
------- -------
$77,466 $91,146
======= =======
Percentage Increase 34.9% 17.7%
<PAGE>
Pretax earnings from the Acquisitions Division increased $7.7 million in
the first nine 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 $6.8 million of
the increase. Improved mortality experience in older acquired blocks of
policies resulted in a $0.9 million increase in pretax earnings in the first
nine months of 1995 as compared to the first nine months of 1994.
Pretax earnings of the Financial Institutions Division were $0.2 million
lower in the first nine months of 1995 as compared to the same period in 1994.
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 reported earnings were reduced by approximately $0.8 million,
these reinsurance transactions are expected to improve the Division's return on
investment.
Group pretax earnings were $2.4 million higher in the first nine months of
1995 as compared to the first nine 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 $1.4 million of
the increase.
The Guaranteed Investment Contract ("GIC") Division had pretax operating
earnings of $24.9 million in the first nine months of 1995 and $20.4 million in
the corresponding period of 1994. This increase was due to the growth in GIC
deposits placed with the Company. At September 30, 1995, GIC deposits totaled
$2.5 billion compared to $2.3 billion one year earlier. Realized investment
losses associated with this Division in the first nine months of 1995 were $0.8
million as compared to realized investment gains of $4.9 million in the same
period last year. As a result, total pretax earnings were $24.1 million in the
first nine months of 1995 compared to $25.3 million for the same period last
year.
Individual Life pretax earnings increased $1.0 million in the first nine
months of 1995 as compared to the first nine 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
nine months of 1995 by approximately $2.3 million when compared to the same
period in 1994. Additionally, expenses to develop new marketing ventures were
$1.5 million higher in the first nine months of 1995 as compared to the first
nine months of 1994. Also reflected in the Division's operating results for
1995 is a $1.2 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 $4.2 million higher in
the first nine 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 $2.5 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 $5.2 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.
<PAGE>
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 declined $0.3 million in the first nine months of 1995 as
compared to the first nine months of 1994.
Unallocated realized investment gains 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:
NINE MONTHS
ENDED ESTIMATED EFFECTIVE
SEPTEMBER 30 INCOME TAX RATES
1994 32%
1995 34
The effective income tax rate for 1994 was 32%. The estimated income tax rate
for the first nine months of 1995 was increased from 33% to 34% during the third
quarter.
NET INCOME
The following table sets forth net income and the net income per share for
the periods shown:
NINE MONTHS NET INCOME
ENDED TOTAL PERCENTAGE
SEPTEMBER 30 (IN THOUSANDS) PER SHARE INCREASE
1994 $51,685 $1.89 36.8%
1995 57,743 2.03 11.7
Compared to the same period in 1994, net income in the first nine 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." In May 1995, the FASB issued SFAS No. 122,
"Accounting for Mortgage Servicing Rights." In October 1995, the FASB issued
SFAS No. 123, "Accounting for Stock Based Compensation." The Company
anticipates that the impact of adopting these accounting standards will be
immaterial to its financial condition.
<PAGE>
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 September 30, 1995, the fixed
maturity investments (bonds, bank loan participations, and redeemable preferred
stocks) had a market value of $3,962.5 million, which is 1.0% above amortized
cost (less allowances for uncollectible amounts on investments) of $3,923.0
million. The Company had $1,718.2 million in mortgage loans at September 30,
1995. While the Company's mortgage loans do not have quoted market values, at
September 30, 1995, the Company estimates the market value of its mortgage loans
to be $1,846.7 million (using discounted cash flows from the next call date)
which is 7.5% 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.
For several years the Company has offered a commercial loan product under
which the Company will permit a slightly higher loan-to-value ratio in exchange
for a participating interest in the cash flows from the underlying real estate.
Approximately $207 million of the Company's mortgage loans have this
participation feature.
At September 30, 1995, delinquent mortgage loans and foreclosed real estate
were 0.6% of assets. Bonds rated less than investment grade were 1.0% of
assets. Additionally, the Company had bank loan participations that were less
than investment grade representing 2.9% 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 September 30, 1995.
<PAGE>
Policy loans at September 30, 1995 were $145.7 million, a decrease of $2.0
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.
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 September 30, 1995, related open interest rate
swap contracts with a notional amount of $210.0 million were in a $2.1 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 $700 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.
The Company is exploring the prospects for securitizing a portion of its
commercial mortgage portfolio as a means to enhance its liquidity and provide an
alternative source of funding for its commercial mortgage loan origination
business.
In anticipation of receiving GIC and annuity deposits, the life insurance
subsidiaries were committed at September 30, 1995 to fund mortgage loans and to
purchase fixed maturity and other long-term investments in the amount of $329.2
million. The Company's subsidiaries held $102.2 million in cash and short-term
investments at September 30, 1995. Protective Life Corporation had an
additional $0.7 million in cash and short-term investments available for general
corporate purposes.
<PAGE>
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.
At September 30, 1995, Protective Life Corporation had borrowed $40.5
million of a $60.0 million revolving line of credit and an additional $8.0
million of short-term bank borrowings, and the Company's insurance subsidiaries
had borrowed $17.0 million to fund investments, all on notes bearing interest
rates averaging 6.4%. The Company's bank borrowings (excluding temporary
borrowings of the Company's insurance subsidiaries) have increased $25.5 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.
<PAGE>
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.
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
September 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 in which the Company does business, juries
have substantial discretion in awarding punitive damages in these circumstances,
and the state appellate courts have affirmed significant punitive awards. The
Company and its subsidiaries, like other life and health insurers, in the course
of business are involved in such litigation. To date, no such lawsuit has
resulted in the award of any significant amount of damages against the Company.
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 July 25, 1995, concerning the Company's
1995 second quarter earnings press release.
A second report on Form 8-K was filed August 7, 1995 concerning the
redemption of rights relating to the Company's Share Purchase Rights
Plan dated July 13, 1987 and the adoption of a new Share Purchase
Rights Plan dated August 7, 1995.
<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: November 13, 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 October 25, 1995, on our review of interim
consolidated financial information of Protective Life Corporation and
subsidiaries for the period ended September 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 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
October 25, 1995
<TABLE> <S> <C>
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<DEBT-HELD-FOR-SALE> 3,909,950
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 47,456
<MORTGAGE> 1,718,200
<REAL-ESTATE> 21,173
<TOTAL-INVEST> 5,983,666
<CASH> 5,748
<RECOVER-REINSURE> 223,457
<DEFERRED-ACQUISITION> 412,504
<TOTAL-ASSETS> 7,096,020
<POLICY-LOSSES> 1,869,029
<UNEARNED-PREMIUMS> 154,969
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 144,468
<NOTES-PAYABLE> 140,500
<COMMON> 15,668<F1>
0
0
<OTHER-SE> 461,345
<TOTAL-LIABILITY-AND-EQUITY> 7,096,020
277,460
<INVESTMENT-INCOME> 354,603
<INVESTMENT-GAINS> 3,401
<OTHER-INCOME> 26,308
<BENEFITS> 383,039
<UNDERWRITING-AMORTIZATION> 63,218
<UNDERWRITING-OTHER> 124,369
<INCOME-PRETAX> 91,146
<INCOME-TAX> 30,990
<INCOME-CONTINUING> 57,743<F2>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 57,743
<EPS-PRIMARY> 2.03<F1>
<EPS-DILUTED> 2.03<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 $2,413.
</FN>
</TABLE>
