<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1996
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 1-12332
PROTECTIVE LIFE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-2492236
(State of incorporation) (IRS Employer Identification Number)
2801 HIGHWAY 280 SOUTH
BIRMINGHAM, ALABAMA 35223
(Address of principal executive offices)
(205) 879-9230
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Number of shares of Common Stock, $.50 par value, outstanding as of
May 3, 1996: 28,797,293 shares.
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PROTECTIVE LIFE CORPORATION
INDEX
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Report of Independent Accountants
Consolidated Condensed Statements of Income for the Three
Months ended March 31, 1996 and 1995 (unaudited)
Consolidated Condensed Balance Sheets as of March 31, 1996
(unaudited) and December 31, 1995
Consolidated Condensed Statements of Cash Flows for the
Three Months ended March 31, 1996 and 1995 (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 4. Results of Votes of Security Holders
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 March 31, 1996, and the
related consolidated condensed statements of income for the three-month periods
ended March 31, 1996 and 1995 and consolidated condensed statements of cash
flows for the three-month periods ended March 31, 1996 and 1995. 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, 1995, 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
12, 1996, we expressed an unqualified opinion which contains an explanatory
paragraph regarding the changes in accounting for stock-based compensation plans
in 1995 and certain investments in debt and equity securities in 1993 on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying consolidated condensed balance sheet as of December 31, 1995,
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
April 24, 1996
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<TABLE>
<CAPTION>
PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in thousands except per share amounts)
(Unaudited)
THREE MONTHS ENDED
MARCH 31
1996 1995
<S> <C> <C>
REVENUES
Premium and policy fees (net of reinsurance ceded:
1996 - $78,303; 1995 - $62,131) $ 108,667 $ 102,014
Net investment income 124,280 112,663
Realized investment gains (losses) 4,421 2,619
Other income 12,377 4,533
---------- ---------
249,745 221,829
---------- ---------
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance ceded:
1996 - $56,751; 1995 - $44,203) 149,229 135,393
Amortization of deferred policy acquisition costs 21,818 20,333
Other operating expenses (net of reinsurance ceded:
1996 - $17,802; 1995 - $11,269) 45,558 36,531
---------- ---------
216,605 192,257
---------- ---------
INCOME BEFORE INCOME TAX AND MINORITY
INTEREST 33,140 29,572
Income tax expense 11,268 9,759
---------- ---------
INCOME BEFORE MINORITY INTEREST 21,872 19,813
Minority interest in net income
of consolidated subsidiaries 804 804
---------- ---------
NET INCOME $ 21,068 $ 19,009
========== ==========
NET INCOME PER SHARE $ 0.73 $ 0.69
========== ==========
DIVIDENDS PAID PER SHARE $ 0.16 $ 0.14
========== ==========
Average shares outstanding 29,020,360 27,599,922
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
</TABLE>
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<TABLE>
<CAPTION>
PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
MARCH 31 DECEMBER 31
1996 1995
(Unaudited)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities $4,408,821 $3,892,008
Equity securities 41,748 38,711
Mortgage loans on real estate 1,378,045 1,834,357
Investment real estate, net 21,454 20,921
Policy loans 164,741 143,372
Other long-term investments 38,709 42,096
Short-term investments 198,912 53,591
---------- ----------
Total investments 6,252,430 6,025,056
Cash 14,556 11,392
Accrued investment income 64,794 61,007
Accounts and premiums receivable, net 35,706 38,722
Reinsurance receivables 293,890 271,018
Deferred policy acquisition costs 451,145 410,396
Property and equipment, net 36,533 36,578
Other assets 57,421 52,184
Assets held in separate accounts 388,321 324,904
---------- ----------
TOTAL ASSETS $7,594,796 $7,231,257
========== ==========
LIABILITIES
Policy liabilities and accruals $2,396,777 $2,124,486
Guaranteed investment contract deposits 2,544,596 2,451,693
Annuity deposits 1,260,454 1,280,069
Other policyholders' funds 142,243 134,380
Other liabilities 146,957 152,042
Accrued income taxes (1,154) (2,894)
Deferred income taxes 41,575 69,520
Debt 128,700 115,500
Liabilities related to separate accounts 388,321 324,904
Minority interest in consolidated subsidiaries 55,000 55,000
---------- ----------
TOTAL LIABILITIES 7,103,469 6,704,700
========== ==========
COMMITMENTS AND CONTINGENT LIABILITIES - NOTE C
STOCKHOLDERS' EQUITY
Preferred Stock, $1 par value
Shares authorized: 3,600,000; Issued: none
Junior Participating Cumulative Preferred Stock, $1 par value
Shares authorized: 400,000; Issued: none
Common Stock, $0.50 par value
Shares authorized: 80,000,000
Issued: 1996 and 1995 - 31,336,462 15,668 15,668
Additional paid-in capital 96,992 96,371
Net unrealized gains (losses) on investments
(net of income tax: 1996 - $2,753; 1995 - $31,157 5,113 57,863
Retained earnings 390,383 373,922
Treasury stock (1996 - 2,539,169 shares; 1995 - 2,561,344 shares) (11,904) (12,008)
Unallocated stock in Employee Stock Ownership Plan
(1996 - 774,058 shares; 1995 - 793,804 shares) (4,925) (5,259)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 491,327 526,557
---------- ----------
$7,594,796 $7,231,257
========== ==========
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
</TABLE>
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<TABLE>
<CAPTION>
PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
THREE MONTHS ENDED
MARCH 31
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 21,068 $ 19,009
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of deferred policy acquisition costs 21,819 20,333
Capitalization of deferred policy acquisition costs (20,328) (21,787)
Depreciation expense 1,570 1,339
Deferred income taxes 459 878
Accrued income taxes 1,740 7,416
Interest credited to universal life and investment products 69,895 67,685
Policy fees assessed on universal life and investment products (26,535) (22,716)
Change in accrued investment income and other receivables (23,643) (2,633)
Change in policy liabilities and other policyholders' funds
of traditional life and health products 86,786 20,304
Change in other liabilities (5,699) 5,565
Other (net) (7,335) 1,618
--------- ---------
Net cash provided by operating activities 119,797 97,011
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reductions of investments
Investments available for sale 189,407 42,451
Other 20,728 22,808
Sale of investments
Investments available for sale 354,545 197,797
Other 554,969 1,759
Cost of investments acquired
Investments available for sale (1,295,016) (370,606)
Other (119,178) (61,928)
Acquisitions and bulk reinsurance assumptions 116,220 (7,550)
Purchase of property and equipment (1,856) (2,806)
Sale of property and equipmen 331 83
---------- ---------
Net cash used in investing activities (179,850) (177,992)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings under line of credit
arrangements and debt 442,234 311,800
Principal payments on line of credit arrangements
and debt (429,034) (285,800)
Dividends to stockholders (4,607) (3,866)
Purchase of treasury stock (3)
Investment product deposits and change in universal life deposits 309,117 55,219
Investment product withdrawals (254,493) 365
---------- ---------
Net cash provided by financing activities 63,217 77,715
---------- ---------
INCREASE (DECREASE) IN CASH 3,164 (3,266)
CASH AT BEGINNING OF PERIOD 11,392 4,468
---------- ---------
CASH AT END OF PERIOD $ 14,556 $ 1,202
========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period:
Interest on debt $ (4,594) $ (4,589)
Income taxes $ (8,496) $ (1,200)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Reissuance of treasury stock to ESOP $ 669 $ 350
Unallocated stock in ESOP $ 334 $ 333
Reissuance of treasury stock $ 81
Acquisitions
Assets acquired $ 138,564 $ 9,781
Liabilities assumed (169,287) (3,851)
Reissuance of treasury stock (30,681)
---------- ---------
Net $ (30,723) $ (24,751)
========== =========
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
three month period ended March 31, 1996 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1996. 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, 1995.
NOTE B - SALE OF MORTGAGE LOANS
On March 22, 1996, the Company sold $554 million of its commercial mortgage
loans in a securitization transaction. Proceeds from the sale consisted of cash
of $400 million, net of expenses, and subordinated mortgaged-backed securities
of $161 million. The transaction resulted in a realized investment gain of
approximately $6.1 million. The cash proceeds were reinvested in fixed
maturity and short-term investments.
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. These 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. Although the
Company has indemnification agreements with certain of its officers providing up
to $10 million in indemnification, the officers' agreements do not require the
Company 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 any 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 no pending or threatened litigation is
reasonably likely to have a material adverse effect on the financial position of
the Company.
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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.
THREE MONTHS ENDED MARCH 31
1996 1995
AMOUNT PERCENT AMOUNT PERCENT
(dollars in thousands)
TOTAL REVENUES:
Acquisitions $ 52,026 20.8% $ 47,178 21.3%
Financial Institutions 14,675 5.9 21,621 9.8
Group 51,018 20.4 40,928 18.5
Guaranteed Investment
Contracts 50,834 20.4 48,825 22.0
Individual Life 46,204 18.5 34,243 15.4
Investment Products 29,774 11.9 24,225 10.9
Corporate and Other 4,524 1.8 2,288 1.0
Unallocated Realized
Investment Gains (Losses) 690 0.3 2,521 1.1
-------- ----- -------- -----
$249,745 100.0% $221,829 100.0%
======== ===== ======== =====
INCOME (LOSS) BEFORE INCOME
TAX AND MINORITY INTEREST:
Acquisitions $ 12,959 39.1% $ 11,009 37.3%
Financial Institutions 1,335 4.0 1,776 6.0
Group 3,872 11.7 1,603 5.4
Guaranteed Investment
Contracts 6,328 19.1 7,317 24.7
Individual Life 3,531 10.6 3,494 11.8
Investment Products 2,903 8.8 1,840 6.2
Corporate and Other 1,522 4.6 12 0.1
Unallocated Realized
Investment Gains (Losses) 690 2.1 2,521 8.5
-------- ----- -------- -----
$ 33,140 100.0% $ 29,572 100.0%
======== ===== ======== =====
MARCH 31, 1996 DECEMBER 31, 1995
AMOUNT PERCENT AMOUNT PERCENT
(dollars in thousands)
IDENTIFIABLE ASSETS:
Acquisitions $1,467,938 19.3% $1,255,542 17.4%
Financial Institutions 269,150 3.6 268,782 3.7
Group 283,115 3.7 278,094 3.8
Guaranteed Investment
Contracts 2,662,857 35.1 2,537,045 35.1
Individual Life 921,983 12.1 890,198 12.3
Investment Products 1,597,273 21.0 1,580,519 21.9
Corporate and Other 392,480 5.2 421,077 5.8
---------- ----- ---------- -----
$7,594,796 100.0% $7,231,257 100.0%
========== ===== ========== =====
<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 March
31, 1996 and for the three months then ended, the Company's life insurance
subsidiaries had stockholder's equity and net income prepared in conformity with
statutory reporting practices of $300.6 million and $6.7 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." As prescribed by SFAS No. 115, certain investments are
recorded at their market values with the resulting unrealized gains and losses
reduced by a related adjustment to deferred policy acquisition costs, net of
income tax, reported as a component of stockholders' equity. The market values
of fixed maturities increase or decrease as interest rates fall or rise.
Therefore, although the adoption of SFAS No. 115 does not affect the Company's
operations, its reported stockholders' equity will fluctuate significantly as
interest rates change.
The Company's balance sheets at March 31, 1996 and December 31, 1995, prepared
on the basis of reporting investments at amortized cost rather than at market
values, are as follows:
MARCH 31, 1996 DECEMBER 31, 1995
(IN THOUSANDS)
Total investments $6,239,831 $5,919,787
Deferred policy acquisition costs 455,877 426,645
All other assets 891,222 795,805
---------- ----------
$7,586,930 $7,142,237
========== ==========
Deferred income taxes $ 38,822 $ 38,364
All other liabilities 7,061,894 6,635,179
---------- ----------
7,100,716 6,673,543
Stockholders' equity 486,214 468,694
---------- ----------
$7,586,930 $7,142,237
========== ==========
At January 1, 1996, the Company adopted SFAS No. 120, "Accounting and Reporting
by Mutual Life Insurance Enterprises and by Insurance Enterprises for Certain
Long-Duration Contracts;" SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets to Be Disposed Of;" and SFAS No. 122, "Accounting for Mortgage
Servicing Rights." The adoption of these accounting standards did not have a
material effect on the Company's financial statements.
NOTE G - RECLASSIFICATIONS
Certain reclassifications have been made in the previously reported financial
statements and accompanying notes to make the prior year amounts comparable to
those of the current year. Such reclassifications had no effect on previously
reported net income, total assets or stockholders' equity.
<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
THREE MONTHS PERCENTAGE
ENDED AMOUNT INCREASE/
MARCH 31 (IN THOUSANDS) (DECREASE)
1995 $102,014 14.0%
1996 108,667 6.5
Premiums and policy fees increased $6.7 million or 6.5% in the first three
months of 1996 over the first three months of 1995. Premiums and policy fees
from the Financial Institutions Division decreased $7.2 million in the first
three months of 1996 as compared to the first three months of 1995. This
resulted from a reinsurance arrangement begun in 1995. Increases in premiums
and policy fees from the Group and Individual Life Divisions were $4.3 million
and $6.0 million, respectively. The coinsurance of a block of policies in the
second quarter of 1995 resulted in a $1.8 million increase in premiums and
policy fees in the first three months of 1996. The coinsurance of a block of
policies in the first quarter of 1996 resulted in a $4.7 million increase in
premiums and policy fees. Decreases in older acquired blocks resulted in a $4.0
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:
THREE MONTHS NET INVESTMENT INCOME
ENDED AMOUNT PERCENTAGE
MARCH 31 (IN THOUSANDS) INCREASE
1995 $112,663 12.4%
1996 124,280 10.3
Net investment income in the first three months of 1996 was $11.6 million or
10.3% 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. The assumption of a block of policies in
the second quarter of 1995 and a block of policies in the first quarter of 1996
resulted in an increase in net investment income of $3.1 million in the first
three months of 1996.
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 approximate 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 resulted principally from portfolio
management decisions to maintain approximate matching of assets and liabilities.
The following table sets forth realized investment gains for the periods shown:
THREE MONTHS REALIZED
ENDED INVESTMENT GAINS
MARCH 31 (IN THOUSANDS)
1995 $2,619
1996 4,421
Realized investment gains for the first three months of 1996 were $1.8 million
higher than the corresponding period of 1995. In the 1996 first quarter, the
Company sold $554 million of its commercial mortgage loans in a securitization
transaction, resulting in a $6.1 million realized investment gain.
<PAGE>
OTHER INCOME
The following table sets forth other income for the periods shown:
THREE MONTHS
ENDED OTHER INCOME
MARCH 31 (IN THOUSANDS)
1995 $ 4,533
1996 12,377
Other income consists primarily of revenues of the Company's dental managed care
plans and 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 three months of 1996 was $7.8 million
higher than the corresponding period of 1995. On March 20, 1995, the Company
completed its acquisition of National Health Care Systems of Florida, Inc.
("NHCS" also known as "DentiCare"), based in Jacksonville, Florida. The
acquisition resulted in a $4.9 million increase in other income in the first
three months of 1996. Other income from all other sources increased $2.9
million in the first three months of 1996 as compared with the first three
months of 1995.
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
THREE MONTHS ENDED MARCH 31
(IN THOUSANDS)
BUSINESS SEGMENT 1995 1996
Acquisitions $11,009 $12,959
Financial Institutions 1,776 1,335
Group 1,603 3,872
Guaranteed Investment Contracts 7,317 6,328
Individual Life 3,494 3,531
Investment Products 1,840 2,903
Corporate and Other 12 1,522
Unallocated Realized Investment Gains 2,521 690
------- -------
$29,572 $33,140
======= =======
Percentage Increase 21.3% 12.1%
<PAGE>
Pretax earnings from the Acquisitions Division increased $2.0 million in the
first three months of 1996 as compared to the same period of 1995. 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 one block of policies during the second quarter of 1995 and
another block of policies in the first quarter of 1996. These acquisitions
represent $1.5 million of the increase.
Pretax earnings of the Financial Institutions Division were $0.4 million lower
in the first three months of 1996 as compared to the same period in 1995. The
reinsurance arrangement begun in the first quarter of 1995 to reinsure all of
the Division's new credit insurance sales and thereby improve the Division's
return on investment, reduced the Division's reported earnings by approximately
$1.0 million, which was contemplated when the arrangement was entered into. In
addition, life insurance claims were approximately $0.4 million higher in the
1996 first quarter as compared to the same period last year.
Group pretax earnings were $2.3 million higher in the first three months of 1996
as compared to the first three months of 1995. Improved dental earnings
represent $2.1 million of the increase.
The Guaranteed Investment Contract ("GIC") Division had pretax operating
earnings of $8.7 million in the first three months of 1996 and $7.2 million in
the corresponding period of 1995. This increase was due to the growth in GIC
deposits placed with the Company. At March 31, 1996, GIC deposits totaled $2.5
billion compared to $2.3 billion one year earlier. Realized investment losses
associated with this Division in the first three months of 1996 were $2.4
million as compared to realized investment gains of $0.1 million in the same
period last year. As a result, total pretax earnings were $6.3 million in the
first three months of 1996 compared to $7.3 million for the same period last
year.
The Individual Life Division had pretax operating earnings of $2.4 million in
the 1996 first quarter as compared to $3.5 million in the same period of 1995.
The decrease was primarily due to approximately $1.0 million higher life
insurance claims in the 1996 first quarter as compared to the same period last
year. Realized investment gains, net of related amortization of deferred policy
acquisition costs, associated with this Division were $1.1 million in 1996. As
a result, total pretax earnings were $3.5 million in the first three months of
1996 which was approximately the same as in the first three months of 1995 in
which there were no realized investment gains.
Investment Products Division pretax operating earnings were $2.2 million which
was $0.4 million higher in the first three months of 1996 compared to the same
period of 1995. Realized investment gains associated with the Division, net of
related amortization of deferred policy acquisition costs, were $0.7 million as
compared to less than $0.1 million last year, resulting in total pretax earnings
of $2.9 million in the first quarter of 1996 as compared to $1.8 million in the
same period of 1995.
The Corporate and Other segment consists primarily of net investment income on
capital, interest expense on substantially all debt, the Company's 50% owned
joint venture in Hong Kong, several small insurance lines of business, and the
operations of several small noninsurance subsidiaries. Pretax earnings for this
segment increased $1.5 million in the first three months of 1996 as compared to
the first three months of 1995 due to improved operating results from the
Company's joint venture in Hong Kong and increased net investment income on
capital, which was partially offset by increased interest expense.
<PAGE>
<PAGE>
INCOME TAXES
The following table sets forth the effective income tax rates for the periods
shown:
THREE MONTHS
ENDED ESTIMATED EFFECTIVE
MARCH 31 INCOME TAX RATES
1995 33%
1996 34
The effective income tax rate for the full year of 1995 was 34%. Management's
estimate of the effective income tax rate for 1996 is also 34%.
NET INCOME
The following table sets forth net income and the net income per share for the
periods shown:
THREE MONTHS NET INCOME
ENDED TOTAL PERCENTAGE
MARCH 31 (IN THOUSANDS) PER SHARE INCREASE
1995 $19,009 $.69 14.7%
1996 21,068 .73 5.8
Compared to the same period in 1995, net income per share in the first three
months of 1996 increased 5.8%, reflecting improved operating earnings in the
Acquisitions, Group, Guaranteed Investment Contracts, and Investment Products
Divisions, and the Corporate and Other segment, which were partially offset by
lower operating earnings in the Financial Institutions and Individual Life
Divisions and lower realized investment gains (net of related amortization of
deferred policy acquisition costs).
<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.
Since future benefit payments largely represent medium-and 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.
Many of the Company's products contain surrender charges and other features that
reward persistency and penalize the early withdrawal of funds. Surrender
charges for these products generally are 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
that 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.
In accordance with Statement of Financial Accounting Standards No. 115, the
Company's investments in debt and equity securities are reported at market
value, and investments in mortgage loans are reported at amortized cost. At
March 31, 1996, the fixed maturity investments (bonds, bank loan participations,
and redeemable preferred stocks) had a market value of $4,408.8 million, which
is 0.1% above amortized cost (less allowances for uncollectible amounts on
investments) of $4,402.5 million. The Company had $1,378.0 million in mortgage
loans at March 31, 1996. While the Company's mortgage loans do not have quoted
market values, at March 31, 1996, the Company estimates the market value of its
mortgage loans to be $1,497.8 million (using discounted cash flows from the next
call date) which is 8.7% 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.
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 $429 million of the Company's mortgage loans have this
participation feature.
At March 31, 1996, delinquent mortgage loans and foreclosed real estate were
0.5% of assets. Bonds rated less than investment grade were 1.5% of assets.
Additionally, the Company had bank loan participations that were less than
investment grade representing 2.6% 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 $31.6 million at March 31, 1996.
Policy loans at March 31, 1996 were $164.7 million, a decrease of $0.9 million
from December 31, 1995 (after excluding the $22.3 million of policy loans
associated with the coinsurance of a block of policies in the first quarter of
1996). Policy loan rates are generally in the 4.5% to 8.0% range and 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, although from time to time broader duration matching is allowed.
The Company does not use derivative financial instruments for trading purposes.
Combinations of futures contracts and options on treasury notes are sometimes
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 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 March 31, 1996,
related open interest rate swap contracts with a notional amount of $155.0
million were in a $1.4 million net unrealized gain position.
Withdrawals related to GIC contracts were approximately $800 million during
1995. Withdrawals related to GIC contracts are estimated to be approximately
$700 million in 1996. 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.
On March 22, 1996, the Company sold approximately $554 million of its commercial
mortgage loans in a securitization transaction. Proceeds from the sale
consisted of cash of $400 million, net of expenses, and mortgaged-backed
securities of approximately $161 million. The transaction resulted in a
realized gain of approximately $6.1 million. The cash proceeds were reinvested
in fixed maturity and short-term investments.
In anticipation of reinvesting proceeds from the mortgage loan securitization,
and of receiving GIC and annuity deposits, the life insurance subsidiaries were
committed at March 31, 1996 to fund mortgage loans and to purchase fixed
maturity and other long-term investments in the amount of $442.5 million. The
Company's subsidiaries held $212.7 million in cash and short-term investments at
March 31, 1996. Protective Life Corporation had an additional $0.7 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 use when
needed. 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 March 31, 1996, Protective Life Corporation had borrowed $43.5 million of a
$60.0 million revolving line of credit and an additional $10.2 million of short-
term bank borrowings, collectively bearing interest rates averaging 5.6%. The
Company's bank borrowings have increased $13.2 million since December 31, 1995.
Proceeds were used for general corporate purposes, including the acquisition of
a small dental managed care organization, and an investment in an Internet-based
insurance distribution system.
Protective Life Corporation's cash flow is dependent on cash dividends and
payments on surplus notes from its subsidiaries, revenues from investment, data
processing, legal, and management services rendered to the subsidiaries, and
investment income. At December 31, 1995, approximately $180 million of con-
solidated 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 sub-
sidiaries, in excess of approximately $322 million, would be subject to federal
income tax at rates then effective. The Company does not anticipate involun-
tarily making distributions that would be subject to income tax.
Due to the expected growth of the Company's insurance sales, the Company plans
to retain substantial portions of the earnings of its life insurance sub-
sidiaries in those companies primarily to support their future growth. Protec-
tive Life Corporation's cash disbursements have from time to time exceeded its
cash receipts, and these 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 oppor-
tunities, 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. The Company is in the process of offering two million shares of common
stock for sale to the public and intends to grant to the underwriters of the
offering an option to acquire up to 300,000 additional shares of common stock
solely to cover over-allotments. A significant portion of the proceeds will be
invested in the Company's insurance company subsidiaries to finance acquisitions
of additional blocks of insurance policies or otherwise support the continued
growth of the business.
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 im-
mediate 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.
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
March 31, 1996 statutory financial reports of the Company's insurance sub-
sidiaries, the Company's insurance subsidiaries are adequately capitalized under
the formula.
<PAGE>
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 reflected in the financial statements.
A substantial 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 that are disproportionate to the actual
damages. In some states (including Alabama), juries have substantial discretion
in awarding punitive damages, which creates the potential for unpredictable
material adverse judgments in any given punitive damage suit. The Company and
its subsidiaries, like other life and health insurers, in the course of business
are involved in such litigation. Although the outcome of any litigation cannot
be predicted with certainty, the Company believes that at the present time there
are no pending or threatened lawsuits that are reasonably likely to have a
material adverse effect on the financial position 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>
PART II
Item 4. RESULTS OF VOTES OF SECURITY HOLDERS
The Annual Meeting of Stockholders was held on May 6, 1996. Shares entitled to
vote at the Annual Meeting totaled 28,797,189 of which 23,802,420 shares were
represented.
At the Annual Meeting the following directors were elected. In addition the
number of shares cast for and authorization withheld for each nominee shown
below, there were 9,100 abstentions and 31,350 broker non-votes for each
nominee.
FOR AUTHORIZATION WITHHELD
William J. Rushton III 23,751,810 10,160
John W. Woods 23,751,170 10,800
William J. Cabaniss, Jr. 23,751,800 10,170
H. G. Pattillo 23,751,149 10,821
Drayton Nabers, Jr. 23,751,830 10,140
John J. McMahon, Jr. 23,751,186 10,784
A. W. Dahlberg 23,751,170 10,800
John W. Rouse, Jr. 23,751,780 10,190
Robert T. David 23,734,956 27,014
Ronald L. Kuehn, Jr. 23,750,230 11,740
Herbert A. Sklenar 23,749,594 12,376
James S. M. French 23,739,386 22,584
Robert A. Yellowlees 23,750,244 11,726
Additionally, at the Annual Meeting stockholders approved two resolutions. The
first resolution was to approve the Company's Deferred Compensation Plan for
Directors Who Are Not Employees of the Company. The second resolution was to
approve the Company's Deferred Compensation Plan for Officers. Shares voting
for the first resolution were 22,923,827, shares voting against were 543,137,
shares abstaining were 276,505, and there were 58,951 broker non-votes. Shares
voting for the second resolution were 22,968,562, shares voting against were
544,529, shares abstaining were 230,378, and there were 58,951 broker non-votes.
With regards to the transaction of such other business as might properly come
before the Annual Meeting or any adjournment thereof, 3,698,264 shares were cast
as authorization withheld, there were 235,779 abstentions, and there were 31,352
broker non-votes. No other matters came before the Annual Meeting or any
adjournment thereof.
<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 February 12, 1996, concerning the
Company's 1995 fourth 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: May 13, 1996 /S/ JERRY W. DEFOOR
Jerry W. DeFoor
Vice President and Controller,
and Chief Accounting Officer
(Duly authorized officer)
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 April 24, 1996, on our review of interim
consolidated financial information of Protective Life Corporation and sub-
sidiaries for the period ended March 31, 1996, 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
April 24, 1996
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 4,408,821
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 41,748
<MORTGAGE> 1,378,045
<REAL-ESTATE> 21,454
<TOTAL-INVEST> 6,252,430
<CASH> 0
<RECOVER-REINSURE> 293,890
<DEFERRED-ACQUISITION> 451,145
<TOTAL-ASSETS> 7,594,796
<POLICY-LOSSES> 2,191,449
<UNEARNED-PREMIUMS> 205,328
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 142,243
<NOTES-PAYABLE> 128,700
<COMMON> 15,668<F1>
0
0
<OTHER-SE> 475,659
<TOTAL-LIABILITY-AND-EQUITY> 7,594,796
108,667
<INVESTMENT-INCOME> 124,280
<INVESTMENT-GAINS> 4,421
<OTHER-INCOME> 12,377
<BENEFITS> 149,229
<UNDERWRITING-AMORTIZATION> 21,818
<UNDERWRITING-OTHER> 45,558
<INCOME-PRETAX> 33,140
<INCOME-TAX> 11,268
<INCOME-CONTINUING> 21,068<F2>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,068
<EPS-PRIMARY> 0.73<F1>
<EPS-DILUTED> 0.73<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 $804.
</FN>
</TABLE>
