- -------------------------------------------------------------------------------
FORM 10-Q
------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1997
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 or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
2801 HIGHWAY 280 SOUTH
BIRMINGHAM, ALABAMA 35223
(Address of principal executive offices and zip code)
(205) 879-9230
(Registrant's telephone number, including area code)
------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Number of shares of Common Stock, $.50 par value, outstanding as of August 8,
1997: 30,814,136 shares.
<PAGE>
PROTECTIVE LIFE CORPORATION
INDEX
PAGE NUMBER
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Report of Independent Accountants................................
Consolidated Condensed Statements of Income for the Three and Six
Months ended June 30, 1997 and 1996 (unaudited).................
Consolidated Condensed Balance Sheets as of June 30, 1997
(unaudited) and December 31, 1996...............................
Consolidated Condensed Statements of Cash Flows for the
Six Months ended June 30, 1997 and 1996 (unaudited).............
Notes to Consolidated Condensed Financial Statements (unaudited)..
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K.............................
Signature................................................................
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Stockholders
Protective Life Corporation
Birmingham, Alabama
We have reviewed the accompanying consolidated condensed balance sheet of
Protective Life Corporation and subsidiaries as of June 30, 1997, and the
related consolidated condensed statements of income for the three-month and
six-month periods ended June 30, 1997 and 1996 and consolidated condensed
statements of cash flows for the six-month periods ended June 30, 1997 and 1996.
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, 1996, 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
11, 1997, we expressed an unqualified opinion which contains an explanatory
paragraph regarding the changes in accounting for stock-based employee
compensation plans in 1995 on those consolidated financial statements. In our
opinion, the information set forth in the accompanying consolidated condensed
balance sheet as of December 31, 1996, is fairly stated in all material respects
in relation to the consolidated balance sheet from which it has been derived.
COOPERS & LYBRAND L.L.P.
Birmingham, Alabama
July 23, 1997
2
<PAGE>
<TABLE>
<CAPTION>
PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in thousands except per share amounts)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------------------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Premiums and policy fees (net of reinsurance ceded:
three months: 1997 - $71,873; 1996 - $88,232
six months: 1997 - $125,916; 1996 - $166,535) $117,993 $132,251 $247,571 $247,837
Net investment income 137,475 130,560 267,805 254,840
Realized investment gains (losses) 1,143 600 725 5,021
Other income 8,906 4,972 13,668 10,430
--------- --------- -------- --------
265,517 268,383 529,769 518,128
-------- -------- -------- --------
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance ceded:
three months: 1997 - $24,394; 1996 - $61,030
six months: 1997 - $40,833; 1996 - $117,781) 169,813 164,057 332,832 317,197
Amortization of deferred policy acquisition costs 18,210 29,522 39,045 51,340
Other operating expenses (net of reinsurance ceded:
three months: 1997 - $22,042; 1996 - $25,007
six months: 1997 - $36,616; 1996 - $42,809) 33,513 38,281 75,143 79,928
-------- -------- ------- --------
221,536 231,860 447,020 448,465
-------- -------- -------- --------
INCOME BEFORE INCOME TAX AND MINORITY
INTEREST 43,981 36,523 82,749 69,663
Income tax expense 14,954 12,417 28,135 23,685
-------- -------- ------- -------
INCOME BEFORE MINORITY INTEREST 29,027 24,106 54,614 45,978
Minority interest in net income
of consolidated subsidiaries 1,497 805 2,301 1,609
-------- -------- -------- --------
NET INCOME $ 27,530 $ 23,301 $ 52,313 $ 44,369
======== ======== ======== ========
NET INCOME PER SHARE $ .88 $ .78 $ 1.68 $ 1.51
========== ========== ========== ==========
DIVIDENDS PAID PER SHARE $ .20 $ .18 $ .38 $ .34
========== ========== =========== ===========
Average shares outstanding 31,243,771 29,805,228 31,203,065 29,412,794
</TABLE>
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
3
<PAGE>
<TABLE>
<CAPTION>
PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
JUNE 30 DECEMBER 31
1997 1996
-------------------------------------
<S> <C> <C>
ASSETS (Unaudited)
Investments:
Fixed maturities $5,216,866 $4,686,072
Equity securities 24,425 35,250
Mortgage loans on real estate 1,737,542 1,503,080
Investment real estate, net 12,072 14,305
Policy loans 195,635 166,704
Other long-term investments 32,298 32,506
Short-term investments 208,653 114,258
----------- -----------
Total investments 7,427,491 6,552,175
Cash 7,768 121,051
Accrued investment income 83,398 70,544
Accounts and premiums receivable, net 42,349 47,371
Reinsurance receivables 442,759 332,614
Deferred policy acquisition costs 621,445 488,384
Property and equipment, net 38,283 36,091
Other assets 70,943 64,278
Assets held in separate accounts 746,226 550,697
----------- -----------
$9,480,662 $8,263,205
========== ==========
LIABILITIES
Policy liabilities and accruals $3,365,397 $2,709,386
Guaranteed investment contract deposits 2,545,193 2,474,728
Annuity deposits 1,516,256 1,331,067
Other policyholders' funds 167,479 142,221
Other liabilities 178,050 170,442
Accrued income taxes 8,457 (4,521)
Deferred income taxes 30,372 37,869
Debt 131,100 181,000
Liabilities related to separate accounts 746,226 550,697
------------ ------------
8,688,530 7,592,889
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES - NOTE B
GUARANTEED PREFERRED BENEFICIAL INTERESTS
IN COMPANY'S SUBORDINATED DEBENTURES
9% Cumulative Monthly Income Preferred Securities, Series A 55,000 55,000
8.25% Trust Originated Preferred Securities 75,000
------------- ------------
130,000 55,000
------------ ------------
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: 1997 and 1996 - 33,336,462 16,668 16,668
Additional paid-in capital 166,972 166,713
Net unrealized gains (losses) on investments
(net of income tax: 1997 - $6,612; 1996 - $3,601) 12,261 6,688
Retained earnings 482,647 442,046
Treasury stock (1997 - 2,522,326 shares; 1996 - 2,561,344 shares) (11,824) (11,874)
Unallocated stock in Employee Stock Ownership Plan
(1997 - 693,120 shares; 1996 - 743,462 shares) (4,592) (4,925)
------------ ------------
662,132 615,316
----------- -----------
$9,480,662 $8,263,205
========== ==========
</TABLE>
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
4
<PAGE>
<TABLE>
<CAPTION>
PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
SIX MONTHS ENDED
JUNE 30
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 52,313 $ 44,369
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of deferred policy acquisition costs 39,045 51,340
Capitalization of deferred policy acquisition costs (49,406) (47,816)
Depreciation expense 473 3,265
Deferred income taxes (17,592) (11,502)
Accrued income taxes 15,209 5,116
Interest credited to universal life and investment products 220,542 135,915
Policy fees assessed on universal life and investment products (63,778) (53,936)
Change in accrued investment income and other receivables 1,483 (69,529)
Change in policy liabilities and other policyholders' funds
of traditional life and health products (134,897) 109,484
Change in other liabilities (11,162) 17,886
Other (net) (6,419) (11,986)
---------- -----------
Net cash provided by operating activities 45,811 172,606
------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reductions of investments
Investments available for sale 2,218,195 394,592
Other 58,635 35,649
Sale of investments
Investments available for sale 1,012,132 559,300
Other 3,247 560,840
Cost of investments acquired
Investments available for sale (3,266,759) (1,671,234)
Other (202,403) (244,164)
Acquisitions and bulk reinsurance assumptions (149,304) 172,726
Purchase of property and equipment (2,788) (2,859)
Sale of property and equipment 2,681 334
------------ -------------
Net cash used in investing activities (326,364) (194,816)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings under line of credit arrangements and debt 1,090,138 731,734
Principal payments on line of credit arrangements and debt (1,140,038) (708,734)
Issuance of Common Stock 0 70,538
Issuance of preferred securities 75,000 0
Dividends to stockholders (11,711) (9,799)
Investment product deposits and changes in universal life deposits 465,132 425,110
Investment product withdrawals (311,251) (479,124)
----------- ------------
Net cash provided by (used in) financing activities 167,270 29,725
----------- ------------
INCREASE (DECREASE) IN CASH (113,283) 7,515
CASH AT BEGINNING OF PERIOD 121,051 11,392
----------- ------------
CASH AT END OF PERIOD $ 7,768 $ 18,907
============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period:
Interest on debt $ (6,108) $ (5,291)
Income taxes $ (26,437) $ (28,896)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Reissuance of treasury stock to ESOP $ 84 $ 669
Unallocated stock in ESOP $ 333 $ 334
Reissuance of treasury stock $ 225 231
Acquisitions
Assets acquired $ 941,462 $ 204,435
Liabilities assumed (784,799) (253,480)
----------- ----------
Net $ 156,663 $(49,045)
======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
5
<PAGE>
PROTECTIVE LIFE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements
of Protective Life Corporation (the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the disclosures required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation have been included. Operating results for the
six month period ended June 30, 1997, are not necessarily indicative of the
results that may be expected for the year ending December 31, 1997. The year-end
consolidated condensed balance sheet data was derived from audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles. 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, 1996.
NOTE B - 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.
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. Increasingly these lawsuits have
resulted in the award of substantial judgments against the insurer that are
disproportionate to the actual damages, including material amounts of punitive
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 damages suit. The Company and
its subsidiaries, like other life and health insurers, in the ordinary course of
business, are involved in such litigation. The outcome of any such litigation
cannot be predicted with certainty. In addition,
6
<PAGE>
in some lawsuits involving insurers' sales practices, insurers have made
material settlement payments to end litigation.
Pending litigation includes a class action filed in Jefferson County
(Birmingham), Alabama with respect to the refund of certain cancer insurance
premiums. 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, results of operations, or liquidity of the Company.
NOTE C - PREFERRED SECURITIES
In 1994 a special purpose finance subsidiary of the Company, PLC
Capital L.L.C. ("PLC Capital"), issued $55 million of 9% Cumulative Monthly
Income Preferred Securities, Series A ("MIPS"). On April 29, 1997, another
special purpose finance subsidiary, PLC Capital Trust I ("PLC Capital Trust")
issued $75 million of 8.25% Trust Originated Preferred Securities ("TOPrS"). The
MIPS and TOPrS are guaranteed on a subordinated basis by the Company. This
guarantee, considered together with the other obligations of the Company with
respect to the MIPS and TOPrS, constitutes a full and unconditional guarantee by
the Company of PLC Capital and PLC Capital Trust's obligations with respect to
the MIPS and TOPrS.
PLC Capital and PLC Capital Trust were formed solely to issue
securities and use the proceeds thereof to purchase subordinated debentures of
the Company. The sole assets of PLC Capital are $69.6 million of Protective Life
Corporation 9% Series A Subordinated Debentures due June 30, 2024. The sole
assets of PLC Capital Trust are $77.3 million of Protective Life Corporation
8.25% Subordinated Debentures due 2027, Series B. The Company has the right
under the subordinated debentures to extend interest payment periods up to five
consecutive years, and, as a consequence, dividends on the MIPS and TOPrS may be
deferred (but will continue to accumulate, together with additional dividends on
any accumulated but unpaid dividends at the dividend rate) by PLC Capital and
PLC Capital Trust, respectively, during any such extended interest payment
period. The MIPS are redeemable by PLC Capital at any time on or after June 30,
1999. The TOPrS are redeemable by PLC Capital Trust at any time on or after
April 29, 2002.
The MIPS and TOPrS are reported in the accompanying balance sheets as
"Guaranteed Preferred Beneficial Interests In Company's Subordinated Debentures"
and the related dividends are reported in the accompanying statements of income
as "minority interest in net income of consolidated subsidiaries".
7
<PAGE>
NOTE D - BUSINESS SEGMENTS
The Company operates predominantly in the life and accident and health
insurance industry. The following table sets forth total revenues, income (loss)
before income tax and minority interest, and identifiable assets of the
Company's business segments.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
1997 1996
---- ----
AMOUNT PERCENT AMOUNT PERCENT
(dollars in thousands)
<S> <C> <C> <C> <C>
TOTAL REVENUES:
Acquisitions $115,446 21.8 % $105,803 20.4%
Dental and Consumer Benefits 113,176 21.4 103,609 20.0
Financial Institutions 25,025 4.7 47,090 9.1
Guaranteed Investment Contracts 104,532 19.7 103,989 20.0
Individual Life 95,316 18.0 88,912 17.2
Investment Products 59,865 11.3 58,458 11.3
Corporate and Other 16,380 3.1 8,456 1.6
Unallocated Realized
Investment Gains (Losses) 29 0.0 1,811 0.4
----------- ------ ---------- ------
$529,769 100.0 % $518,128 100.0%
======== ===== ======== =====
INCOME (LOSS) BEFORE INCOME
TAX AND MINORITY INTEREST:
Acquisitions $ 29,271 35.4 % $ 25,626 36.8%
Dental and Consumer Benefits 10,228 12.4 6,700 9.6
Financial Institutions 5,921 7.1 3,852 5.5
Guaranteed Investment Contracts 15,800 19.1 15,093 21.7
Individual Life 5,946 7.2 7,049 10.1
Investment Products 5,944 7.2 7,938 11.4
Corporate and Other 9,610 11.6 1,594 2.3
Unallocated Realized
Investment Gains (Losses) 29 0.0 1,811 2.6
---------- ------ --------- ------
$ 82,749 100.0 % $ 69,663 100.0%
======== ===== ======== =====
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
(dollars in thousands)
IDENTIFIABLE ASSETS:
Acquisitions $2,422,091 25.5 % $1,579,253 19.1%
Dental and Consumer Benefits 281,426 3.0 278,926 3.4
Financial Institutions 327,319 3.5 352,021 4.3
Guaranteed Investment Contracts 2,690,020 28.4 2,608,149 31.5
Individual Life 1,120,206 11.8 1,037,386 12.5
Investment Products 2,155,801 22.7 1,873,119 22.7
Corporate and Other 483,799 5.1 534,351 6.5
----------- ------ ----------- ------
$9,480,662 100.0 % $8,263,205 100.0%
========== ===== ========== =====
</TABLE>
NOTE E - STATUTORY REPORTING PRACTICES
Financial statements prepared in conformity with generally accepted
accounting principles ("GAAP") differ in some respects from the statutory
accounting practices prescribed or permitted by insurance regulatory
authorities. At June 30, 1997 and for the six months then ended, the Company's
life insurance subsidiaries had stockholder's equity and net income prepared in
conformity with statutory reporting practices of $407.5 million and $60.0
million, respectively.
8
<PAGE>
NOTE F - INVESTMENTS
As prescribed by Statement of Financial Accounting Standards ("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 June 30, 1997 and December 31, 1996,
prepared on the basis of reporting investments at amortized cost rather than at
market values, are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Total investments $7,402,320 $6,534,122
Deferred policy acquisition costs 627,743 496,148
All other assets 1,431,726 1,222,646
---------- ----------
$9,461,789 $8,252,916
========== ==========
Deferred income taxes $ 23,760 $ 34,268
All other liabilities 8,788,158 7,610,020
---------- ----------
8,811,918 7,644,288
Stockholders' equity 649,871 608,628
----------- -----------
$9,461,789 $8,252,916
========== ==========
</TABLE>
NOTE G - ACCOUNTING POLICIES FOR DERIVATIVE FINANCIAL INSTRUMENTS
The Company does not use derivative financial instruments for trading
purposes. Combinations 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, mortgage-backed
securities, and liabilities arising from interest-sensitive products such as
guaranteed investment contracts and annuities. Realized investment gains and
losses on such contracts are deferred and amortized over the life of the hedged
asset. At June 30, 1997, open option contracts with a notional amount of
$1,225.0 million were in a $1.0 million unrealized loss position.
The Company uses interest rate swap contracts to convert certain
investments from a variable to a fixed rate of interest. The Company also uses
interest rate swap contracts and options to enter into interest rate swaps
(swaptions) to convert a portion of its Senior Notes, Medium-Term Notes, MIPS,
and TOPrS from a fixed rate to a variable rate of interest. The proceeds from
the sale of swaptions are deferred and amortized over the life of the related
securities. At June 30, 1997, related open interest rate swap contracts with a
notional amount of $500.3 million where in a $0.3 million net unrealized gain
position.
9
<PAGE>
NOTE H - RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1996 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
statement is effective for transactions entered into after January 1, 1997.
NOTE I - 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.
10
<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.
The Company has six operating divisions: Acquisitions, Dental and
Consumer Benefits ("Dental"), Financial Institutions, Guaranteed Investment
Contracts ("GIC"), Individual Life, and Investment Products. The Company also
has an additional business segment which is described herein as Corporate and
Other.
The Dental Division (formerly known as the Group Division) recently
exited from the traditional group major medical business, fulfilling the
Division's strategy to focus primarily on dental and related products.
Accordingly, the Division was renamed the Dental and Consumer Benefits Division.
RESULTS OF OPERATIONS
PREMIUMS AND POLICY FEES
The following table sets forth for the periods shown the amount of
premiums and policy fees and the percentage change from the prior period:
PREMIUMS AND POLICY FEES
SIX MONTHS PERCENTAGE
ENDED AMOUNT INCREASE/
JUNE 30 (IN THOUSANDS) (DECREASE)
1996 $247,837 13.9 %
1997 247,571 (0.1)
Premiums and policy fees decreased $0.3 million or 0.1% in the first
six months of 1997 over the first six months of 1996. The coinsurance by the
Acquisitions Division of a block of policies and the acquisition of a small life
insurance company in the fourth quarter of 1996 and the acquisition of West
Coast Life Insurance Company ("West Coast") in the second quarter of 1997
resulted in a $6.6 million increase in premiums and policy fees. Decreases in
older acquired blocks resulted in a $4.6 million decrease in premiums and policy
fees. Premiums and policy fees from the Dental Division increased $9.8 million
in the first six months of 1997 as compared to the same period in 1996. Premiums
and policy fees related to the Division's dental business increased $15.0
million in the first six months of 1997 as compared to the same period in 1996.
This increase was partially offset by a decrease in premiums related to the
Division's exit from the group major medical business. Premiums and policy fees
from the Financial
11
<PAGE>
Institutions Division decreased $21.0 million in the first six months of 1997 as
compared to the first six months of 1996. Decreases of $11.9 million resulted
from a reinsurance arrangement begun in 1995 whereby most of the Division's new
credit insurance sales are being ceded to a reinsurer. Decreases of $9.1 million
relate to the normal decrease in premiums on a closed block of credit insurance
policies reinsured in 1996. Increases in premiums and policy fees from the
Individual Life and Investment Product Divisions were $8.0 million and $1.3
million, respectively.
NET INVESTMENT INCOME
The following table sets forth for the periods shown the amount of net
investment income and the percentage change from the prior period:
SIX MONTHS NET INVESTMENT INCOME
ENDED AMOUNT PERCENTAGE
JUNE 30 (IN THOUSANDS) INCREASE
1996 $254,840 10.5%
1997 267,805 5.1
Net investment income in the first six months of 1997 was $13.0 million
or 5.1% 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 deposits and to acquisitions. The
coinsurance of a block of policies and the acquisition of a small life insurance
company in the fourth quarter of 1996 and the acquisition of West Coast in the
second quarter of 1997 resulted in an increase in net investment income of $8.4
million in the first six months of 1997 as compared to the same period in 1996.
REALIZED INVESTMENT GAINS (LOSSES)
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 net realized investment gains for the
periods shown:
SIX MONTHS NET REALIZED
ENDED INVESTMENT GAINS
JUNE 30 (IN THOUSANDS)
1996 $5,021
1997 725
Net realized investment gains were $0.7 million for the first six
months of 1997 compared to $5.0 million for the corresponding period of 1996. 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.
12
<PAGE>
OTHER INCOME
The following table sets forth other income for the periods shown:
SIX MONTHS
ENDED OTHER INCOME
JUNE 30 (IN THOUSANDS)
1996 $10,430
1997 13,668
Other income consists primarily of revenues of the Company's
broker-dealer subsidiary, fees from variable insurance products and
administrative-services-only types of group accident and health insurance
contracts, revenues of the Company's wholly-owned insurance marketing
organizations and small noninsurance subsidiaries, and the results of the
Company's 50%-owned joint venture in Hong Kong. Other income in the first six
months of 1997 was $3.2 million higher than the corresponding period of 1996.
Revenues from the Company's broker-dealer subsidiary increased $2.3 million in
the first six months of 1997 as compared to the same period in 1996. Other
income from all other sources increased $0.9 million in the first six months of
1997 as compared with the first six months of 1996.
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:
<TABLE>
<CAPTION>
INCOME (LOSS) BEFORE INCOME TAX
AND MINORITY INTEREST
SIX MONTHS ENDED JUNE 30
(IN THOUSANDS)
BUSINESS SEGMENT 1997 1996
---------------- ---- ----
<S> <C> <C>
Acquisitions $29,271 $25,626
Dental and Consumer Benefits 10,228 6,700
Financial Institutions 5,921 3,852
Guaranteed Investment Contracts 15,800 15,093
Individual Life 5,946 7,049
Investment Products 5,944 7,938
Corporate and Other 9,610 1,594
Unallocated Realized Investment Gains (Losses) 29 1,811
--------- --------
$82,749 $69,663
======= =======
Percentage Increase 17.9% 20.3%
</TABLE>
13
<PAGE>
Pretax earnings from the Acquisitions Division increased $3.6 million
in the first six months of 1997 as compared to the same period of 1996. 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. The Division's most recent
acquisitions resulted in a $2.8 million increase in pretax earnings. In
addition, the Division's mortality experience was approximately $2.1 million
more favorable in the first six months of 1997 as compared to the same period
last year.
Dental Division pretax earnings were $3.5 million higher in the first
six months of 1997 as compared to the first six months of 1996. $1.8 million of
the increase was a one-time release of reserves associated with exiting the
group major medical business. Lower cancer earnings partially offset improved
traditional group life and health results. Dental earnings were $4.4 million
(including expenses of $1.0 million to develop a new discounted fee-for-service
program) in the first six months of 1997 as compared to $4.6 million in the
first six months of 1996.
Pretax earnings of the Financial Institutions Division were $2.1
million higher in the first six months of 1997 as compared to the same period in
1996. Included in the Division's results are earnings from the coinsurance of a
block of policies in the second quarter of 1996.
The GIC Division had pretax operating earnings of $15.7 million in the
first six months of 1997 and $19.5 million in the corresponding period of 1996.
In December, 1996, the Company sold a major portion of its bank loan
participations in a securitization transaction which has subsequently reduced
the Division's earnings. The decrease was partially offset by a related
improvement in earnings in the Corporate and Other segment. In addition, the
Division has shortened the duration of its invested assets which also reduced
earnings. Realized investment gains associated with this Division in the first
six months of 1997 were $0.1 million as compared to realized investment losses
of $4.4 million in the same period last year. As a result, total pretax earnings
were $15.8 million in the first six months of 1997 compared to $15.1 million for
the same period last year.
The Individual Life Division had pretax operating earnings of $5.9
million in both the first six months of 1997 and in the same period of 1996.
During the second quarter of 1997 the Division experienced record high
mortality. After an extensive audit of second quarter claims, management
concluded this experience was a random fluctuation. Furthermore, claims in July
1997 were at expected levels. This decrease was partially offset by earnings
from Empire General (an insurance subsidiary which distributes products through
brokerage general agencies) which improved $1.9 million in the first six months
of 1997 as compared to the same period in 1996 and by reductions in expenses
related to new marketing ventures. 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 $5.9 million
in the first six months of 1997 as compared to $7.0 million in the first six
months of 1996.
Investment Products Division pretax operating earnings of $5.7 million
were $0.1 million lower in the first six months of 1997 compared to the same
period of 1996. The Division's 1996 results included a one-time $0.9 million
addition to earnings. Realized investment gains associated with the Division,
net of related amortization of deferred policy acquisition costs, were $0.2
million in the first six months of 1997 as compared to $2.1 million in 1996,
resulting in total pretax earnings of $5.9 million in the first six months of
1997 as compared to $7.9 million in the same period of 1996.
14
<PAGE>
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 $8.0 million in the first six months of 1997 as
compared to the first six months of 1996. In the 1997 second quarter the Company
sold its interest in a money management joint venture resulting in a gain of
$4.1 million. The remaining increase in earnings relate primarily to increased
net investment income on capital.
INCOME TAXES
The following table sets forth the effective income tax rates for the
periods shown:
SIX MONTHS
ENDED ESTIMATED EFFECTIVE
JUNE 30 INCOME TAX RATES
1996 34%
1997 34
The effective income tax rate for the full year of 1996 was 34%.
Management's estimate of the effective income tax rate for 1997 is also 34%.
NET INCOME
The following table sets forth net income and the net income per share
for the periods shown, and the percentage change from the prior period:
<TABLE>
<CAPTION>
SIX MONTHS NET INCOME
ENDED TOTAL PERCENTAGE
JUNE 30 (IN THOUSANDS) PER SHARE INCREASE
----------------- ------------- --------- -----------
<S> <C> <C> <C> <C>
1996 $44,369 $1.51 15.3%
1997 52,313 1.68 11.3
</TABLE>
Compared to the same period in 1996, net income per share in the first
six months of 1997 increased 11.3%, reflecting improved operating earnings in
the Acquisitions, Dental, Financial Institutions, and Individual Life Divisions
and the Corporate and Other segment, which were partially offset by lower
operating earnings in the Guaranteed Investment Contracts and Investment
Products Divisions and lower realized investment gains (net of related
amortization of deferred policy acquisition costs.)
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997 the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings
per Share" effective for financial statements issued for periods ending after
December 15, 1997. In June 1997 the FASB issued SFAS No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" effective for financial statements issued
for periods beginning after December 15, 1997. The Company anticipates that the
impact of adopting these accounting standards will not be significant.
15
<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 than at the time of issue.
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 June 30, 1997, the fixed maturity investments (bonds, bank loan
participations, and redeemable preferred stocks) had a market value of $5,216.9
million, which is 0.1% above amortized cost (less allowances for uncollectible
amounts on investments) of $5,195.9 million. The Company had $1,737.5 million in
mortgage loans at June 30, 1997. While the Company's mortgage loans do not have
quoted market values, at June 30, 1997, the Company estimates the market value
of its mortgage loans to be $1,807.7 million (using discounted cash flows from
the next call date) which is 4.0% 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 type of commercial loan
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 $559.4 million of the Company's mortgage loans have this
participation feature.
At June 30, 1997, delinquent mortgage loans and foreclosed real estate
were 0.3% 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 0.3% of assets. The Company does not expect these
investments to adversely affect its liquidity or ability to maintain proper
matching of assets and liabilities. The Company's allowance for uncollectible
amounts on investments was $31.6 million at June 30, 1997.
Policy loans at June 30, 1997, were $195.6 million, a decrease of $2.0
million from December 31, 1996 (after excluding approximately $30.9 million of
policy loans associated with an acquisition in the second quarter of 1997).
Policy loan rates are generally in the 4.5% to 8.0% range and are at least equal
the assumed interest rates used for future policy benefits.
16
<PAGE>
The Company believes its asset/liability management programs and
procedures 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 management
programs and procedures 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 management programs and procedures
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 generally maintain
asset and liability durations within one half year 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, interest rate options, and interest
rate swaps are sometimes used as hedges for asset/liability management of
certain investments, primarily mortgage loans on real estate, mortgage-backed
securities, 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. At June 30, 1997, open
option contracts with a notional amount of $1,225.0 million were in a $1.0
million unrealized loss position.
The Company may also sometimes use interest rate swap contracts and
options to enter into interest rate swap contracts (swaptions) 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 a portion of its Senior Notes,
Medium-Term Notes, Monthly Income Preferred Securities, and Trust Originated
Preferred Securities from a fixed rate to a variable rate of interest. The
proceeds from the sale of swaptions are deferred and amortized over the life of
the related debt. At June 30, 1997, related open interest rate swap contracts
with a notional amount of $500.3 million were in a $0.3 million net unrealized
gain position.
Withdrawals related to GICs were approximately $786 million during
1996. Withdrawals related to GICs are estimated to be approximately $600 million
in 1997. The Company's asset/liability management programs and procedures take
into account maturing contracts. Accordingly, the Company does not expect
maturing contracts to have an unusual effect on the future operations and
liquidity of the Company.
In anticipation of receiving GIC and annuity deposits, the life
insurance subsidiaries were committed at June 30, 1997 to fund mortgage loans
and to purchase fixed maturity and other long-term investments in the amount of
$368.7 million. The Company's subsidiaries held $211.6 million in cash and
short-term investments at June 30, 1997. Protective Life Corporation had an
additional $4.8 million in cash and short-term investments available for general
corporate purposes.
While the Company generally anticipates that the cash flows of its
subsidiaries will be sufficient to meet their investment commitments and
operating cash needs, the Company recognizes that investment commitments
scheduled to be funded may from time to time exceed the funds then available.
Therefore, the Company has arranged sources of credit for its insurance
subsidiaries to
17
<PAGE>
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.
On April 29, 1997, a special purpose finance subsidiary of the Company,
PLC Capital Trust I ("PLC Capital Trust") issued $75 million of 8.25% Trust
Originated Preferred Securities ("TOPrS"), guaranteed on a subordinated basis by
the Company. PLC Capital Trust was formed solely to issue TOPrS and other
securities and use the proceeds thereof to purchase subordinated debentures of
the Company. The Company has the right under the subordinated debentures to
extend interest payment periods up to 20 consecutive quarters, and, as a
consequence, quarterly dividends on the TOPrS may be deferred (but will continue
to accumulate, together with additional dividends on any accumulated but unpaid
dividends at the dividend rate) by PLC Capital Trust during any such extended
interest payment period. The TOPrS are redeemable by PLC Capital Trust at any
time on or after April 29, 2002. Net proceeds of approximately $72.6 million
were used to repay bank borrowings. In related transactions, the Company entered
into interest rate swap agreements which effectively converted the TOPrS from a
fixed dividend rate to the floating 90 day London Interbank Offered Rate
("LIBOR") plus 74 basis points. The effective interest rate at June 30, 1997 was
6.52%.
At June 30, 1997, Protective Life Corporation had borrowed $7.1 million
of a $70 million revolving line of credit bearing interest rates averaging 6.0%.
In addition, Protective Life Insurance Company had borrowed $4.0 million at a
rate of 6.6%.
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, 1996, approximately $173 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 $439 million, would be subject to
federal income tax at rates then effective.
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 subsidiaries in those companies primarily to support their future
growth. Protective 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 acquisitions
and other growth opportunities, the Company has registered $200 million of debt
securities, preferred and common stock and stock purchase contracts of
Protective Life Corporation, and additional preferred securities of special
purpose finance subsidiaries 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
18
<PAGE>
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 NAIC's risk-based capital requirements require insurance companies to
calculate and report information under a risk-based capital formula. 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 retained statutory earnings
or equity contributions by the Company.
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.
The Company and its subsidiaries, like other life and health insurers,
in the course of business are involved in litigation. Pending litigation
includes a class action filed in Jefferson County (Birmingham), Alabama with
respect to the refund of certain cancer insurance premiums. 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,
results of operations, or liquidity of the Company.
Rating downgrades have exceeded upgrades for the past several years,
and public pronouncements by the rating agencies indicate that this trend is
expected to continue for the near future.
The Company is not aware of any material pending or threatened
regulatory action with respect to the Company or any of its subsidiaries.
19
<PAGE>
PART II
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a). Exhibit 15 - Letter re: unaudited interim financial statements
Exhibit 27 - Financial Data Schedule
Exhibit 99 - Safe Harbor for Forward Looking Statements
(b). A report on Form 8-K dated April 23, 1997, was filed reporting
under Item 5 and Item 7, the Company's 1997 first quarter
earnings press release.
20
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PROTECTIVE LIFE CORPORATION
Date: August 14, 1997 /S/ JERRY W. DEFOOR
--------------------
Jerry W. DeFoor
Vice President and Controller,
and Chief Accounting Officer
(Duly authorized officer)
21
Exhibit 15
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Protective Life Corporation
We are aware that our report dated July 23, 1997, on our review of interim
consolidated financial information of Protective Life Corporation and
subsidiaries for the period ended June 30, 1997, and included in the Company's
quarterly report on Form 10-Q for the quarter then ended, is incorporated by
reference in the Company's registration statements on Form S-8 and Form S-3.
Pursuant to Rule 436(c) under the Securities Act of 1933, this report should not
be considered a part of the registration statements prepared or certified by us
within the meaning of Sections 7 and 11 of that Act.
COOPERS & LYBRAND L.L.P.
Birmingham, Alabama
August 14, 1997
22
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 5,216,866
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 24,425
<MORTGAGE> 1,737,542
<REAL-ESTATE> 12,072
<TOTAL-INVEST> 7,427,491
<CASH> 7,768
<RECOVER-REINSURE> 442,759
<DEFERRED-ACQUISITION> 621,445
<TOTAL-ASSETS> 9,480,662
<POLICY-LOSSES> 3,115,898
<UNEARNED-PREMIUMS> 249,499
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 167,479
<NOTES-PAYABLE> 131,100
130,000
0
<COMMON> 16,668
<OTHER-SE> 645,464
<TOTAL-LIABILITY-AND-EQUITY> 9,480,662
247,571
<INVESTMENT-INCOME> 267,805
<INVESTMENT-GAINS> 725
<OTHER-INCOME> 13,668
<BENEFITS> 332,832
<UNDERWRITING-AMORTIZATION> 39,045
<UNDERWRITING-OTHER> 75,143
<INCOME-PRETAX> 54,614
<INCOME-TAX> 28,135
<INCOME-CONTINUING> 52,313<F1>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 52,313
<EPS-PRIMARY> 1.68
<EPS-DILUTED> 1.68
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Net of minority interest in income of consolidated subsidiaries of $2,301.
</FN>
</TABLE>
Exhibit 99
to
Form 10-Q
of
Protective Life Corporation
for the six months
Ended June 30, 1997
Safe Harbor for Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the "Act")
encourages companies to make "forward-looking statements" by creating a safe
harbor to protect the companies from securities law liability in connection with
forward-looking statements. Forward-looking statements can be identified by use
of words such as "expect," "estimate," "project, " budget," "forecast,"
"anticipate," "plan," and similar expressions. Protective Life Corporation (the
"Company") intends to qualify both its written and oral forward-looking
statements for protection under the Act.
To qualify oral forward-looking statements for protection under the
Act, a readily available written document must identify important factors that
could cause actual results to differ materially from those in the
forward-looking statements. The Company provides the following information to
qualify forward-looking statements for the safe harbor protection of the Act.
The operating results of companies in the insurance industry have
historically been subject to significant fluctuations due to competition,
economic conditions, interest rates, investment performance, maintenance of
insurance ratings, and other factors. Certain known trends and uncertainties
which may affect future results of the Company are discussed more fully below.
COMPETITION. Life and health insurance is a mature industry. In recent
years, the industry has experienced virtually no growth in life insurance sales,
though the aging population has increased the demand for retirement savings
products. Life and health insurance is a highly competitive industry and the
Company's Divisions encounter significant competition in all their respective
lines of business from other insurance companies, many of which have greater
financial resources than the Company, as well as competition from other
providers of financial services.
Management believes that the Company's ability to compete is dependent
upon, among other things, its ability to attract and retain distribution
channels to market its insurance and investment products, its ability to develop
competitive and profitable products, its ability to maintain low unit costs, and
its maintenance of strong claims-paying and financial strength ratings from
rating agencies.
The Company competes against other insurance companies and financial
institutions in the origination of commercial mortgage loans.
<PAGE>
RATINGS. Ratings are an important factor in the competitive position of
life insurance companies. Rating organizations periodically review the financial
performance and condition of insurers, including the Company's insurance
subsidiaries. A downgrade in the ratings of the Company's life insurance
subsidiaries could adversely affect its ability to sell its products and its
ability to compete for attractive acquisition opportunities.
Rating organizations assign ratings based upon several factors. While
most of the considered factors relate to the rated company, some of the factors
relate to general economic conditions and circumstances outside the rated
company's control.
POLICY CLAIMS FLUCTUATIONS. The Company's results may fluctuate from
year to year on account of fluctuations in policy claims received by the
Company.
LIQUIDITY AND INVESTMENT PORTFOLIO. Many of the products offered by the
Company's life insurance subsidiaries allow policyholders and contractholders to
withdraw their funds under defined circumstances. The Company's life insurance
subsidiaries design products and configure investment portfolios so as to
provide and maintain sufficient liquidity to support anticipated withdrawal
demands and contract benefits and maturities. Asset/liability management
programs and procedures are used to monitor the relative duration of the
Company's assets and liabilities. While the Company's life insurance
subsidiaries own a significant amount of liquid assets, many of their assets are
relatively illiquid. Significant unanticipated withdrawal or surrender activity
could, under some circumstances, compel the Company's life insurance
subsidiaries to dispose of illiquid assets on unfavorable terms, which could
have a material adverse effect on the Company.
INTEREST RATE FLUCTUATIONS. Significant changes in interest rates
expose life insurance companies to the risk of not earning anticipated spreads
between the interest rate earned on investments and the interest rate credited
to its life insurance and investment products. Both rising and declining
interest rates can negatively affect the Company's spread income. For example,
certain of the Company's insurance and investment products guarantee a minimum
credited interest rate. While the Company develops and maintains asset/liability
management programs and procedures designed to preserve spread income in rising
or falling interest rate environments, no assurance can be given that
significant changes in interest rates will not materially affect such spreads.
Lower interest rates may result in lower sales of the Company's life
insurance and investment products.
INVESTMENT RISKS. The Company's invested assets are subject to inherent
risks of defaults and changes in market values. The value of the Company's
commercial mortgage portfolio depends in part on the financial condition of the
tenants occupying the properties on which the Company has made loans. Factors
that may affect the overall default rate on, and market value of, the Company's
invested assets include the level of interest rates, performance of the
financial markets, and general economic conditions, as well as particular
circumstances affecting the businesses of individual borrowers and tenants.
<PAGE>
CONTINUING SUCCESS OF ACQUISITION STRATEGY. The Company has actively
pursued a strategy of acquiring blocks of insurance policies. This acquisition
strategy has increased the Company's earnings in part by allowing the Company to
position itself to realize certain operating efficiencies associated with
economies of scale. There can be no assurance, however, that suitable
acquisitions, presenting opportunities for continued growth and operating
efficiencies, will continue to be available to the Company, or that the Company
will realize the anticipated financial results from its acquisitions.
REGULATION AND TAXATION. The Company's insurance subsidiaries are
subject to government regulation in each of the states in which they conduct
business. Such regulation is vested in state agencies having broad
administrative power dealing with all aspects of the insurance business
including premium rates, benefits, marketing practices, advertising, policy
forms, underwriting standards, and capital adequacy, and is concerned primarily
with the protection of policyholders rather than stockholders. The Company
cannot predict the form of any future regulatory initiatives.
Under the Internal Revenue Code of 1986, as amended (the Code), income
tax payable by policyholders on investment earnings is deferred during the
accumulation period of certain life insurance and annuity products. This
favorable tax treatment may give certain of the Company's products a competitive
advantage over other non-insurance products. To the extent that the Code is
revised to reduce the tax-deferred status of life insurance and annuity
products, or to increase the tax-deferred status of competing products, all life
insurance companies, including the Company's subsidiaries, would be adversely
affected.
The Company cannot predict what future initiatives the President or
Congress may propose which may affect the life and health insurance industry and
the Company.
LITIGATION. 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. Increasingly these lawsuits have
resulted in the award of substantial judgments against the insurer that are
disproportionate to the actual damages, including material amounts of punitive
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 damages suit. The Company and
its subsidiaries, like other life and health insurers, in the ordinary course of
business, are involved in such litigation. The outcome of any such litigation
cannot be predicted with certainty. In addition, in some lawsuits involving
insurers' sales practices, insurers have made material settlement payments to
end litigation.
RELIANCE UPON THE PERFORMANCE OF OTHERS. The Company has entered into
various ventures involving other parties. Examples include, but are not limited
to: many of the Company's products are sold through independent distribution
channels; the Investment Products Division's variable annuity deposits are
invested in funds managed by four unaffiliated investment managers; a portion of
the sales in the Financial Institutions, Dental and Consumer Benefits, and
Individual Life Divisions comes from arrangements with unrelated marketing
organizations; and
<PAGE>
the Company has entered the Hong Kong insurance market in a joint venture with
the Lippo Group. Therefore the Company's results may be affected by the
performance of others.
REINSURANCE. As is customary in the insurance industry, the Company's
insurance subsidiaries cede insurance to other insurance companies. However, the
ceding insurance company remains liable with respect to ceded insurance should
any reinsurer fail to meet the obligations assumed by it. Additionally, the
Company assumes policies of other insurers. Any regulatory or other adverse
development affecting the ceding insurer could also have an adverse effect on
the Company.
Forward-looking statements express expectations of future events and/or
results. All forward-looking statements are inherently uncertain as they are
based on various expectations and assumptions concerning future events and they
are subject to numerous known and unknown risks and uncertainties which could
cause actual events or results to differ materially from those projected. Due to
these inherent uncertainties, investors are urged not to place undue reliance on
forward-looking statements. In addition, the Company undertakes no obligation to
update or revise forward-looking statements to reflect changed assumptions, the
occurrence of unanticipated events, or changes to projections over time.
