- -----------------------------------------------------------------------------
FORM 10-Q
------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1998
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 November 6,
1998: 64,435,017 shares.
<PAGE>
PROTECTIVE LIFE CORPORATION
INDEX
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Report of Independent Accountants.....................................
Consolidated Condensed Statements of Income for the Three and Nine
Months ended September 30, 1998 and 1997 (unaudited)................
Consolidated Condensed Balance Sheets as of September 30, 1998
(unaudited) and December 31, 1997...................................
Consolidated Condensed Statements of Cash Flows for the
Nine Months ended September 30, 1998 and 1997 (unaudited)...........
Notes to Consolidated Condensed Financial Statements (unaudited)......
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K..................................
Signature.....................................................................
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Stockholders
Protective Life Corporation
Birmingham, Alabama
We have reviewed the accompanying consolidated condensed balance sheet of
Protective Life Corporation and subsidiaries as of September 30, 1998, and the
related consolidated condensed statements of income for the three-month and
nine-month periods ended September 30, 1998 and 1997, and consolidated condensed
statements of cash flows for the nine-month periods ended September 30, 1998 and
1997. 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, 1997, 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, 1998, except for Note N as to which the date is March 2, 1998, we expressed
an unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying consolidated condensed
balance sheet as of December 31, 1997, is fairly stated in all material respects
in relation to the consolidated balance sheet from which it has been derived.
PricewaterhouseCoopers LLP
Birmingham, Alabama
October 27, 1998
2
<PAGE>
<TABLE>
<CAPTION>
PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in thousands except per share amounts)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------------ --------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Premiums and policy fees (net of reinsurance ceded:
three months: 1998 - $127,850; 1997 - $95,507
nine months: 1998 - $337,182; 1997 - $221,292) $167,734 $116,246 $471,752 $363,817
Net investment income 164,537 158,196 475,192 426,001
Realized investment gains (losses) 411 61 2,445 786
Other income 15,912 8,222 48,577 21,890
-------- --------- -------- ---------
348,594 282,725 997,966 812,494
-------- -------- -------- --------
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance ceded:
three months: 1998 - $109,513; 1997 - $51,059
nine months: 1998 - $236,241; 1997 - $93,780) 197,282 163,880 571,082 496,712
Amortization of deferred policy acquisition costs 30,784 28,516 89,053 67,561
Other operating expenses (net of reinsurance ceded:
three months: 1998 - $47,133; 1997 - $26,459
nine months: 1998 - $112,985; 1997 - $63,086) 64,325 41,475 176,114 116,618
-------- -------- -------- --------
292,391 233,871 836,249 680,891
-------- -------- -------- --------
INCOME BEFORE INCOME TAX AND MINORITY
INTEREST 56,203 48,854 161,717 131,603
Income tax expense 19,671 16,610 56,601 44,745
-------- --------- -------- ---------
INCOME BEFORE MINORITY INTEREST 36,532 32,244 105,116 86,858
Minority interest in net income
of consolidated subsidiaries 3,024 1,810 9,073 4,111
--------- ---------- --------- ----------
NET INCOME $ 33,508 $ 30,434 $ 96,043 $ 82,747
======== ========= ======== =========
NET INCOME PER SHARE - BASIC $ .53 $ .49 $ 1.53 $ 1.33
========== =========== ========= ==========
NET INCOME PER SHARE - DILUTED $ .52 $ .49 $ 1.51 $ 1.32
========== =========== ========= ==========
DIVIDENDS PAID PER SHARE $ .11 $ .10 $ .32 $ .29
========== =========== ========== ===========
Average shares outstanding - basic 63,272,089 62,463,876 62,863,523 62,415,048
Average shares outstanding - diluted 64,132,236 62,904,976 63,661,855 62,806,770
</TABLE>
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
3
<PAGE>
<TABLE>
<CAPTION>
PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
SEPTEMBER 30 DECEMBER 31
1998 1997
-------------------------------------
ASSETS (Unaudited)
<S> <C> <C>
Investments:
Fixed maturities $ 6,756,341 $ 6,374,328
Equity securities 11,861 15,006
Mortgage loans on real estate 1,449,663 1,312,778
Investment real estate, net 14,677 13,602
Policy loans 188,590 194,109
Other long-term investments 74,419 63,511
Short-term investments 128,306 76,086
------------ -------------
Total investments 8,623,857 8,049,420
Cash 32,989 47,502
Accrued investment income 108,270 95,616
Accounts and premiums receivable, net 56,622 47,784
Reinsurance receivables 660,359 591,613
Deferred policy acquisition costs 691,994 632,737
Property and equipment, net 54,374 36,957
Other assets 282,518 78,541
Assets held in separate accounts 1,091,017 931,465
----------- -------------
$11,602,000 $10,511,635
=========== =============
LIABILITIES
Policy liabilities and accruals $ 4,057,680 $ 3,725,151
Guaranteed investment contract deposits 2,642,885 2,684,676
Annuity deposits 1,525,592 1,511,553
Other policyholders' funds 188,867 183,233
Other liabilities 301,925 306,241
Accrued income taxes (11,209) 4,907
Deferred income taxes 59,122 41,212
Debt 533,947 120,000
Liabilities related to separate accounts 1,091,017 931,465
----------- -------------
10,389,826 9,508,438
----------- ------------
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 75,000
6.5% FELINE PRIDES 115,000 115,000
------------ -------------
245,000 245,000
------------ -------------
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: 1998 - 160,000,000; 1997 - 80,000,000
Shares issued: 1998 - 69,333,117 and 1997 - 66,672,924 34,667 33,336
Additional paid-in capital 254,705 167,923
Treasury stock (1998 - 4,898,100 shares; 1997 - 5,030,640 shares) (13,140) (13,455)
Unallocated stock in Employee Stock Ownership Plan
(1998 - 1,291,194 shares; 1997 - 1,386,244 shares) (4,277) (4,592)
Retained earnings 589,532 513,258
Accumulated other comprehensive income
Net unrealized gains on investments
(net of income tax: 1998 - $56,908; 1997 - $33,238) 105,687 61,727
------------- --------------
967,174 758,197
------------- --------------
$11,602,000 $10,511,635
============= ==============
</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)
NINE MONTHS ENDED
SEPTEMBER 30
----------------------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 96,043 $ 82,747
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of deferred policy acquisition costs 89,053 67,561
Capitalization of deferred policy acquisition costs (156,148) (88,154)
Depreciation expense 5,494 1,946
Deferred income taxes 9,389 (20,349)
Accrued income taxes (31,101) 16,637
Interest credited to universal life and investment products 259,672 357,880
Policy fees assessed on universal life and investment products (104,173) (97,491)
Change in accrued investment income and other receivables (90,238) (34,468)
Change in policy liabilities and other policyholders' funds
of traditional life and health products 514,633 (5,602)
Change in other liabilities (4,224) (10,515)
Other (net) (114,942) (23,341)
---------- -------------
Net cash provided by operating activities 473,458 246,851
---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reductions of investments
Investments available for sale 6,727,599 4,670,040
Other 149,765 225,427
Sale of investments
Investments available for sale 524,624 1,062,668
Other 270,257 689,043
Cost of investments acquired
Investments available for sale (7,640,041) (6,547,985)
Other (433,390) (582,300)
Acquisitions and bulk reinsurance assumptions (76,896) (171,560)
Purchase of property and equipment (9,754) (3,594)
Sale of property and equipment 15 2,681
--------------- --------------
Net cash used in investing activities (487,821) (655,580)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings under line of credit arrangements and debt 1,634,996 1,202,938
Principal payments on line of credit arrangements and debt (1,255,566) (1,245,338)
Issuance of preferred securities 75,000
Dividends to stockholders (19,769) (17,874)
Investment product deposits and changes in universal life deposits 739,488 771,793
Investment product withdrawals (1,099,299) (498,531)
----------- -------------
Net cash provided by (used in) financing activities ( 150) 287,988
-------------- -------------
INCREASE (DECREASE) IN CASH (14,513) (120,741)
CASH AT BEGINNING OF PERIOD 47,502 121,051
------------- -------------
CASH AT END OF PERIOD $ 32,989 $ 310
============ ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period:
Interest on debt $ 6,824 $ 11,264
Income taxes $ 62,388 $ 40,585
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Reissuance of treasury stock to ESOP $ 205 $ 84
Unallocated stock in ESOP $ 315 $ 333
Reissuance of treasury stock $ 3,097 $ 1,096
Acquisitions
Assets acquired $ 198,676 $ 1,115,171
Liabilities assumed (33,236)
Issuance of common stock (88,131)
Reissuance of treasury stock (902,357)
------------------------------
Net $ 77,309 $ 212,814
=============== ============
</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; STOCK SPLIT
The accompanying unaudited consolidated condensed financial statements
of Protective Life Corporation (the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the disclosures required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation have been included. Operating results for the
nine month period ended September 30, 1998, are not necessarily indicative of
the results that may be expected for the year ending December 31, 1998. 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, 1997.
The Company's Board of Directors approved a two-for-one split of the
Company's Common Stock in the form of a 100% stock dividend distributed on April
1, 1998. Stockholders' equity has been restated to give retroactive recognition
to the stock split for all periods presented by reclassifying from retained
earnings to common stock the par value of the additional shares arising from the
stock split. In addition, unless indicated otherwise, all references to number
of shares and per share amounts included herein have been restated to reflect
the stock split.
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 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
6
<PAGE>
the award of substantial judgments against the insurer that are disproportionate
to the actual damages, including material amounts of punitive damages. In
addition, in some class action and other lawsuits involving insurers' sales
practices, insurers have made material settlement payments. 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
insurers, in the ordinary course of business, are involved in such litigation.
Although the outcome of any such 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 - GUARANTEED PREFERRED BENEFICIAL INTERESTS
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 ("MIPSSM"). On April 29, 1997, another
special purpose finance subsidiary, PLC Capital Trust I ("PLC Capital Trust I")
issued $75 million of 8.25% Trust Originated Preferred Securities ("TOPrSSM").
The MIPS and 8.25% 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 8.25% TOPrS, constitutes a full and unconditional
guarantee by the Company of PLC Capital and PLC Capital Trust I's obligations
with respect to the MIPS and 8.25% TOPrS.
PLC Capital and PLC Capital Trust I 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% Subordinated Debentures due September 30, 2024, Series A. The
sole assets of PLC Capital Trust I 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
8.25% 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 I, respectively, during any such
extended interest payment period. The MIPS are redeemable by PLC Capital at any
time on or after September 30, 1999. The 8.25%TOPrS are redeemable by PLC
Capital Trust I at any time on or after April 29, 2002.
On November 20, 1997, another special purpose finance subsidiary, PLC
Capital Trust II, issued $115 million of FELINE PRIDESSM which are comprised of
a stock purchase contract and a beneficial ownership of 6.5% TOPrS. The sole
assets of PLC Capital Trust II are $118.6 million of Protective Life Corporation
6.5% Subordinated Debentures due 2003, Series C. Under the stock purchase
contract, on February 16, 2001, the holders will purchase shares of the
Company's Common Stock from the Company. The holders may generally settle the
contract in cash or by exercising their right to put, in effect, the 6.5% TOPrS
back to the Company. The shares of Common Stock issuable range from
approximately 3.6 million shares if the price of the Company's Common Stock is
greater than or equal to $32.52 to approximately 4.4 million shares if the stock
price is less than or equal to $26.66. The 6.5% TOPrS are guaranteed on a
subordinated basis by the Company. Dividends on the 6.5% TOPrS may be deferred
until maturity. The dividend rate on
7
<PAGE>
the 6.5% TOPrS which remain outstanding after February 16, 2001, will be reset
by a formula specified in the agreement.
The MIPS, 8.25% TOPrS, and FELINE PRIDES 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".
8
<PAGE>
NOTE D - BUSINESS SEGMENTS
The Company operates predominantly in the life and accident and health
insurance industry. The following table sets forth total operating segment
income and assets for the periods shown. Adjustments represent the inclusion of
unallocated realized investment gains (losses), the reclassification and tax
effecting of pretax minority interest in the Corporate and Other segment, and
the recognition of income tax expense. There are no asset adjustments.
<TABLE>
<CAPTION>
OPERATING SEGMENT INCOME FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS)
------------------------------------------------------------------------------
SPECIALTY INSURANCE
LIFE INSURANCE PRODUCTS
------------------------------------------- ----------------------------
DENTAL AND
INDIVIDUAL CONSUMER FINANCIAL
ACQUISITIONS LIFE WEST COAST BENEFITS INSTITUTIONS
------------ ----------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Premiums and policy fees $ 70,784 $ 97,825 $19,250 $183,183 $ 86,731
Net investment income 79,860 40,401 46,837 12,206 17,085
Realized investment gains (losses)
Other income 1,600 26,161 2,475 12,293
--------- --------- ------- -------- --------
Total revenues 152,244 164,387 66,087 197,864 116,109
-------- -------- ------- -------- --------
Benefits and settlement expenses 84,171 80,768 42,944 126,141 39,806
Amortization of deferred policy
acquisition costs 13,594 24,376 3,866 7,731 25,182
Other operating expenses 17,489 38,902 3,604 51,229 36,810
--------- --------- ------- -------- --------
Total benefits and expenses 115,254 144,046 50,414 185,101 101,798
-------- -------- ------- -------- --------
Income before income tax 36,990 20,341 15,673 12,763 14,311
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
GUARANTEED CORPORATE
INVESTMENT INVESTMENT AND TOTAL
CONTRACTS PRODUCTS OTHER ADJUSTMENTS CONSOLIDATED
------------ ----------- ---------- ----------- --------------
Premiums and policy fees $ 13,827 $ 152 $471,752
Net investment income $160,735 79,525 38,543 475,192
Realized investment gains (losses) (895) 678 $ 2,662 2,445
Other income 6,599 (551) 48,577
-------- -------- -------- -------- --------
Total revenues 159,840 100,629 38,144 2,662 997,966
-------- -------- -------- -------- --------
Benefits and settlement expenses 134,531 62,283 438 571,082
Amortization of deferred policy
acquisition costs 554 13,752 (2) 89,053
Other operating expenses 1,864 15,308 24,867 (13,959) 176,114
-------- -------- ------- ------- --------
Total benefits and expenses 136,949 91,343 25,303 (13,959) 836,249
-------- -------- ------- ------- --------
Income before income tax 22,891 9,286 12,841 161,717
Income tax expense 56,601 56,601
Minority interest 9,073 9,073
--------
Net income $ 96,043
========
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
OPERATING SEGMENT INCOME FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1997
----------------------------------------------------------------------------
(IN THOUSANDS)
SPECIALTY INSURANCE
LIFE INSURANCE PRODUCTS
------------------------------------------- ---------------------------
DENTAL AND
INDIVIDUAL CONSUMER FINANCIAL
ACQUISITIONS LIFE WEST COAST BENEFITS INSTITUTIONS
------------ ---------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C>
Premiums and policy fees $ 78,186 $ 95,724 $ 8,677 $141,624 $30,855
Net investment income 83,086 37,706 18,122 15,441 9,267
Realized investment gains (losses)
Other income 10 12,488 1,072 1,090
-------- -------- ------- -------- --------
Total revenues 161,282 145,918 26,799 158,137 41,212
-------- -------- ------- -------- -------
Benefits and settlement expenses 87,303 88,966 14,179 100,457 11,972
Amortization of deferred policy
acquisition costs 13,017 19,920 4,586 7,700 11,113
Other operating expense 17,019 25,257 3,941 35,877 8,930
-------- -------- ------- -------- --------
Total benefits and expenses 117,339 134,143 22,706 144,034 32,015
-------- -------- ------- -------- -------
Income before income tax 43,943 11,775 4,093 14,103 9,197
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
GUARANTEED CORPORATE
INVESTMENT INVESTMENT AND TOTAL
CONTRACTS PRODUCTS OTHER ADJUSTMENTS CONSOLIDATED
----------- -------- ---------- ----------- ------------
Premiums and policy fees $ 8,562 $ 189 $363,817
Net investment income $157,716 77,985 26,678 426,001
Realized investment gains (losses) (1,840) 589 $ 2,037 786
Other income 4,269 2,961 21,890
-------- ------- ------- ------- --------
Total revenues 155,876 91,405 29,828 2,037 812,494
-------- ------- ------- ------- --------
Benefits and settlement expenses 132,334 61,179 322 496,712
Amortization of deferred policy
acquisition costs 436 10,766 23 67,561
Other operating expenses 3,024 10,883 18,012 (6,325) 116,618
-------- ------- ------- ------- --------
Total benefits and expenses 135,794 82,828 18,357 (6,325) 680,891
-------- ------- ------- ------- --------
Income before income tax 20,082 8,577 11,471 131,603
Income tax expense 44,745 44,745
Minority interest 4,111
--------
Net income $ 82,747
========
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
OPERATING SEGMENT ASSETS
SEPTEMBER 30, 1998
---------------------------------------------------------------------------
(IN THOUSANDS)
SPECIALTY INSURANCE
LIFE INSURANCE PRODUCTS
----------------------------------------- -------------------------
DENTAL AND
INDIVIDUAL CONSUMER FINANCIAL
ACQUISITIONS LIFE WEST COAST BENEFITS INSTITUTIONS
------------ ------------ ----------- --------- -------------
<S> <C> <C> <C> <C> <C>
Investments and other assets $1,256,251 $1,057,969 $1,049,169 $484,288 $658,283
Deferred policy acquisition costs 124,012 284,585 138,801 25,123 56,766
---------- ---------- ---------- -------- --------
Total assets $1,380,263 $1,342,554 $1,187,970 $509,411 $715,049
========== ========== ========== ======== ========
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
GUARANTEED CORPORATE
INVESTMENT INVESTMENT AND TOTAL
CONTRACTS PRODUCTS OTHER CONSOLIDATED
----------- ---------- -------- --------------
Investments and other assets $2,856,619 $2,555,838 $991,589 $10,910,006
Deferred policy acquisition costs 1,490 61,205 12 691,994
---------- ---------- -------- -----------
Total assets $2,858,109 $2,617,043 $991,601 $11,602,000
========== ========== ======== ===========
OPERATING SEGMENT ASSETS
DECEMBER 31, 1997
---------------------------------------------------------------------------
(IN THOUSANDS)
SPECIALTY INSURANCE
LIFE INSURANCE PRODUCTS
----------------------------------------- ---------------------------
DENTAL AND
INDIVIDUAL CONSUMER FINANCIAL
ACQUISITIONS LIFE WEST COAST BENEFITS INSTITUTIONS
------------ ---------- ---------- -------- ------------
Investments and other assets $1,401,294 $ 963,661 $ 910,030 $264,083 $544,085
Deferred policy acquisition costs 138,052 252,321 108,126 22,459 52,837
---------- ---------- ---------- -------- --------
Total assets $1,539,346 $1,215,982 $1,018,156 $286,542 $596,922
========== ========== ========== ======== ========
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
GUARANTEED CORPORATE
INVESTMENT INVESTMENT AND TOTAL
CONTRACTS PRODUCTS OTHER CONSOLIDATED
--------- ---------- ---------- ------------
Investments and other assets $2,887,732 $2,316,495 $591,518 $ 9,878,898
Deferred policy acquisition costs 1,785 56,074 1,083 632,737
---------- ---------- -------- -----------
Total assets $2,889,517 $2,372,569 $592,601 $10,511,635
========== ========== ======== ===========
</TABLE>
11
<PAGE>
NOTE E - STATUTORY REPORTING PRACTICES
Financial statements prepared in conformity with generally accepted
accounting principles ("GAAP") differ in some respects from the statutory
accounting practices prescribed or permitted by insurance regulatory
authorities. At September 30, 1998 and for the nine months then ended, the
Company's life insurance subsidiaries had consolidated stockholder's equity and
net income prepared in conformity with statutory reporting practices of $575.2
million and $76.4 million, respectively.
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 September 30, 1998 and December 31,
1997, prepared on the basis of reporting investments at amortized cost rather
than at market values, are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
(IN THOUSANDS)
<S> <C> <C>
Total investments $ 8,431,874 $ 7,933,017
Deferred policy acquisition costs 721,337 654,175
All other assets 2,286,149 1,829,478
----------- -----------
$11,439,360 $10,416,670
=========== ===========
Deferred income taxes $ 2,169 $ 7,974
All other liabilities 10,330,704 9,467,226
---------- -----------
10,332,873 9,475,200
Guaranteed preferred beneficial
interests in Company's sub-
ordinated debentures 245,000 245,000
Stockholders' equity 861,487 696,470
----------- -----------
$11,439,360 $10,416,670
=========== ===========
</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 September 30, 1998, options and open
12
<PAGE>
futures contracts with a notional amount of $1,300.0 million were in a $1.7
million net unrealized gain 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 8.25% TOPrS from a fixed rate to a variable rate of interest. Amounts paid
or received related to the initiation of interest rate swap contracts and
swaptions are deferred and amortized over the life of the related debt. At
September 30, 1998, related open interest rate swap contracts with a notional
amount of $345.3 million were in an $8.2 million net unrealized gain position.
In connection with a commercial mortgage loan securitization, the
Company entered into interest rate swap contracts converting a fixed rate of
interest to a floating rate of interest and converting a floating rate of
interest to a fixed rate of interest with a notional amount at September 30,
1998, of $409.9 million. In the aggregate, there were no net unrealized gains or
losses associated with these swap contracts at September 30, 1998.
NOTE H - NET INCOME PER SHARE
Net income per share - basic is net income divided by the average
number of shares of Common Stock outstanding including shares that are issuable
under various deferred compensation plans. The average shares outstanding used
to compute net income per share - basic were 62,863,523 and 62,415,048 for the
nine months ended September 30, 1998 and 1997, respectively.
Net income per share - diluted is net income divided by the average
number of shares outstanding including all dilutive potentially issuable shares
that are issuable under various stock-based compensation plans and stock
purchase contracts. The average shares outstanding used to compute net income
per share - diluted were 63,661,855 and 62,806,770 for the nine months ended
September 30, 1998 and 1997, respectively.
A reconciliation of average shares outstanding for the nine months
ended September 30 is summarized as follows:
RECONCILIATION OF
AVERAGE SHARES OUTSTANDING
<TABLE>
<CAPTION>
SEPTEMBER 30
-------------------------------
1998 1997
---- ----
<S> <C> <C>
Issued and outstanding 61,919,841 61,621,122
Issuable under various deferred compensation plans 943,682 793,926
---------- ----------
Basic 62,863,523 62,415,048
Stock appreciation rights 164,105 16,058
Issuable under various other stock-based compensation plans 411,566 375,664
FELINE PRIDES stock purchase contracts 222,661
---------- ----------
Diluted 63,661,855 62,806,770
========== ==========
</TABLE>
13
<PAGE>
NOTE I - COMPREHENSIVE INCOME
The following table sets forth the Company's comprehensive income for
the nine months ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
-----------------------------------
(IN THOUSANDS)
1998 1997
---- ----
<S> <C> <C>
Net income $ 96,043 $ 82,747
Increase (decrease) in net unrealized gains
on investments (net of income tax:
1998 - $24,526; 1997 - $16,981) 45,549 31,537
Reclassification adjustment for amounts included
in net income (net of income tax:
1998 - $(445); 1997 - $(252)) (1,589) (471)
--------- ---------
Comprehensive income $140,003 $113,813
========= =========
</TABLE>
NOTE J - ACQUISITIONS
In June 1997, the Company acquired West Coast Life Insurance Company
("West Coast"). In September 1997, the Company acquired the Western
Diversified Group.
On September 11, 1998, the Company completed its acquisition of United
Dental Care, Inc. ("United Dental"). The transaction has been accounted for as a
purchase, and goodwill of approximately $160 million has been recorded by the
Company. The results of these acquisitions have been included in the
accompanying financial statements since their respective effective dates.
Summarized below are the consolidated results of operations for the
nine months ended September 30, 1998 and 1997, on an unaudited pro forma basis,
as if the West Coast, Western Diversified Group and United Dental acquisitions
had occurred as of January 1, 1997. The pro forma information is based on the
Company's consolidated results of operations for the nine months ended September
30, 1998 and 1997 and on data provided by the respective companies, after giving
effect to certain pro forma adjustments. The pro forma financial information
does not purport to be indicative of results of operations that would have
occurred had the transactions occurred on the basis assumed above nor are they
indicative of results of the future operations of the combined enterprises.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
-----------------------------------------
(IN THOUSANDS)
(UNAUDITED)
1998 1997
---- ----
<S> <C> <C>
Total revenues $ 1,092,935 $ 1,025,880
Net income $ 93,877 $ 78,900
Net income per share-basic $ 1.44 $ 1.21
Net income per share-diluted $ 1.42 $ 1.21
</TABLE>
14
<PAGE>
On October 14, 1998, the Company completed its acquisition of
approximately 260,000 policies from Lincoln National Corporation. The policies
represent the payroll deduction business originally marketed and underwritten by
Aetna.
NOTE K - 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.
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 seven operating divisions: Acquisitions, Individual
Life, West Coast, Dental and Consumer Benefits ("Dental"), Financial
Institutions, Guaranteed Investment Contracts ("GIC"), and Investment Products.
The Company also has an additional business segment which is described herein as
Corporate and Other.
This report includes "forward-looking statements" which express the
Company's current expectations of future events and/or results. The words
"believe", "expect", "anticipate" and similar expressions identify
forward-looking statements which are based on future expectations rather than on
historical facts and are therefore subject to a number of risks and
uncertainties that could cause actual results to differ materially from those
expressed. The Company cannot give assurance that such statements will prove to
be correct. Please refer to Exhibit 99 for more information about factors which
could affect future results.
15
<PAGE>
RESULTS OF OPERATIONS
PREMIUMS AND POLICY FEES
The following table sets forth for the periods shown the amount of
premiums and policy fees and the percentage change from the prior period:
PREMIUMS AND POLICY FEES
NINE MONTHS ---------------------------------
ENDED PERCENTAGE
SEPTEMBER 30 AMOUNT INCREASE/
(IN THOUSANDS) (DECREASE)
- ------------ -------------- ----------
1997 $363,817 (0.7)%
1998 471,752 29.7
Premiums and policy fees increased $107.9 million or 29.7% in the first
nine months of 1998 over the first nine months of 1997. Premiums and policy fees
from the Acquisitions Division decreased $7.4 million. The Individual Life
Division's premiums and policy fees increased $2.1 million. The acquisition of
West Coast Life Insurance Company ("West Coast") in the second quarter of 1997
increased premiums and policy fees $10.6 million in the first nine months of
1998 as compared to the same period last year. The Dental Division's exit from
the group major medical business resulted in a $10.3 million decrease in
premiums and policy fees. The acquisition of United Dental Care, Inc. ("United
Dental") resulted in a $13.6 million increase in premiums and policy fees.
Premiums and policy fees related to the Dental Division's other businesses
increased $38.3 million in the first nine months of 1998 as compared to the same
period in 1997. Premiums and policy fees from the Financial Institutions
Division increased $55.9 million in the first nine months of 1998 as compared to
the first nine months of 1997. The acquisition of the Western Diversified Group
("Western Diversified") and the coinsurance of an unrelated closed block of
credit insurance policies in late 1997 increased premiums and policy fees $55.3
million. The increase in premiums and policy fees from the Investment Products
Division was $5.3 million.
NET INVESTMENT INCOME
The following table sets forth for the periods shown the amount of net
investment income and the percentage change from the prior period:
NET INVESTMENT INCOME
NINE MONTHS -------------------------------------
ENDED AMOUNT PERCENTAGE
SEPTEMBER 30 (IN THOUSANDS) INCREASE
--------------- -------------- ---------
1997 $426,001 10.9 %
1998 475,192 11.6
Net investment income in the first nine months of 1998 was $49.2
million or 11.6% higher than the corresponding period of the preceding year
primarily due to increases in the average amount of invested assets and an
increase in participating mortgage loan income. Invested assets have
16
<PAGE>
increased primarily due to acquisitions and due to receiving annuity deposits.
The acquisition of West Coast, Western Diversified, and a block of credit
insurance policies in 1997 resulted in an increase in net investment income of
$38.5 million in the first nine months of 1998 as compared to the same period in
1997.
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 net realized investment gains for the
periods shown:
NINE MONTHS REALIZED INVESTMENT
ENDED GAINS (LOSSES)
SEPTEMBER 30 (IN THOUSANDS)
-------------- -------------------
1997 $ 786
1998 2,445
Realized investment gains were $2.4 million for the first nine months
of 1998 compared to $0.8 million for the corresponding period of 1997.
OTHER INCOME
The following table sets forth other income for the periods shown:
NINE MONTHS
ENDED OTHER INCOME
SEPTEMBER 30 (IN THOUSANDS)
------------- ------------
1997 $21,890
1998 48,577
Other income consists primarily of revenues of the Company's
broker-dealer subsidiary, investment management fees from variable insurance
products, 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 nine
months of 1998 was $26.7 million higher than the corresponding period of 1997.
Revenues from the Company's broker-dealer subsidiary increased $13.4 million in
the first nine months of 1998 as compared to the same period in 1997. The
acquisition of Western Diversified in late 1997 resulted in a $7.2 million
increase in other income in the first nine months of 1998 as compared to the
same period in 1997. Other income from all other sources increased $6.1 million
in the first nine months of 1998 as compared with the first nine months of 1997.
17
<PAGE>
INCOME BEFORE INCOME TAX AND MINORITY INTEREST
The following table sets forth operating income or loss and income or
loss before income tax for the periods shown:
<TABLE>
<CAPTION>
OPERATING INCOME (LOSS) AND INCOME (LOSS) BEFORE INCOME TAX
NINE MONTHS ENDED SEPTEMBER 30
(IN THOUSANDS)
1998 1997
---- ----
<S> <C> <C>
Operating Income (Loss)(1),(2)
Life Insurance
Acquisitions $ 36,990 $ 43,943
Individual Life 20,341 11,775
West Coast 15,673 4,093
Specialty Insurance Products
Dental and Consumer Benefits 12,763 14,103
Financial Institutions 14,311 9,197
Retirement Savings and Investment Products
Guaranteed Investment Contracts 23,786 21,922
Investment Products 8,975 8,419
Corporate and Other(2) 12,841 11,471
-------- --------
Total operating income 145,680 124,923
-------- --------
Realized Investment Gains (Losses)
Guaranteed Investment Contracts (895) (1,840)
Investment Products 678 589
Unallocated Realized Investment Gains (Losses) 2,662 2,037
Related Amortization Deferred Policy Acquisition Costs
Investment Products (367) (431)
-------- --------
Total net 2,078 355
-------- --------
Income (Loss) Before Income Tax (2)
Life Insurance
Acquisitions 36,990 43,943
Individual Life 20,341 11,775
West Coast 15,673 4,093
Specialty Insurance Products
Dental and Consumer Benefits 12,763 14,103
Financial Institutions 14,311 9,197
Retirement Savings and Investment Products
Guaranteed Investment Contracts 22,891 20,082
Investment Products 9,286 8,577
Corporate and Other(2) 12,841 11,471
Unallocated Realized Investment Gains (Losses) 2,662 2,037
-------- --------
Total income before income tax $147,758 $125,278
======== ========
</TABLE>
(1) Income before income tax excluding realized investment gains and losses and
related amortization of deferred acquisition costs.
(2) Operating income and income before income tax for the Corporate and Other
segment have been reduced by pretax minority interest in income of
consolidated subsidiaries of $6,325 in the first nine months of 1997 and
$13,959 in the first nine months of 1998. Such minority interest related to
payments made on the Company's MIPS(SM), 8.25%TOPrS(SM), and FELINE
PRIDES(SM).
18
<PAGE>
Pretax earnings from the Acquisitions Division decreased $6.9 million in
the first nine months of 1998 as compared to the same period of 1997. The
Division's mortality experience was approximately $2.1 million worse than
expected in the first nine months of 1998 as compared to being approximately
$4.9 million better than expected in the first nine months of 1997.
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. On October 14, 1998,
the Company acquired approximately 260,000 policies from Lincoln National
Corporation. The policies represent the payroll deduction business originally
marketed and underwritten by Aetna. The transaction represents approximately
$330 million of life insurance reserves and approximately $65 million of annual
premium.
The Individual Life Division's pretax earnings of $20.3 million in the
first nine months of 1998 were $8.5 million above the same period of 1997. In
the second quarter of 1997, the Division experienced record high mortality.
Mortality experience was at expected levels in the second and third quarters of
1998 after having been above expected levels in the first quarter of 1998.
West Coast had pretax earnings of $15.7 million for the first nine
months of 1998 compared to $4.1 million for the period ended September 30, 1997.
The Division was acquired by the Company in June 1997.
Dental Division pretax earnings were $1.3 million lower in the first
nine months of 1998 as compared to the first nine months of 1997. Last year's
results include approximately $4.0 million of earnings from the group major
medical business which the Division exited last year.
On September 11, 1998, the Company acquired United Dental, a leading
provider of prepaid dental coverages. With the acquisition, the Company has
almost 3 million members in its dental programs and estimated annualized premium
of $333 million. In addition, the Company has become the third largest provider
of prepaid dental coverages, operating in almost 40 states.
Pretax earnings of the Financial Institutions Division were $5.1 million
higher in the first nine months of 1998 as compared to the same period in 1997.
At the end of the 1997 third quarter, the Division acquired the Western
Diversified Group and coinsured an unrelated block of policies. These
acquisitions increased earnings $5.4 million in the first nine months of 1998 as
compared to the same period last year.
The GIC Division had pretax operating earnings of $23.8 million in the
first nine months of 1998 and $21.9 million in the corresponding period of 1997.
Realized investment losses associated with this Division in the first nine
months of 1998 were $0.9 million as compared to $1.8 million in the same period
last year. As a result, total pretax earnings were $22.9 million in the first
nine months of 1998 compared to $20.1 million for the same period last year.
Investment Products Division pretax operating earnings of $9.0 million
were $0.6 million higher in the first nine months of 1998 compared to the same
period of 1997. Realized investment gains associated with the Division, net of
related amortization of deferred policy acquisition costs, were approximately
$0.3 million in the first nine months of 1998 compared to $0.2 million in the
first nine months of 1997. Total pretax earnings were $9.3 million in the first
nine months of 1998 as compared to $8.6 million in the same period of 1997.
19
<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 $1.3 million in the first nine months of 1998 as
compared to the first nine months of 1997.
INCOME TAXES
The following table sets forth the effective income tax rates for the
periods shown:
NINE MONTHS
ENDED ESTIMATED EFFECTIVE
SEPTEMBER 30 INCOME TAX RATES
-------------- --------------------
1997 34%
1998 35
The effective income tax rate for the full year of 1997 was 34%.
Management's estimate of the effective income tax rate for 1998 is 35%.
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>
NET INCOME
NINE MONTHS ----------------------------------------------------------------------------
ENDED TOTAL PER SHARE- PERCENTAGE PER SHARE- PERCENTAGE
SEPTEMBER 30 (IN THOUSANDS) BASIC INCREASE DILUTED INCREASE
- ------------ ------------- ----------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
1997 $82,747 $1.33 24.3% $1.32 23.4%
1998 96,043 1.53 15.0 1.51 14.4
</TABLE>
Compared to the same period in 1997, net income per share-basic in the
first nine months of 1998 increased 15.0%, reflecting improved operating
earnings in the Individual Life, West Coast, Financial Institutions, Guaranteed
Investment Contracts and Investment Products Divisions and the Corporate and
Other segment, and higher realized investment gains (net of related amortization
of deferred policy acquisition costs), which were partially offset by lower
operating earnings in the Acquisitions and Dental Divisions.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") has issued Statement
of Financial Accounting Standards No. ("SFAS") 132, "Employer's Disclosures
About Pension and Other Postretirement Benefits" which revises the footnote
disclosures about pension and other postretirement benefit plans. The FASB has
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" and SFAS No. 134, "Accounting for Mortgage-Backed Securities
Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise." The adoption of these accounting standards is not expected
to have a material effect on the Company's financial condition.
20
<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 September 30, 1998, the fixed maturity investments (bonds, bank loan
participations, and redeemable preferred stocks) had a market value of $6,756.3
million, which is 2.9% above amortized cost (less allowances for uncollectible
amounts on investments) of $6,564.4 million. The Company had $1,449.7 million in
mortgage loans at September 30, 1998. While the Company's mortgage loans do not
have quoted market values, at September 30, 1998, the Company estimates the
market value of its mortgage loans to be $1,548.4 million (using discounted cash
flows from the next call date) which is 6.8% 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. As of September 30, 1998, approximately $469.6 million of the Company's
mortgage loans have this participation feature.
At September 30, 1998, delinquent mortgage loans and foreclosed real
estate were 0.1% of assets. Bonds rated less than investment grade were 2.2% 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 $20.8 million
at September 30, 1998.
Policy loans at September 30, 1998, were $188.6 million, a decrease of
$5.5 million from December 31, 1997. Policy loan rates are generally in the 4.5%
to 8.0% range and are at least equal to the assumed interest rates used for
future policy benefits.
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
21
<PAGE>
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 general policy to generally
maintain asset and liability durations within one half year of one another,
although from time to time a broader interval may be allowed.
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 September 30, 1998, options and open futures contracts with a notional
amount of $1,300.0 million were in a $1.7 million net unrealized gain 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. Amounts paid or
received related to the initiation of interest rate swap contracts and swaptions
are deferred and amortized over the life of the related debt. At September 30,
1998, related open interest rate swap contracts with a notional amount of $345.3
million were in a $8.2 million net unrealized gain position.
In connection with a commercial mortgage loan securitization, the
Company entered into interest rate swap contracts converting a fixed rate of
interest to a floating rate of interest and converting a floating rate of
interest to a fixed rate of interest with a notional amount at September 30,
1998, of $409.9 million. In the aggregate, there were no net unrealized gains or
losses associated with these swap contracts at September 30, 1998.
Withdrawals related to GICs were approximately $700 million during
1997. Withdrawals related to GICs are estimated to be approximately $900 million
in 1998. The Company's asset/liability management programs and procedures take
into account GIC withdrawals. Accordingly, the Company does not expect GIC
withdrawals to have an unusual effect on the future operations and liquidity of
the Company.
In anticipation of a positive cash flow, the life insurance
subsidiaries were committed at September 30, 1998, to fund mortgage loans and to
purchase fixed maturity and other long-term investments in the amount of $600.6
million. The Company's subsidiaries held $152.5 million in cash and short-term
investments at September 30, 1998.
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
22
<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.
At September 30, 1998, Protective Life Corporation had $30.0 million
outstanding under its $70.0 million revolving line of credit and an additional
$19.0 million of bank borrowings at an interest rate of 5.8%. The increase in
borrowing primarily relates to the acquisition of United Dental in the 1998
third quarter. In addition, at September 30, 1998, the Company's subsidiary,
Protective Life, had $360.3 million of short-term borrowings with an average
interest rate of 5.6%. In the third quarter, Protective Life funded the purchase
of approximately $300 million of bonds relating to the October 1998 acquisition
of a block of policies from Lincoln National Corporation. In the acquisition
transaction, Protective Life received approximately $200 million of cash which
will be used to reduce its borrowings.
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, 1997, approximately $154 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 $727 million, would be subject to
federal income tax at rates then effective.
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 common stock under
the Securities Act of 1933 on a delayed (or shelf) basis.
In connection with the acquisition of United Dental, the Company issued
2,660,165 shares of Company common stock.
A life insurance company's statutory capital is computed according to
rules prescribed by the National Association of Insurance Commissioners
("NAIC"), as modified by the insurance company's state of domicile. Statutory
accounting rules are different from generally accepted accounting principles and
are intended to reflect a more conservative view by, for example, requiring
immediate expensing of policy acquisition costs. The 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.
23
<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 number of civil jury verdicts have been returned against 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 addition, in
some class action and other lawsuits involving insurers' sales practices,
insurers have made material settlement payments. 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 insurers, in
the ordinary course of business, are involved in such litigation. Although the
outcome of any such 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.
The Company is not aware of any material pending or threatened
regulatory action with respect to the Company or any of its subsidiaries.
YEAR 2000 DISCLOSURE
Computer hardware and software often denote the year using two digits
rather than four; for example, the year 1998 often is denoted by such hardware
and software as "98." It is probable that such hardware and software will
malfunction when calculations involving the year 2000 are attempted because the
hardware and/or software will interpret "00" as representing the year 1900
rather than the year 2000. This "Year 2000" issue potentially affects all
individuals and companies (including the Company, its customers, business
partners, suppliers, banks, custodians and administrators). The problem is most
prevalent in older mainframe systems, but personal computers and equipment
containing computer chips could also be affected.
The Company began work on the Year 2000 problem in 1995 and has
developed and implemented a Year 2000 transition plan intended to identify and
modify or replace important hardware and/or software systems on which it relies
that have Year 2000 issues or to develop appropriate contingency measures. The
Company is also confirming that its service providers are implementing plans to
identify and modify or replace their systems that have a Year 2000 issue.
Substantial resources are being devoted to this effort; however, the Company
cannot specifically identify all of the costs to develop and implement these
plans. Since 1995, the costs that have been identified as relating to addressing
the year 2000 problem total less than $5 million.
The majority of the modifications necessary for the Company's mainframe
systems to be able to process transactions dated beyond 1999 have been completed
and the remainder are targeted for completion by December 31, 1998. The
Company's other systems are currently being addressed with most targeted
completion dates being prior to June 30, 1999. The Company is developing
detailed contingency plans for a large percentage of its remaining Year 2000
issues. The Company is also using research, direct inquiry, and/or testing to
attempt to determine the Year 2000 readiness of
24
<PAGE>
critical vendors and business partners. During 1999, the Company will future
date test its systems in a production environment, and finalize its contingency
plans. The Company currently anticipates that its systems with Year 2000 issues
will have been addressed and appropriate action taken before December 31, 1999.
Due to the fact that the Company does not control all of the factors
that could impact its Year 2000 readiness, there can be no assurances that the
Company's efforts will be successful, that interactions with other service
providers with Year 2000 issues will not impair the Company's operations, or
that the Year 2000 issue will not otherwise adversely affect the Company.
Should some of the Company's systems not be available due to Year 2000
problems, in a reasonably likely worst case scenario, the Company may experience
significant delays in its ability to perform certain functions, but does not
expect an inability to perform critical functions or to otherwise conduct
business.
PART II
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
15 Letter re: unaudited interim financial statements
27 Financial Data Schedule
99 Safe harbor for Forward Looking Statements
(b). A current report on Form 8-K was filed July 28, 1998, reporting
under Item 5 and Item 7 the Company's 1998 second quarter
earnings press release.
25
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PROTECTIVE LIFE CORPORATION
Date: November 13, 1998 /S/ JERRY W. DEFOOR
----------------------
Jerry W. DeFoor
Vice President and Controller,
and Chief Accounting Officer
(Duly authorized officer)
26
Exhibit 15
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Protective Life Corporation
We are aware that our report dated October 27, 1998, on our review of interim
consolidated financial information of Protective Life Corporation and
subsidiaries for the period ended September 30, 1998, 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.
PricewaterhouseCoopers LLP
Birmingham, Alabama
November 13, 1998
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of Protective Life Corporation and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 6,756,341
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 11,861
<MORTGAGE> 1,449,663
<REAL-ESTATE> 14,677
<TOTAL-INVEST> 8,248,916
<CASH> 32,989
<RECOVER-REINSURE> 660,359
<DEFERRED-ACQUISITION> 691,994
<TOTAL-ASSETS> 11,602,000
<POLICY-LOSSES> 3,655,862
<UNEARNED-PREMIUMS> 401,817
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 188,867
<NOTES-PAYABLE> 533,947
0
0
<COMMON> 34,667<F1>
<OTHER-SE> 932,507
<TOTAL-LIABILITY-AND-EQUITY> 11,602,000
471,752
<INVESTMENT-INCOME> 475,192
<INVESTMENT-GAINS> 2,445
<OTHER-INCOME> 48,577
<BENEFITS> 571,082
<UNDERWRITING-AMORTIZATION> 89,053
<UNDERWRITING-OTHER> 176,114
<INCOME-PRETAX> 161,717
<INCOME-TAX> 56,601
<INCOME-CONTINUING> 96,043<F2>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 96,043
<EPS-PRIMARY> 1.53<F1>
<EPS-DILUTED> 1.51<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 a two for one stock split effective April 1, 1998.
<F2>Net of minority interest in income of consolidated subsidiaries of $9,073.
</FN>
</TABLE>
Exhibit 99
to
Form 10-Q
of
Protective Life Corporation
for the nine months
ended September 30, 1998
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.
MATURE INDUSTRY; 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. Insurance is a highly competitive industry and the
Company encounters significant competition in all 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.
The life and health insurance industry is consolidating, with larger,
more efficient organizations emerging from consolidation. Also, mutual insurance
companies are converting to stock ownership which will give them greater access
to capital markets.
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.
<PAGE>
The Company competes against other insurance companies and financial
institutions in the origination of commercial mortgage loans.
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. For the past several years rating downgrades in the industry
have exceeded upgrades.
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 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. Formal 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 insurance subsidiaries to
dispose of illiquid assets on unfavorable terms, which could have a material
adverse effect on the Company.
INTEREST RATE FLUCTUATIONS. Sudden and/or significant changes in
interest rates expose insurance companies to the risk of not earning anticipated
spreads between the interest rate earned on investments and the credited rates
paid on outstanding policies. 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
insurance and investment products.
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 many aspects of the insurance business, which
may include premium rates, marketing practices, advertising, policy forms, and
capital adequacy, and is concerned primarily with the protection of
policyholders
<PAGE>
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 with respect to their ability to sell such products, and, depending on
grandfathering provisions, the surrenders of existing annuity contracts and life
insurance policies. The Company cannot predict what future initiatives the
President or Congress may propose which may affect the Company.
LITIGATION. A number of civil jury verdicts have been returned against
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 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 class action and other lawsuits
involving insurers' sales practices, insurers have made material settlement
payments.
INVESTMENT RISKS. The Company's invested assets are subject to
customary 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 which the Company has
financed. Factors that may affect the overall default rate on, and market value
of, the Company's invested assets include interest rate levels, financial market
performance, and general economic conditions, as well as particular
circumstances affecting the businesses of individual borrowers and tenants.
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.
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 unaffiliated investment
<PAGE>
managers; a portion of the sales in the Individual Life, Dental, and Financial
Institutions Divisions comes from arrangements with unrelated marketing
organizations; and the Company has entered the Hong Kong insurance market in a
joint venture. Therefore the Company's results may be affected by the
performance of others.
YEAR 2000. Computer hardware and software often denote the year using
two digits rather than four; for example, the year 1998 often is denoted by such
hardware and software as "98." It is probable that such hardware and software
will malfunction when calculations involving the year 2000 are attempted because
the hardware and/or software will interpret "00" as representing the year 1900
rather that the year 2000. This "Year 2000" issue potentially affects all
individuals and companies (including the Company, its customers, business
partners, suppliers, banks, custodians and administrators). The problem is most
prevalent in older mainframe systems, but personal computers and equipment
containing computer chips could also be affected.
The Company began work on the Year 2000 problem in 1995 and has
developed and implemented a Year 2000 transition plan intended to identify and
modify or replace important hardware and/or software systems on which it relies
that have Year 2000 issues or to develop appropriate contingency measures. The
Company is also confirming that its service providers are implementing plans to
identify and modify or replace their systems that have a Year 2000 issue.
The Company currently anticipates that its systems with Year 2000
issues will have been addressed and appropriate action taken before December 31,
1999.
Due to the fact that the Company does not control all of the factors
that could impact its Year 2000 readiness, there can be no assurances that the
Company's efforts will be successful, that interactions with other service
providers with Year 2000 issues will not impair the Company's operations, or
that the Year 2000 issue will not otherwise adversely affect the Company.
Should some of the Company's systems not be available due to Year 2000
problems, in a reasonable likely worst case scenario, the Company may experience
significant delays in its ability to perform certain functions, but does not
expect an inability to perform critical functions or to otherwise conduct
business. However, other worst case scenarios, depending upon their duration,
could have a material adverse effect on the Company and its operations.
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. The cost of
reinsurance is, in some cases, reflected in the premium rates charged by the
Company. Under certain reinsurance agreements, the reinsurer may increase the
rate it charges the Company for the reinsurance, though the Company does not
anticipate increases to occur. Therefore, if the cost of reinsurance were to
increase with respect to policies where the rates have been guaranteed by the
Company, the Company could be adversely affected.
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.
<PAGE>
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.
<PAGE>
