- ------------------------------------------------------------------------------
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, 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 August 7,
1998: 61,774,852 shares.
<PAGE>
PROTECTIVE LIFE CORPORATION
INDEX
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Report of Independent Accountants......................................
Consolidated Condensed Statements of Income for the Three and Six
Months ended June 30, 1998 and 1997 (unaudited)......................
Consolidated Condensed Balance Sheets as of June 30, 1998
(unaudited) and December 31, 1997....................................
Consolidated Condensed Statements of Cash Flows for the
Six Months ended June 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 5. 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, 1998, and the
related consolidated condensed statements of income for the three-month and
six-month periods ended June 30, 1998 and 1997, and consolidated condensed
statements of cash flows for the six-month periods ended June 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 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, 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
July 28, 1998, except for Note J
as to which the date is August 7, 1998
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
--------------------------------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Premiums and policy fees (net of reinsurance ceded:
three months: 1998 - $109,703; 1997 - $71,873
six months: 1998 - $209,331; 1997 - $125,916) $154,833 $117,993 $ 304,018 $247,571
Net investment income 153,006 137,475 310,655 267,805
Realized investment gains (losses) 2,023 1,143 2,034 725
Other income 19,150 8,906 32,665 13,668
--------- --------- --------- ---------
329,012 265,517 649,372 529,769
-------- -------- --------- --------
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance ceded:
three months: 1998 - $82,964; 1997 - $24,394
six months: 1998 - $126,727; 1997 - $40,833) 186,076 169,813 373,800 332,832
Amortization of deferred policy acquisition costs 33,434 18,210 58,269 39,045
Other operating expenses (net of reinsurance ceded:
three months: 1998 - $34,239; 1997 - $22,042
six months: 1998 - $65,948; 1997 - $36,616) 54,014 33,513 111,789 75,143
-------- -------- -------- ---------
273,524 221,536 543,858 447,020
-------- -------- -------- --------
INCOME BEFORE INCOME TAX AND MINORITY
INTEREST 55,488 43,981 105,514 82,749
Income tax expense 19,921 14,954 36,930 28,135
-------- --------- -------- ---------
INCOME BEFORE MINORITY INTEREST 35,567 29,027 68,584 54,614
Minority interest in net income
of consolidated subsidiaries 3,025 1,497 6,049 2,301
-------- --------------------------- ----------
NET INCOME $ 32,542 $ 27,530 $ 62,535 $ 52,313
======== ======== ======== ========
NET INCOME PER SHARE - BASIC $ .52 $ .44 $ 1.00 $ .84
========== ========== ========= ==========
NET INCOME PER SHARE - DILUTED $ .52 $ .43 $ .99 $ .83
========== =========== ========= ==========
DIVIDENDS PAID PER SHARE $ .11 $ .10 $ .21 $ .19
========== ========== ========= ==========
Average shares outstanding - basic 62,704,433 62,462,192 62,655,854 62,390,230
Average shares outstanding - diluted 63,582,011 62,843,476 63,422,767 62,756,852
</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
1998 1997
-------------------------------------
<S> <C> <C>
ASSETS (Unaudited)
Investments:
Fixed maturities $ 6,400,684 $ 6,374,328
Equity securities 13,131 15,006
Mortgage loans on real estate 1,484,075 1,312,778
Investment real estate, net 11,063 13,602
Policy loans 190,491 194,109
Other long-term investments 67,021 63,511
Short-term investments 82,451 76,086
------------ -------------
Total investments 8,248,916 8,049,420
Cash 4,594 47,502
Accrued investment income 97,769 95,616
Accounts and premiums receivable, net 35,842 47,784
Reinsurance receivables 614,608 591,613
Deferred policy acquisition costs 675,495 632,737
Property and equipment, net 38,612 36,957
Other assets 105,981 78,541
Assets held in separate accounts 1,201,399 931,465
------------- -------------
$11,023,216 $10,511,635
LIABILITIES
Policy liabilities and accruals $ 3,920,968 $ 3,725,151
Guaranteed investment contract deposits 2,653,241 2,684,676
Annuity deposits 1,550,783 1,511,553
Other policyholders' funds 189,506 183,233
Other liabilities 268,649 306,241
Accrued income taxes (183) 4,907
Deferred income taxes 26,422 41,212
Debt 154,958 120,000
Liabilities related to separate accounts 1,201,399 931,465
------------ -------------
9,965,743 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 and 1997 - 66,672,924 33,336 33,336
Additional paid-in capital 170,903 167,923
Treasury stock (1998 - 4,898,326 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 562,820 513,258
Accumulated other comprehensive income
Net unrealized gains on investments
(net of income tax: 1998 - $33,832; 1997 - $33,238) 62,831 61,727
------------- --------------
812,473 758,197
------------- --------------
$11,023,216 $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)
SIX MONTHS ENDED
JUNE 30
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $62,535 $52,313
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of deferred policy acquisition costs 58,269 39,045
Capitalization of deferred policy acquisition costs (103,844) (49,406)
Depreciation expense 3,908 473
Deferred income taxes (16,725) (17,592)
Accrued income taxes (5,091) 15,209
Interest credited to universal life and investment products 166,829 220,542
Policy fees assessed on universal life and investment products (67,322) (63,778)
Change in accrued investment income and other receivables (13,206) 1,483
Change in policy liabilities and other policyholders' funds
of traditional life and health products 332,756 (134,897)
Change in other liabilities (37,502) (11,162)
Other (net) (23,258) (6,419)
------------- --------------
Net cash provided by operating activities 357,349 45,811
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reductions of investments
Investments available for sale 4,986,996 2,218,195
Other 94,343 58,635
Sale of investments
Investments available for sale 306,944 1,012,132
Other 124,129 3,247
Cost of investments acquired
Investments available for sale (5,443,497) (3,266,759)
Other (264,455) (202,403)
Acquisitions and bulk reinsurance assumptions 0 (149,304)
Purchase of property and equipment (4,294) (2,788)
Sale of property and equipment 19 2,681
---------------- --------------
Net cash used in investing activities (199,815) (326,364)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings under line of credit arrangements and debt 339,500 1,090,138
Principal payments on line of credit arrangements and debt (304,500) (1,140,038)
Issuance of preferred securities 75,000
Dividends to stockholders (12,974) (11,711)
Investment product deposits and changes in universal life deposits 459,471 465,132
Investment product withdrawals (681,939) (311,251)
------------- -------------
Net cash provided by (used in) financing activities (200,442) 167,270
------------- -------------
INCREASE (DECREASE) IN CASH (42,908) (113,283)
CASH AT BEGINNING OF PERIOD 47,502 121,051
------------- -------------
CASH AT END OF PERIOD $ 4,594 $ 7,768
============= ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period:
Interest on debt $ 3,264 $ 6,108
Income taxes $ 45,607 $ 26,437
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Reissuance of treasury stock to ESOP $ 199 $ 84
Unallocated stock in ESOP $ 315 $ 333
Reissuance of treasury stock $ 3,098 $ 225
Acquisitions
Assets acquired $ 3,398 $ 941,462
Liabilities assumed (347) (784,799)
Reissuance of treasury stock (3,005)
--------- ---------
Net $ 46 $ 156,663
========= =========
</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
six month period ended June 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 ("MIPS(SM)"). 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 ("TOPrS(SM)"). 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 June 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
June 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 PRIDES(SM) 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
SIX MONTHS ENDED JUNE 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 $ 48,249 $ 66,945 $13,052 $108,422 $58,323
Net investment income 52,176 27,060 31,142 7,601 11,597
Realized investment gains (losses)
Other income 1,600 16,377 1,445 9,655
-------- -------- ---------- -------- --------
Total revenues 102,025 110,382 44,194 117,468 79,575
------- ------- ------- ------- -------
Benefits and settlement expenses 56,892 54,273 29,238 74,068 27,385
Amortization of deferred policy
acquisition costs 9,638 15,194 2,188 5,487 16,181
Other operating expenses 11,698 26,264 2,815 29,882 26,692
-------- ------- -------- ------- -------
Total benefits and expenses 78,228 95,731 34,241 109,437 70,258
-------- ------- ------- ------- -------
Income before tax 23,797 14,651 9,953 8,031 9,317
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
GUARANTEED CORPORATE
INVESTMENT INVESTMENT AND TOTAL
CONTRACTS PRODUCTS OTHER ADJUSTMENTS CONSOLIDATED
Premiums and policy fees $ 8,899 $ 128 $304,018
Net investment income $107,142 52,536 21,401 310,655
Realized investment gains (losses) (59) 678 $ 1,415 2,034
Other income 4,330 (742) 32,665
----------- -------- --------- ---------- ---------
Total revenues 107,083 66,443 20,787 1,415 649,372
-------- ------- ------- ------- --------
Benefits and settlement expenses 89,959 41,772 213 373,800
Amortization of deferred policy
acquisition costs 363 9,208 10 58,269
Other operating expenses 987 9,286 13,471 (9,306) 111,789
-------- -------- ------- -------- --------
Total benefits and expenses 91,309 60,266 13,694 (9,306) 543,858
------- ------- ------- -------- --------
Income before tax 15,774 6,177 7,093 105,514
Income tax expense 36,930 36,930
Minority interest 6,049 6,049
---------
Net income $ 62,535
========
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
OPERATING SEGMENT INCOME FOR THE
SIX MONTHS ENDED JUNE 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 $ 52,914 $64,965 $2,238 $104,182 $18,057
Net investment income 55,750 23,595 4,534 8,351 6,297
Realized investment gains (losses)
Other income 10 6,756 643 671
----------- -------- ---------- ---------- --------
Total revenues 108,674 95,316 6,772 113,176 25,025
-------- ------- ------- -------- -------
Benefits and settlement expenses 60,022 60,055 3,355 74,511 7,667
Amortization of deferred policy
acquisition costs 8,532 12,558 1,200 3,145 6,536
Other operating expense 11,939 16,757 1,127 25,292 4,901
--------- ------- ------- -------- --------
Total benefits and expenses 80,493 89,370 5,682 102,948 19,104
--------- ------- ------- -------- -------
Income before income tax 28,181 5,946 1,090 10,228 5,921
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
GUARANTEED CORPORATE
INVESTMENT INVESTMENT AND TOTAL
CONTRACTS PRODUCTS OTHER ADJUSTMENTS CONSOLIDATED
Premiums and policy fees $ 5,087 $ 128 $247,571
Net investment income $104,425 51,603 13,250 $ 29 267,805
Realized investment gains (losses) 107 589 725
Other 2,586 3,002 13,668
------------ ------- -------- ---------- ---------
Total revenues 104,532 59,865 16,380 29 529,769
-------- ------- ------- --------- ---------
Benefits and settlement expenses 86,678 40,275 269 332,832
Amortization of deferred policy
acquisition costs 273 6,785 16 39,045
Other operating expenses 1,781 6,861 10,026 (3,541) 75,143
-------- ------- ------- -------- ---------
Total benefits and expenses 88,732 53,921 10,311 (3,541) 447,020
-------- ------- ------- -------- --------
Income before tax 15,800 5,944 6,069 82,749
Income tax expense 28,135 28,135
Minority interest 2,301 2,301
---------
Net income $ 52,313
========
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
OPERATING SEGMENT ASSETS
JUNE 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 $1,260,337 $1,021,041 $ 972,470 $254,903 $652,027
Deferred policy acquisition costs 128,529 273,252 129,000 24,973 55,675
----------- ------------ ----------- --------- ---------
Total assets $1,388,866 $1,294,293 $1,101,470 $279,876 $707,702
========== ========== ========== ======== ========
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
GUARANTEED CORPORATE
INVESTMENT INVESTMENT AND TOTAL
CONTRACTS PRODUCTS OTHER CONSOLIDATED
Investments and other assets $2,851,616 $2,666,629 $668,698 $10,347,721
Deferred policy acquisition costs 1,624 62,432 10 675,495
------------ ------------ ----------- -------------
Total assets $2,853,240 $2,729,061 $668,708 $11,023,216
========== ========== ======== ===========
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 June 30, 1998 and for the six 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 $618.3 million and
$46.2 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 June 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>
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Total investments $ 8,127,932 $ 7,933,017
Deferred policy acquisition costs 699,816 654,175
All other assets 2,098,805 1,829,478
------------ ------------
$10,926,553 $10,416,670
=========== ===========
Deferred income taxes $ (7,410) $ 7,974
All other liabilities 9,939,321 9,467,226
------------ ------------
9,931,911 9,475,200
Guaranteed preferred beneficial
interests in Company's sub-
ordinated debentures 245,000 245,000
Stockholders' equity 749,642 696,470
------------- -------------
$10,926,553 $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
12
<PAGE>
deferred and amortized over the life of the hedged asset. At June 30, 1998,
options and open futures contracts with a notional amount of $975.0 million were
in a $0.5 million net 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 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 June
30, 1998, related open interest rate swap contracts with a notional amount of
$365.3 million were in a $4.1 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 June 30, 1998, of
$332.4 million. In the aggregate, there were no net unrealized gains or losses
associated with these swap contracts at June 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 62,655,854 and 62,390,230 for the
six months ended June 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 63,422,767 and 62,756,852 for the six months ended June
30, 1998 and 1997, respectively.
A reconciliation of average shares outstanding for the six months ended
June 30 is summarized as follows:
<TABLE>
<CAPTION>
RECONCILIATION OF
AVERAGE SHARES OUTSTANDING
JUNE 30
1998 1997
---- ----
<S> <C> <C>
Issued and outstanding 61,758,403 61,617,489
Issuable under various deferred compensation plans 897,451 772,741
------------ -----------
Basic 62,655,854 62,390,230
Stock appreciation rights 156,909
Issuable under various other stock-based compensation plans 448,035 366,622
FELINE PRIDES stock purchase contracts 161,969
------------ ----------
Diluted 63,422,767 62,756,852
========== ==========
</TABLE>
13
<PAGE>
NOTE I - COMPREHENSIVE INCOME
The following table sets forth the Company's comprehensive income for
the six months ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
(IN THOUSANDS)
1998 1997
---- ----
<S> <C> <C>
Net income $62,535 $52,313
Increase (decrease) in net unrealized gains
on investments (net of income tax:
1998 - $1,306; 1997 - $3,255) 2,426 6,044
Reclassification adjustment for amounts included
in net income (net of income tax:
1998 - $(712); 1997 - $(254)) (1,322) (471)
-------- ---------
Comprehensive income $63,639 $57,886
======= =======
</TABLE>
NOTE J - ACQUISITIONS
On March 11, 1998, the Company announced a definitive agreement under
which the Company will acquire United Dental Care, Inc. ("United Dental Care").
United Dental Care is a leading provider of managed dental care plans with over
1.8 million members. The purchase price per share of United Dental Care common
stock is payable in a combination of $9.31 in cash and 0.2893 shares of the
Company's common stock. The transaction is subject to approval by United Dental
Care stockholders and regulators and other closing conditions. United Dental
Care (subject to the Company's right to increase the merger consideration) or
the Company may terminate the agreement if the price of the Company's common
stock is below $27.50 per share and the Company may terminate the agreement if
the price of the Company's common stock is above $39.50 per share. United Dental
Care has approximately 8.9 million shares of its common stock outstanding.
On August 7, 1998, the Company announced that one of its subsidiaries
has agreed to acquire, through a coinsurance transaction, a block of
approximately 260,000 individual life insurance policies from Lincoln National
Corporation. The transaction represents approximately $330 million of life
insurance reserves and approximately $65 million of annual premium.
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.
14
<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 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
expectations of future events and/or results. All statements based on future
expectations rather than on historical facts are forward- looking statements
that involve a number of risks and uncertainties, and 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.
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:
SIX MONTHS PREMIUMS AND POLICY FEES
ENDED PERCENTAGE
JUNE 30 AMOUNT INCREASE/
(IN THOUSANDS) DECREASE
1997 $247,571 (0.1)%
1998 304,018 22.8
Premiums and policy fees increased $56.4 million or 22.8% in the first
six months of 1998 over the first six months of 1997. Premiums and policy fees
from the Acquisitions Division decreased $4.7 million. The Individual Life
Division's premiums and policy fees increased $2.0 million. The acquisition of
West Coast Life Insurance Company ("West Coast") in the second quarter of 1997
increased premiums and policy fees $10.8 million. The Dental Division's exit
from the group major medical business resulted in an $6.0 million decrease in
premiums and policy fees. Premiums and policy fees related to the Dental
Division's other businesses increased $10.2 million in the first six months of
1998 as compared to the same period in 1997. Premiums and policy fees from the
Financial Institutions Division increased $40.3 million in the first six months
of 1998 as
15
<PAGE>
compared to the first six 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 $38.7 million. Decreases of $4.8 million relate to the normal
decrease in premiums on a closed block of credit insurance policies reinsured in
1996. The increase in premiums and policy fees from the Investment Products
Division was $3.8 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:
SIX MONTHS NET INVESTMENT INCOME
ENDED AMOUNT PERCENTAGE
JUNE 30 (IN THOUSANDS) INCREASE
1997 $267,805 5.1 %
1998 310,655 16.0
Net investment income in the first six months of 1998 was $42.9 million
or 16.0% 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 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 $32.5 million in the first
six 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:
SIX MONTHS REALIZED INVESTMENT
ENDED GAINS (LOSSES)
JUNE 30 (IN THOUSANDS)
1997 $ 725
1998 2,034
Realized investment gains were $2.0 million for the first six months of
1998 compared to $0.7 million for the corresponding period of 1997.
16
<PAGE>
OTHER INCOME
The following table sets forth other income for the periods shown:
SIX MONTHS
ENDED OTHER INCOME
JUNE 30 (IN THOUSANDS)
1997 $13,668
1998 32,665
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 six months of 1998 was
$19.0 million higher than the corresponding period of 1997. Revenues from the
Company's broker-dealer subsidiary increased $8.8 million in the first six
months of 1998 as compared to the same period in 1997. The acquisition of
Western Diversified in late 1997 resulted in a $4.9 million increase in other
income in the first six months of 1998 as compared to the same period in 1997.
Other income from all other sources increased $5.3 million in the first six
months of 1998 as compared with the first six 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 SIX MONTHS ENDED JUNE 30
(IN THOUSANDS)
1998 1997
---- ----
<S> <C> <C>
Operating Income (Loss) (1),(2)
Life Insurance
Acquisitions $23,797 $28,181
Individual Life 14,651 5,946
West Coast 9,953 1,090
Specialty Insurance Products
Dental and Consumer Benefits 8,031 10,229
Financial Institutions 9,317 5,921
Retirement Savings and Investment Products
Guaranteed Investment Contracts 15,833 15,693
Investment Products 5,866 5,728
Corporate and Other2 7,093 6,069
-------- --------
Total operating income 94,541 78,857
------- -------
Realized Investment Gains (Losses)
Guaranteed Investment Contracts (59) 107
Investment Products 678 589
Unallocated Realized Investment Gains (Losses) 1,415 29
Related Amortization Deferred Poilcy Acquisition Costs
Investment Products (367) (373)
--------- ---------
Total net 1,667 352
-------- --------
Income (Loss) Before Income Tax 2
Life Insurance
Acquisitions 23,797 28,181
Individual Life 14,651 5,946
West Coast 9,953 1,090
Specialty Insurance Products
Dental and Consumer Benefits 8,031 10,229
Financial Institutions 9,317 5,921
Retirement Savings and Investment Products
Guaranteed Investment Contracts 15,774 15,800
Investment Products 6,177 5,944
Corporate and Other2 7,093 6,069
Unallocated Realized Investment Gains (Losses) 1,415 29
-------- ----------
Total income before income tax $96,208 $79,209
======= =======
</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 $3,541 in the first six months of 1997 and
$9,306 in the first six months of 1998. Such minority interest related to
payments made on the Company's MIPS(sm), 8.25% TOPrS(sm), and FELINE
PRIDE (sm).
18
<PAGE>
Pretax earnings from the Acquisitions Division decreased $4.4 million in
the first six months of 1998 as compared to the same period 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. In addition, the Division's
mortality experience was approximately $2.1 million worse than expected in the
first six months of 1998 as compared to being approximately $1.7 million better
than expected in the first six months of 1997.
The Individual Life Division's pretax earnings of $14.7 million in the
first six months of 1998 were $8.7 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 quarter of 1998 after
having been above expected levels in the first quarter of 1998.
West Coast had pretax earnings of $10.0 million for the first six months
of 1998 compared to $1.1 million in the first six months of 1997. The Division
was acquired by the Company in June 1997, therefore last year's results
represent only one month of operations.
Dental Division pretax earnings were $2.2 million lower in the first six
months of 1998 as compared to the first six months of 1997. Last year's results
include $3.1 million of earnings from the group major medical business which the
Division exited last year.
Pretax earnings of the Financial Institutions Division were $3.4 million
higher in the first six 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 $3.1 million in the first six months of 1998 as
compared to the same period last year.
The GIC Division had pretax operating earnings of $15.8 million in the
first six months of 1998 and $15.7 million in the corresponding period of 1997.
Realized investment losses associated with this Division in the first six months
of 1998 were less than $0.1 million as compared to $0.1 million of realized
investment gains in the same period last year. As a result, total pretax
earnings were $15.7 million in the first six months of 1998 compared to $15.8
million for the same period last year.
Investment Products Division pretax operating earnings of $5.9 million
were $0.1 million lower in the first six 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 six months of 1998 compared to $0.2 million in the
first six months of 1997. Total pretax earnings were $6.2 million in the first
six months of 1998 as compared to $5.9 million in the same period of 1997.
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 $1.0 million in the first six months of 1998 as
compared to the first six months of 1997.
19
<PAGE>
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
1997 34.0 %
1998 35.0
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>
SIX MONTHS NET INCOME
ENDED TOTAL PER SHARE- PERCENTAGE PER SHARE- PERCENTAGE
JUNE 30 (IN THOUSANDS) BASIC INCREASE DILUTED INCREASE
- ----------- ------------- --------------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
1997 $52,313 $ .84 12.0% $.83 10.7%
1998 62,535 1.00 19.1 .99 19.3
</TABLE>
Compared to the same period in 1997, net income per share-basic in the
first six months of 1998 increased 19.1%, 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
also issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The adoption of these accounting standards are 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 June 30, 1998, the fixed maturity investments (bonds, bank loan
participations, and redeemable preferred stocks) had a market value of $6,400.7
million, which is 2.1% above amortized cost (less allowances for uncollectible
amounts on investments) of $6,267.8 million. The Company had $1,484.1 million in
mortgage loans at June 30, 1998. While the Company's mortgage loans do not have
quoted market values, at June 30, 1998, the Company estimates the market value
of its mortgage loans to be $1,589.8 million (using discounted cash flows from
the next call date) which is 7.1% 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 $384.9 million of the Company's mortgage loans have this
participation feature.
At June 30, 1998, delinquent mortgage loans and foreclosed real estate
were 0.2% 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 $22.0 million at June 30,
1998.
Policy loans at June 30, 1998, were $190.5 million, a decrease of $3.6
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 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 June 30, 1998, options and open futures contracts with a notional
amount of $975.0 million were in a $0.5 million net 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. 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 June 30, 1998,
related open interest rate swap contracts with a notional amount of $365.3
million were in a $4.1 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 June 30, 1998, of
$332.4 million. In the aggregate, there were no net unrealized gains or losses
associated with these swap contracts at June 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 receiving GIC and annuity deposits, the life
insurance subsidiaries were committed at June 30, 1998, to fund mortgage loans
and to purchase fixed maturity and other long-term investments in the amount of
$618.8 million. The Company's subsidiaries held $87.0 million in cash and
short-term investments at June 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 use when needed. The Company expects that the rate received on
its investments will equal or exceed
22
<PAGE>
its borrowing rate. Additionally, the Company may from time to time sell
short-duration GICs to complement its cash management practices.
At June 30, 1998, Protective Life Corporation had no borrowings
outstanding under its $70 million revolving line of credit. However, at June 30,
1998, Protective Life Insurance Company had $35.0 million of short-term
borrowings with an interest rate of 5.9%.
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.
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 common stock under
the Securities Act of 1933 on a delayed (or shelf) basis.
A life insurance company's statutory capital is computed according to
rules prescribed by the National Association of Insurance Commissioners
("NAIC"), as modified by the insurance company's state of domicile. Statutory
accounting rules are different from generally accepted accounting principles and
are intended to reflect a more conservative view by, for example, requiring
immediate expensing of policy acquisition costs. The 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.
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
23
<PAGE>
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.
President Clinton's recent budget proposal contains provisions that
would change the way insurance companies and certain of their products are
taxed, which, if enacted by Congress would negatively affect 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 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 to work on the year 2000 problem in 1995 and has
developed and has 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. Substantial resources are being devoted to this effort; however, the
total costs to develop and implement these plans are not expected to be
material. 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 majority of the modifications necessary for the Company's mainframe
systems to be able to process transactions dated beyond 1999 have been
completed. The Company currently anticipates that its remaining systems with
Year 2000 issues will be 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.
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 determine the Year 2000 readiness of
critical vendors and business partners.
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.
24
<PAGE>
PART II
Item 5. OTHER INFORMATION
The federal proxy rules specify what constitutes timely submission for
a stockholder proposal to be included in the proxy statement. If a
stockholder desires to bring business before an annual meeting of
stockholders which is not the subject of a proposal to be included in
the proxy statement, the shareholder must follow procedures outlined in
the Company's By-laws. A copy of these procedures is available upon
request from the Secretary of the Company, P.O. Box 2606, Birmingham,
Alabama 35202. One of the procedural requirements in the By-laws is the
timely notice in writing of the business the stockholder proposes to
bring before an annual meeting of stockholders. Such notice must be
received by the Secretary of the Company not less than 60 days nor more
than 90 days prior to the first anniversary of the preceding year's
annual stockholder meeting. With respect to the 1999 Annual Meeting of
Stockholders, such notice must be received between December 27, 1998
and January 26, 1999.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
3(a)(1) 1985 Restated Certificate of Incorporation of
Protective Life Corporation (incorporated by
reference to Exhibit 3(a) to Protective Life
Corporation's Form 10-K Annual Report for the year
ended December 31, 1993).
3(a)(2) Certificate of Amendment of 1985 Restated
Certificate of Incorporation of Protective Life
Corporation filed with the Secretary of State of
Delaware on June 1, 1987 (incorporated by reference
to Exhibit 3(a)(1) to Protective Life Corporation's
Form 10-K Annual Report for the year ended
December 31, 1993).
3(a)(3) Certificate of Amendment of 1985 Restated
Certificate of Incorporation of Protective Life
Corporation filed with the Secretary of State of
Delaware on May 5, 1994 (incorporated by reference
to Exhibit 3(a)(5) to Protective Life Corporation's
Form 10-Q Quarterly Report for the period ended
March 31, 1994).
3(a)(4) Certificate of Amendment of 1985 Restated
Certificate of Incorporation of Protective Life
Corporation filed with the Secretary of State of
Delaware on April 30, 1998 (incorporated by
reference to Exhibit 4(a)(4) to Protective Life
Corporation's Amendment No. 1 to Form S-4
Registration Statement filed on August 6, 1998 (Reg.
No. 333-60535)).
3(a)(5) Certificate of Designation of Junior Participating
Cumulative Preferred Stock of Protective Life
Corporation filed with the Secretary of State of
Delaware on August 9, 1995 (incorporated by
reference to Exhibit A to Exhibit 1 to Protective
Life Corporation's Form 8-A Report filed on August
7, 1995).
25
<PAGE>
3(a)(6) Certificate of Decrease of Shares Designated as
Junior Participating Cumulative Preferred Stock of
Protective Life Corporation filed with the Secretary
of State of Delaware on August 8, 1995 (incorporated
by reference to Exhibit 3(a)(4) to Protective Life
Corporation's Form 10-K Annual Report for the year
ended December 31, 1995).
3(b)(1) 1995 Amended and Restated By-laws of Protective Life
Corporation (incorporated by reference to Exhibit
3(b) to Protective Life Corporation's Form 10-K
Annual Report for the year ended December 31, 1996).
3(b)(2) Amendment dated March 3, 1997 to the 1995 Amended
and Restated By-laws of Protective Life Corporation
(incorporated by reference to Exhibit 3(b) to
Protective Life Corporation's Form 10-K Annual
Report for the year ended December 31, 1996).
3(b)(3) Amendment dated March 2, 1998 to the 1995 Amended
and Restated By-laws of Protective Life Corporation
(incorporated by reference to Exhibit 4(b)(2) to
Protective Life Corporation's Amendment No. 1 to
Form S-4 Registration Statement filed on August 6,
1998 (Reg. No. 333-60535)).
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 April 23, 1998,
reporting under Item 5 and Item 7 the Company's 1998 first
quarter earnings press release.
26
<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, 1998 /S/ JERRY W. DEFOOR
----------------------
Jerry W. DeFoor
Vice President and Controller,
and Chief Accounting Officer
(Duly authorized officer)
27
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 28, 1998, on our review of interim
consolidated financial information of Protective Life Corporation and
subsidiaries for the period ended June 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, Form S-3, and
Form S-4. 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
August 14, 1998
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of Protectove Life Corporation and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> JUN-30-1998 Jun-30-1997
<DEBT-HELD-FOR-SALE> 6,400,684 5,216,866
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 13,131 24,425
<MORTGAGE> 1,484,075 1,737,542
<REAL-ESTATE> 11,063 12,072
<TOTAL-INVEST> 8,248,916 7,427,491
<CASH> 4,594 7,768
<RECOVER-REINSURE> 614,608 442,759
<DEFERRED-ACQUISITION> 675,495 621,445
<TOTAL-ASSETS> 11,023,216 9,480,662
<POLICY-LOSSES> 3,527,827 3,115,898
<UNEARNED-PREMIUMS> 393,141 249,499
<POLICY-OTHER> 0 0
<POLICY-HOLDER-FUNDS> 189,506 167,479
<NOTES-PAYABLE> 154,958 131,100
0 0
0 0
<COMMON> 33,336<F1> 33,336<F1>
<OTHER-SE> 779,137 628,796
<TOTAL-LIABILITY-AND-EQUITY> 11,023,216 9,480,662
304,018 247,571
<INVESTMENT-INCOME> 310,655 267,805
<INVESTMENT-GAINS> 2,034 725
<OTHER-INCOME> 32,665 13,668
<BENEFITS> 373,800 332,832
<UNDERWRITING-AMORTIZATION> 58,269 39,045
<UNDERWRITING-OTHER> 111,789 75,143
<INCOME-PRETAX> 105,514 82,749
<INCOME-TAX> 36,930 28,135
<INCOME-CONTINUING> 62,535<F2> 52,313<F3>
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 62,535 52,313
<EPS-PRIMARY> 1.00<F1> 0.84<F1>
<EPS-DILUTED> 0.99<F1> 0.83<F1>
<RESERVE-OPEN> 0 0
<PROVISION-CURRENT> 0 0
<PROVISION-PRIOR> 0 0
<PAYMENTS-CURRENT> 0 0
<PAYMENTS-PRIOR> 0 0
<RESERVE-CLOSE> 0 0
<CUMULATIVE-DEFICIENCY> 0 0
<FN>
<F1>Reflects two for one stock split effective April 1, 1998.
<F2>Net of minority interest in income of consolidated subsidiaries of $6,049.
<F3>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, 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 all aspects of the insurance business
including premium rates, marketing practices, advertising, policy forms, and
capital
<PAGE>
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. Congress is currently reviewing
certain proposals contained in President Clinton's Fiscal Year 1999 Budget
which, if enacted, would adversely impact the tax treatment of variable annuity
and certain other life 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
<PAGE>
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 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 to work on the year 2000 problem in 1995 and has
developed and has 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. Substantial resources are being devoted to this effort; however, the
total costs to develop and implement these plans are not expected to be
material. 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 majority of the modifications necessary for the Company's mainframe
systems to be able to process transactions dated beyond 1999 have been
completed. The Company currently anticipates that its remaining systems with
Year 2000 issues will be 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.
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 determine the Year 2000 readiness of
critical vendors and business partners.
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.
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
<PAGE>
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.
