- --------------------------------------------------------------------------------
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, 1999
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 6,
1999: 64,502,092 shares.
<PAGE>
PROTECTIVE LIFE CORPORATION
INDEX
Item 1. Financial Statements:
Report of Independent Accountants
Consolidated Condensed Statements of Income for the Three and Six
Months ended June 30, 1999 and 1998 (unaudited)
Consolidated Condensed Balance Sheets as of June 30, 1999
(unaudited) and December 31, 1998
Consolidated Condensed Statements of Cash Flows for the
Six Months ended June 30, 1999 and 1998 (unaudited)
Notes to Consolidated Condensed Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K
Signature
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Share Owners
Protective Life Corporation
Birmingham, Alabama
We have reviewed the accompanying consolidated condensed balance sheet of
Protective Life Corporation and subsidiaries as of June 30, 1999, and the
related consolidated condensed statements of income for the three-month and
six-month periods ended June 30, 1999 and 1998 and consolidated condensed
statements of cash flows for the six-month periods ended June 30, 1999 and 1998.
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 interim financial statements referred to
above for them to be in conformity with generally accepted accounting
principles.
We previously audited in accordance with generally accepted auditing standards,
the consolidated balance sheet as of December 31, 1998, and the related
consolidated statements of income, share-owners' equity, and cash flows for the
year then ended (not presented herein), and in our report dated February 11,
1999, 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, 1998, is fairly stated
in all material respects in relation to the consolidated balance sheet from
which it has been derived.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Birmingham, Alabama
July 27, 1999
<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
---------------------------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
REVENUES
<S> <C> <C> <C> <C>
Premiums and policy fees $326,805 $258,524 $642,174 $501,356
Reinsurance ceded (130,345) (103,691) (248,297) (197,338)
-------- -------- -------- --------
Premiums and policy fees, net of reinsurance ceded 196,460 154,833 393,877 304,018
Net investment income 170,818 153,006 333,253 310,655
Realized investment gains (losses) (682) 2,023 644 2,034
Other income 25,244 19,150 43,247 32,665
--------- --------- --------- --------
391,840 329,012 771,021 649,372
-------- -------- -------- --------
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance ceded:
three months: 1999 - $77,085; 1998 - $82,964
six months: 1999 - $157,523; 1998 - $126,727) 217,719 186,076 430,812 373,800
Amortization of deferred policy acquisition costs 28,274 33,434 59,226 58,269
Other operating expenses (net of reinsurance ceded:
three months: 1999 - $36,941; 1998 - $34,239
six months: 1999 - $69,371; 1998 - $65,948) 81,420 54,014 154,607 111,789
--------- --------- -------- --------
327,413 273,524 644,645 543,858
-------- -------- -------- --------
INCOME BEFORE INCOME TAX 64,427 55,488 126,376 105,514
Income tax expense 23,195 19,921 45,495 36,930
--------- -------- -------- ---------
INCOME BEFORE MINORITY INTEREST AND
EXTRAORDINARY LOSS 41,232 35,567 80,881 68,584
Minority interest in net income
of consolidated subsidiaries 3,024 3,025 6,049 6,049
--------- --------- -------- ---------
INCOME BEFORE EXTRAORDINARY LOSS 38,208 32,542 74,832 62,535
Extraordinary loss on early extinguishment of debt 1,763 1,763
--------- ------------ --------- ------------
NET INCOME $ 36,445 $ 32,542 $ 73,069 $ 62,535
======== ======== ======== ========
EARNINGS PER SHARE - BASIC
Income before extraordinary loss $ .58 $ .52 $ 1.14 $ 1.00
Extraordinary loss .03 .03
---------- ------------ ---------- ------------
Net income $ .55 $ .52 $ 1.11 $ 1.00
========== ========== ========= =========
EARNINGS PER SHARE - DILUTED
Income before extraordinary loss $ .57 $ .52 $ 1.13 $ .99
Extraordinary loss .03 .03
--------- ------------ ---------- ------------
Net income $ .54 $ .52 $ 1.10 $ .99
========= ========== ========= ==========
DIVIDENDS PAID PER SHARE $ .12 $ .11 $ .23 $ .21
========= ========== ========== ==========
Average shares outstanding - basic 65,519,483 62,704,433 65,504,726 62,655,854
Average shares outstanding - diluted 66,189,219 63,295,035 66,132,684 63,260,798
</TABLE>
See notes to consolidated condensed financial statements
<PAGE>
<TABLE>
<CAPTION>
PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
JUNE 30 DECEMBER 31
1999 1998
---------------------------------------------
ASSETS (Unaudited)
Investments:
<S> <C> <C>
Fixed maturities $ 6,240,948 $ 6,437,756
Equity securities 29,707 12,258
Mortgage loans on real estate 1,949,662 1,622,903
Investment real estate, net 16,339 14,868
Policy loans 232,316 232,670
Other long-term investments 71,708 69,906
Short-term investments 106,824 216,249
------------ ------------
Total investments 8,647,504 8,606,610
Cash 53,029 9,486
Accrued investment income 108,904 102,359
Accounts and premiums receivable, net 62,700 40,794
Reinsurance receivables 846,738 756,370
Deferred policy acquisition costs 914,151 841,425
Goodwill, net 201,186 202,615
Property and equipment, net 57,688 50,585
Other assets 70,240 76,211
Assets related to separate accounts
Variable annuity 1,528,316 1,285,952
Variable universal life 24,533 13,606
Other 3,437 3,482
-------------- --------------
$12,518,426 $11,989,495
============== ==============
LIABILITIES
Policy liabilities and accruals $4,800,501 $ 4,534,461
Stable value contract account balances 2,792,768 2,691,697
Annuity account balances 1,532,954 1,519,820
Other policyholders' funds 125,597 222,704
Other liabilities 434,718 327,108
Accrued income taxes (14,776) (15,200)
Deferred income taxes (30,625) 44,636
Debt 274,350 172,035
Liabilities related to separate accounts
Variable annuity 1,528,316 1,285,952
Variable universal life 24,533 13,606
Other 3,437 3,482
-------------- --------------
11,471,773 10,800,301
------------ -----------
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
8.25% Trust Originated Preferred Securities 75,000 75,000
6.5% FELINE PRIDES 115,000 115,000
------------- -------------
190,000 245,000
------------- -------------
SHARE-OWNERS' 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 34,667 34,667
Shares authorized: 160,000,000
Shares issued: 69,333,117
Additional paid-in capital 256,057 254,705
Treasury stock (1999 - 4,831,025 shares; 1998 - 4,898,100 shares) (12,960) (13,140)
Stock held in trust (1999 -10,950 shares) (366)
Unallocated stock in Employee Stock Ownership Plan
(1999 - 1,220,534 shares; 1998 -1,291,194 shares) (4,043) (4,277)
Retained earnings 675,426 617,182
Accumulated other comprehensive income
Net unrealized gains (losses) on investments
(net of income tax: 1999 - $(49,607); 1998 - $29,646) (92,128) 55,057
-------------- --------------
856,653 944,194
-------------- --------------
$12,518,426 $11,989,495
============== ==============
</TABLE>
See notes to consolidated condensed financial statements
<PAGE>
<TABLE>
<CAPTION>
PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
SIX MONTHS ENDED
JUNE 30
------------------------------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 73,069 $ 62,535
Adjustments to reconcile net income to net cash provided by
operating activities:
Realized investment gains (644) (2,034)
Amortization of deferred policy acquisition costs 59,226 58,269
Capitalization of deferred policy acquisition costs (110,884) (103,844)
Depreciation expense 4,699 3,908
Deferred income taxes 3,990 (16,725)
Accrued income taxes 424 (5,091)
Amortization of goodwill 1,429 542
Interest credited to universal life and investment products 162,794 166,829
Policy fees assessed on universal life and investment products (73,423) (67,322)
Change in accrued investment income and other receivables (118,818) (13,206)
Change in policy liabilities and other policyholders' funds
of traditional life and health products 81,400 332,756
Change in other liabilities 107,610 (37,502)
Other (net) (300) (23,800)
------------- ------------
Net cash provided by operating activities 190,572 355,315
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reductions of investments
Investments available for sale 1,978,571 4,986,996
Other 144,736 94,343
Sale of investments
Investments available for sale 181,712 306,944
Other 3,368 124,129
Cost of investments acquired
Investments available for sale (2,110,002) (5,441,463)
Other (478,758) (264,455)
Purchase of property and equipment (11,638) (4,294)
Sale of property and equipment 126 19
-----------------------------
Net cash used in investing activities (291,885) (197,781)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings under line of credit arrangements and debt 2,124,717 339,500
Principal payments on line of credit arrangements and debt (2,022,402) (304,500)
Payment of preferred securities (55,000)
Dividends to share owners (14,825) (12,974)
Investment product deposits and changes in universal life deposits 659,108 459,471
Investment product withdrawals (546,742) (681,939)
------------ ------------
Net cash provided by (used in) financing activities 144,856 (200,442)
------------ ------------
INCREASE (DECREASE) IN CASH 43,543 (42,908)
CASH AT BEGINNING OF PERIOD 9,486 47,502
------------- -------------
CASH AT END OF PERIOD $ 53,029 $ 4,594
============ =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period:
Interest on debt $ 6,860 3,264
Income taxes $ 30,243 $ 45,607
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Reissuance of treasury stock to ESOP $ 199
Unallocated stock in ESOP $ 264 $ 315
Reissuance of treasury stock $ 1,500 $ 3,098
Acquisitions
Assets acquired $ 3,398
Liabilities assumed (347)
Reissuance of treasury stock (3,005)
--------------
Net $ 46
==============
</TABLE>
See notes to consolidated condensed financial statements
<PAGE>
PROTECTIVE LIFE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements
of Protective Life Corporation (the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the disclosures required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation have been included. Operating results for the
six month period ended June 30, 1999, are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999. 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, 1998.
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 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 or
alternatively in arbitration. Although the outcome of any such litigation or
<PAGE>
arbitration 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
On April 29, 1997, a special purpose finance subsidiary of the Company,
PLC Capital Trust I issued $75 million of 8.25% Trust Originated Preferred
Securities ("TOPrS(SM)"). The 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 8.25% TOPrS, constitutes a full and
unconditional guarantee by the Company of PLC Capital Trust I's obligations with
respect to the 8.25% TOPrS.
PLC Capital Trust I was formed solely to issue securities and use the
proceeds thereof to purchase subordinated debentures of the Company. 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 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 Trust
I during any such extended interest payment period. 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 3.5 million shares if the price of the Company's Common Stock is
greater than or equal to $32.52 to approximately 4.3 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 the 6.5% TOPrS which remain outstanding
after February 16, 2001, will be reset by a formula specified in the agreement.
The 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".
<PAGE>
NOTE D - EXTRAORDINARY LOSS - EARLY REDEMPTION OF MONTHLY INCOME
PREFERRED SECURITIES
In 1994 a special purpose 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 June 30, 1999, the Company caused PLC
Capital to redeem the $55 million of MIPS. In a related transaction the Company
redeemed its $69.6 million of Subordinated Debentures which were held by PLC
Capital. The redemption of the Subordinated Debentures resulted in an
extraordinary loss of $1.8 million. The extraordinary loss was comprised
primarily of unamortized deferred debt issue costs and losses related to the
termination of related interest rate swap agreements, net of an income tax
benefit of $0.9 million.
<PAGE>
NOTE E - OPERATING SEGMENTS
The Company operates seven divisions whose principal strategic focuses
can be grouped into three general categories: life insurance, specialty
insurance products and retirement savings and investment products. 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, 1999
---------------------------------------------------------------------------------
(In Thousands)
SPECIALTY INSURANCE
LIFE INSURANCE PRODUCTS
Dental and
Individual Consumer Financial
Life West Coast Acquisitions Benefits Institutions
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Premiums and policy fees $130,663 $37,649 $ 80,032 $242,543 $139,864
Reinsurance ceded (79,143) (26,269) (16,995) (36,027) (89,863)
--------- ------- -------- --------- ----------
Net of reinsurance ceded 51,520 11,380 63,037 206,516 50,001
Net investment income 30,314 37,158 66,197 8,941 11,578
Realized investment gains (losses) 0 0 0 0 0
Other income 21,533 484 (9) 2,349 11,542
--------- --------- ------------ --------- ---------
Total revenues 103,367 49,022 129,225 217,806 73,121
-------- ------- -------- -------- ---------
Benefits and settlement expenses 37,137 31,466 65,969 139,698 24,938
Amortization of deferred policy
acquisition costs 17,569 2,512 12,497 5,035 11,249
Other operating expenses 31,476 2,676 14,790 56,471 26,419
-------- -------- --------- --------- ---------
Total benefits and expenses 86,182 36,654 93,256 201,204 62,606
-------- -------- --------- --------- ---------
Income before income tax 17,185 12,368 35,969 16,602 10,515
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
Stable Corporate
Value Investment and Total
Products Products Other Adjustments Consolidated
------------------------------------------------------------------------------
Premiums and policy fees $11,331 $ 92 $642,174
Reinsurance ceded 0 0 (248,297)
---------- --------- --------
Net of reinsurance ceded 11,331 92 393,877
Net investment income $102,951 51,938 24,176 333,253
Realized investment gains (losses) 222 892 0 $ (470) 644
Other income 0 4,752 2,596 43,247
----------- -------- ------- ---------- ---------
Total revenues 103,173 68,913 26,864 (470) 771,021
-------- ------- ------- -------- --------
Benefits and settlement expenses 86,835 42,432 2,337 430,812
Amortization of deferred policy
acquisition costs 382 9,982 0 59,226
Other operating expenses 1,656 10,002 20,423 (9,306) 154,607
---------- ------- ------- ------- --------
Total benefits and expenses 88,873 62,416 22,760 (9,306) 644,645
--------- ------- ------- ------- --------
Income before income tax 14,300 6,497 4,104 126,376
Income tax expense 45,495 45,495
Minority interest 6,049 6,049
Extraordinary loss 1,763 1,763
---------
Net income $ 73,069
========
<PAGE>
Operating Segment Income for the
Six Months Ended June 30, 1998
---------------------------------------------------------------------------------
(In Thousands)
SPECIALTY INSURANCE
LIFE INSURANCE PRODUCTS
Dental and
Individual Consumer Financial
Life West Coast Acquisitions Benefits Institutions
--------------------------------------------------------------------------------
Premiums and policy fees $108,782 $36,057 $ 56,009 $155,394 $136,087
Reinsurance ceded (41,837) (23,005) (7,760) (46,972) (77,764)
--------- -------- --------- --------- ---------
Net of reinsurance ceded 66,945 13,052 48,249 108,422 58,323
Net investment income 27,060 31,142 52,176 7,601 11,597
Realized investment gains (losses)
Other income 16,377 1,600 1,445 9,655
--------- ---------- --------- --------- ---------
Total revenues 110,382 44,194 102,025 117,468 79,575
-------- ------- -------- -------- --------
Benefits and settlement expenses 54,273 29,238 56,892 74,068 27,385
Amortization of deferred policy
acquisition costs 15,194 2,188 9,638 5,487 16,181
Other operating expenses 26,264 2,815 11,698 29,882 26,692
-------- ------- -------- --------- --------
Total benefits and expenses 95,731 34,241 78,228 109,437 70,258
-------- ------- -------- -------- -------
Income before income tax 14,651 9,953 23,797 8,031 9,317
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
Stable Corporate
Value Investment and Total
Products Products Other Adjustments Consolidated
-----------------------------------------------------------------------------------
Premiums and policy fees $ 8,899 $ 128 $501,356
Reinsurance ceded 0 0 (197,338)
------------ --------- ---------- --------
Net of reinsurance ceded 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 income 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>
<PAGE>
<TABLE>
<CAPTION>
Operating Segment Assets
June 30, 1999
---------------------------------------------------------------------------------
(In Thousands)
SPECIALTY INSURANCE
LIFE INSURANCE PRODUCTS
Dental and
Individual Consumer Financial
Life West Coast Acquisitions Benefits Institutions
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investments and other assets $1,136,353 $1,243,749 $1,554,460 $281,301 $745,618
Deferred policy acquisition costs
and goodwill 337,210 170,328 242,850 223,629 41,576
----------- ----------- ----------- -------- ---------
Total assets $1,473,563 $1,414,077 $1,797,310 $504,930 $787,194
========== ========== ========== ======== ========
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
Stable Corporate
Value Investment and Total
Products Products Other Consolidated
-----------------------------------------------------------------------------
Investments and other assets $2,909,075 $2,792,264 $740,269 $11,403,089
Deferred policy acquisition costs
and goodwill 1,382 98,245 117 1,115,337
------------ ------------ ---------- ------------
Total assets $2,910,457 $2,890,509 $740,386 $12,518,426
========== ========== ======== ===========
Operating Segment Assets
December 31, 1998
---------------------------------------------------------------------------------
(In Thousands)
SPECIALTY INSURANCE
LIFE INSURANCE PRODUCTS
Dental and
Individual Consumer Financial
Life West Coast Acquisitions Benefits Institutions
-------------------------------------------------------------------------------
Investments and other assets $1,083,388 $1,149,642 $1,600,123 $272,586 $655,684
Deferred policy acquisition costs
and goodwill 301,941 144,455 255,347 223,953 41,710
----------- ----------- ----------- -------- ---------
Total assets $1,385,329 $1,294,097 $1,855,470 $496,539 $697,394
========== ========== ========== ======== ========
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
Stable Corporate
Value Investment and Total
Products Products Other Consolidated
-----------------------------------------------------------------------------
Investments and other assets $2,869,304 $2,545,364 $769,364 $10,945,455
Deferred policy acquisition costs
and goodwill 1,448 75,177 9 1,044,040
------------ ------------ ------------ ------------
Total assets $2,870,752 $2,620,541 $769,373 $11,989,495
========== ========== ======== ===========
</TABLE>
<PAGE>
NOTE F - 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, 1999 and for the six months then ended, the Company's
life insurance subsidiaries had consolidated share-owner's equity and net income
prepared in conformity with statutory reporting practices of $561.3 million and
$44.4 million, respectively.
NOTE G - 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
share-owners' 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 share-owners' equity will
fluctuate significantly as interest rates change.
The Company's balance sheets at June 30, 1999 and December 31, 1998,
prepared on the basis of reporting investments at amortized cost rather than at
market values, are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Total investments $ 8,793,627 $ 8,501,646
Deferred policy acquisition costs 909,572 857,948
All other assets 2,956,771 2,545,197
------------ ------------
$12,659,970 $11,904,791
=========== ===========
Deferred income taxes $ 18,789 $ 12,798
All other liabilities 11,502,400 10,757,856
------------ -----------
11,521,189 10,770,654
Guaranteed preferred beneficial
interests in Company's sub-
ordinated debentures 190,000 245,000
Share-owners' equity 948,781 889,137
------------- -------------
$12,659,970 $11,904,791
=========== ===========
</TABLE>
NOTE H - ACCOUNTING POLICIES FOR DERIVATIVE FINANCIAL INSTRUMENTS
The Company does not currently use derivative financial instruments for
trading purposes. Combinations of options and futures contracts are sometimes
used as hedges against changes in interest rates for certain investments,
primarily outstanding mortgage loan commitments, mortgage loans and
mortgage-backed securities, and liabilities arising from interest-sensitive
products. Realized investment gains and losses on such contracts are deferred
and amortized over the life of the hedged asset. No realized investment gains or
losses were deferred in the first six months of 1999
<PAGE>
or the full year of 1998. At June 30, 1999, options with a notional amount of
$375 million were in a $0.6 million net unrealized loss position.
The Company uses interest rate swap contracts, swaptions (options to
enter into interest rate swap contracts), caps, and floors to convert certain
investments from a variable to a fixed rate of interest and from a fixed rate of
interest to a variable rate of interest, and 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. Swap contracts are also used to alter the effective durations
of assets and liabilities. At June 30, 1999, interest rate swap contracts,
swaptions, caps and floors with a notional amount of $949 million were in an
$1.5 million net unrealized gain position. During the six months ended June 30,
1999, a $5.4 million loss was recognized on interest rate swap contracts, with a
notional amount of $130.0 million related to the Company's MIPS and 8.25% TOPrS.
NOTE I - 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.
Net income per share - diluted is adjusted 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.
A reconciliation of net income and adjusted net income, and basic and
diluted average shares outstanding for the six months ended June 30 is
summarized as follows:
<TABLE>
<CAPTION>
RECONCILIATION OF NET INCOME AND
AVERAGE SHARES OUTSTANDING
June 30
------------------------------------
1999 1998
---- ----
<S> <C> <C>
Net income $73,069 $62,535
Dividends on FELINE PRIDES (1) (1)
--------- -------
Adjusted net income $73,069 $62,535
======= =======
Average shares issued and outstanding 64,461,568 61,758,403
Issuable under various deferred compensation plans 1,043,158 897,451
----------- -----------
Average shares outstanding - basic 65,504,726 62,655,854
Stock appreciation rights 192,740 156,909
Issuable under various other stock-based compensation plans 435,218 448,035
FELINE PRIDES stock purchase contracts (1) (1)
---------- ----------
Average shares outstanding - diluted 66,132,684 63,260,798
========== ==========
</TABLE>
(1) Excluded because the effect is anti-dilutive.
<PAGE>
NOTE J - COMPREHENSIVE INCOME (LOSS)
The following table sets forth the Company's comprehensive income
(loss) for the six months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Six Months Ended
June 30
----------------------------------
(In Thousands)
1999 1998
---- ----
<S> <C> <C>
Net income $73,069 $62,535
Increase (decrease) in net unrealized gains
on investments (net of income tax:
1999 - $(79,028); 1998 - $1,306) (146,766) 2,426
Reclassification adjustment for amounts included
in net income (net of income tax:
1999 - $(225); 1998 - $(712)) (419) (1,322)
---------- --------
Comprehensive income (loss) $(74,116) $63,639
========= =======
</TABLE>
NOTE K - ACQUISITIONS
In September 1998, the Company acquired United Dental Care, Inc.
("United Dental Care"). The transaction has been accounted for as a purchase,
and the results of the transaction have been included in the accompanying
financial statements since its effective date.
Summarized below are the consolidated results of operations for the six
months ended June 30, 1998, on an unaudited pro forma basis, as if the United
Dental Care acquisition had occurred as of January 1, 1998. The pro forma
information is based on the Company's consolidated results of operations for the
six months ended June 30, 1998, and on data provided by United Dental Care,
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 transaction occurred on the basis assumed above nor
are they indicative of results of the future operations of the combined
enterprises.
Six Months Ended
June 30, 1998
-----------------
(In Thousands)
(Unaudited)
Total revenues $ 732,451
Net income $ 63,337
Net income per share-basic $ 0.97
Net income per share-dilute $ 0.96
<PAGE>
NOTE L - STOCK HELD IN TRUST
The Company sponsors a deferred compensation plan for certain of its
agents in the form of a trust. Company stock owned by the trust is accounted for
as treasury stock under generally accepted accounting principles.
NOTE M - 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 share-owners' equity.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Protective Life Corporation is a holding company whose subsidiaries
provide financial services through the production, distribution, and
administration of insurance and investment products. Founded in 1907, Protective
Life Insurance Company 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 operates seven divisions whose principal strategic focuses
can be grouped into three general categories: life insurance, specialty
insurance products, and retirement savings and investment products. The
Company's Divisions are: Individual Life, West Coast, Acquisitions, Dental and
Consumer Benefits (Dental), Financial Institutions, Stable Value Products, and
Investment Products. The Company also has an additional business segment which
is Corporate and Other.
The Stable Value Products Division (formerly known as the Guaranteed
Investment Contracts ("GIC") Division) was renamed during the second quarter of
1999 to reflect its broader product offerings and customer base.
This report includes "forward-looking statements" which express the
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, 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, net of reinsurance ("premiums and policy fees") and
the percentage change from the prior period:
<TABLE>
<CAPTION>
PREMIUMS AND POLICY FEES
---------------------------------
SIX MONTHS
ENDED AMOUNT PERCENTAGE
JUNE 30 (IN THOUSANDS) INCREASE
------------- ---------------- ---------------
<S> <C> <C>
1998 $304,018 22.8%
1999 393,877 29.6
</TABLE>
Premiums and policy fees increased $89.9 million or 29.6% in the first
six months of 1999 as compared to the first six months of 1998. Premiums and
policy fees in the Individual Life and West Coast Divisions decreased $15.4
million and $1.7 million, respectively, in the first six months of 1999 as
compared to the same period in 1998 due to increased usage of reinsurance by
these
<PAGE>
Divisions. The coinsurance of a block of policies from Lincoln National
Corporation ("Lincoln National") in October 1998 resulted in a $17.8 million
increase in premiums and policy fees in the Acquisitions Division, whereas
decreases in older acquired blocks resulted in a $3.0 million decrease in
premiums and policy fees. The September 1998 acquisition of United Dental Care,
Inc. ("United Dental Care") resulted in a $69.5 million increase in premiums and
policy fees in the Dental Division. Premiums and policy fees related to the
Dental Division's other businesses increased $28.6 million in the first six
months of 1999 as compared to the same period in 1998. Premiums and policy fees
from the Financial Institutions Division decreased $8.3 million in the first six
months of 1999 as compared to the first six months of 1998 of which $3.5 million
related to the normal decrease in premiums on closed blocks of policies acquired
in prior years. Premiums and policy fees related to the Financial Institutions
Division's other businesses increased only slightly due to the continued use of
reinsurance. The increase in premiums and policy fees from the Investment
Products Division was $2.4 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:
<TABLE>
<CAPTION>
NET INVESTMENT INCOME
SIX MONTHS --------------------------------------
ENDED AMOUNT PERCENTAGE
JUNE 30 (IN THOUSANDS) INCREASE
--------- --------------- -------------
<S> <C> <C> <C>
1998 $310,655 16.0 %
1999 333,253 7.3
</TABLE>
Net investment income in the first six months of 1999 was $22.6 million
or 7.3% higher than the corresponding period of the preceding year primarily due
to increases in the average amount of invested assets. Invested assets have
increased primarily due to acquisitions and due to receiving stable value
contract (guaranteed investment contract and funding agreement) and annuity
deposits.
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. 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:
<TABLE>
<CAPTION>
SIX MONTHS REALIZED INVESTMENT
ENDED GAINS
JUNE 30 (IN THOUSANDS)
---------- ---------------------
<S> <C>
1998 $2,034
1999 644
</TABLE>
<PAGE>
Realized investment gains were $0.6 million for the first six months of
1999 compared to $2.0 million for the corresponding period of 1998.
Other Income
The following table sets forth other income for the periods shown:
SIX MONTHS
ENDED OTHER INCOME
JUNE 30 (IN THOUSANDS
-------------- ----------------
1998 $32,665
1999 43,247
Other income consists primarily of revenues of the Company's
broker-dealer subsidiary, fees from variable insurance products, revenues of the
Company's wholly-owned insurance marketing organizations, small noninsurance
subsidiaries and automobile warranty business, and the results of the Company's
joint venture in Hong Kong. Other income in the first six months of 1999 was
$10.6 million higher than the corresponding period of 1998. Revenues from the
Company's broker-dealer subsidiary and automobile warranty business increased
$7.3 million and $5.9 million, respectively, in the first six months of 1999 as
compared to the same period in 1998. Other income from all other sources
decreased $2.6 million in the first six months of 1999 as compared with the
first six months of 1998.
<PAGE>
Income Before Income Tax
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 1999
---- ----
Operating Income (Loss) (1)(2)
Life Insurance
<S> <C> <C>
Individual Life $14,651 $ 17,185
West Coast 9,953 12,368
Acquisitions 23,797 35,969
Specialty Insurance Products
Dental and Consumer Benefits 8,031 16,602
Financial Institutions 9,317 10,515
Retirement Savings and Investment Products
Stable Value Products 15,833 14,078
Investment Products 5,866 6,497
Corporate and Other (2) 7,093 4,104
-------- ---------
Total operating income 94,541 117,318
------- --------
Realized Investment Gains (Losses)
Stable Value Products (59) 222
Investment Products 678 892
Unallocated Realized Investment Gains (Losses) 1,415 (470)
Related Amortization of Deferred Policy Acquisition Costs
Investment Products (367) (892)
--------- ---------
Total net 1,667 (248)
-------- ---------
Income (Loss) Before Income Tax (2)
Life Insurance
Individual Life 14,651 17,185
West Coast 9,953 12,368
Acquisitions 23,797 35,969
Specialty Insurance Products
Dental and Consumer Benefits 8,031 16,602
Financial Institutions 9,317 10,515
Retirement Savings and Investment Products
Stable Value Products 15,774 14,300
Investment Products 6,177 6,497
Corporate and Other(2) 7,093 4,104
Unallocated Realized Investment Gains (Losses) 1,415 (470)
-------- -----------
Total income before income tax $96,208 $117,070
======= ========
(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 $9,306 in the first six months of 1999 and
1998. Such minority interest related to payments made on the Company's
MIPSsm, 8.25% TOPrSsm, and FELINE PRIDESsm.
</TABLE>
<PAGE>
The Individual Life Division's pretax operating income was $17.2 million
in the first six months of 1999 compared to $14.7 million in the same period of
1998. The Division's 1999 results include a $2.0 million loss relating to a
venture to sell term and term-like products through direct response and other
expenses to support future growth. The Division has reinsured most of its
mortality risk, therefore earnings fluctuations due to mortality experience have
been significantly reduced.
West Coast had pretax operating income of $12.4 million for the first
six months of 1999 compared to $10.0 million for the same period last year. This
increase reflects the Division's growth through sales.
Pretax operating income from the Acquisitions Division was $36.0 million
in the first six months of 1999 as compared to $23.8 million in the same period
of 1998. The Division's mortality experience was approximately $3.1 million
better than expected in the first six months of 1999 as compared to being
approximately $2.1 million worse than expected in the first six months of 1998.
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 October 1998, the
Company coinsured a block of policies from Lincoln National resulting in
earnings of $4.2 million in the first six months of 1999.
The Dental Division's pretax operating income was $16.6 million in the
first six months of 1999 compared to $8.0 million in the first six months of
1998. The recent acquisition of United Dental Care contributed earnings of $8.3
million in 1999. The pretax operating earnings of the Division's other dental
businesses increased $0.3 million in the first six months of 1999 as compared to
the same period last year.
Pretax operating income of the Financial Institutions Division was $10.5
million in the first six months of 1999 as compared to $9.3 million last year.
Several of the Division's lines of business improved in the first six months of
1999 as compared to the same period of 1998.
The Stable Value Products Division had pretax operating income of $14.1
million in the first six months of 1999 and $15.8 million in the corresponding
period of 1998. This decrease was primarily due to lower interest rate spreads
which resulted from the Division shortening the duration of its invested assets
in order to better match assets to liabilities. Realized investment gains
associated with this Division in the first six months of 1999 were $0.2 million
as compared to losses of less than $0.1 million in the same period last year. As
a result, total pretax earnings were $14.3 million in the first six months of
1999 compared to $15.8 million for the same period last year.
Investment Products Division pretax operating income was $6.5 million in
the first six months of 1999 compared to $5.9 million in the same period of
1998. The Division had no realized investment gains or losses (net of related
amortization of deferred policy acquisition costs) in the first six months of
1999 as compared to approximately $0.3 million of realized gains in the same
period of 1998. Total pretax earnings were $6.5 million in the first six months
of 1999 as compared to $6.2 million in the same period of 1998.
Earnings from the Corporate and Other segment consist primarily of net
investment income on unallocated capital, interest expense on substantially all
debt, the Company's joint venture in Hong Kong, several small insurance lines of
business, and the operations of several small noninsurance
<PAGE>
subsidiaries. Pretax earnings for this segment decreased $3.0 million in the
first six months of 1999 as compared to the first six months of 1998, primarily
due to the allocation of capital to the United Dental Care acquisition and the
coinsurance of a block of policies from Lincoln National.
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
--------------- ---------------------
1998 35%
1999 36
The effective income tax rate for the full year of 1998 was
approximately 35.3%. Management's estimate of the effective income tax rate for
1999 is 36%. The increase in the effective tax rate primarily relates to
nondeductible goodwill associated with the acquisition of United Dental Care.
Net Income Before Extraordinary Loss
The following table sets forth net income before extraordinary loss and
the net income before extraordinary loss per share for the periods shown, and
the percentage change from the prior period:
<TABLE>
<CAPTION>
Net Income
Six Months ---------------------------------------------------------------------------------
Ended Total Per Share- Percentage Per Share- Percentage
June 30 (In thousands) Basic Increase Diluted Increase
------------- ------------- --------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
1998 $62,535 $1.00 19.1% $ .99 19.3%
1999 73,069 1.11 11.0 1.10 11.1
</TABLE>
Compared to the same period in 1998, net income per share-diluted in
the first six months of 1999 increased 11.1%, reflecting improved operating
earnings in the Individual Life, West Coast, Acquisitions, Dental, Financial
Institutions, and Investment Products Divisions and higher realized investment
gains (net of related amortization of deferred policy acquisition costs), which
were partially offset by lower operating earnings in the Stable Value Products
Division and the Corporate and Other segment.
Extraordinary Loss
On June 30, 1999, the Company caused PLC Capital L.L.C. ("PLC
Capital"), a special purpose finance subsidiary, to redeem its $55 million of 9%
Cumulative Monthly Income Preferred Securities, Series A ("MIPS"). In a related
transaction, the Company redeemed its $69.6 million of Subordinated Debentures
which were held by PLC Capital. The redemption resulted in an extraordinary loss
of $1.8 million or $0.03 per share on both a basic and diluted basis. The
extraordinary loss was comprised primarily of unamortized deferred debt issue
costs and losses related to the termination of related interest rate swap
agreements, net of an income tax benefit of $0.9 million.
<PAGE>
Recently Issued Accounting Standards
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 will require the Company to
report derivative financial instruments on the balance sheet and to carry such
derivatives at fair value. The fair values of derivatives increase or decrease
as interest rates change. Under SFAS No. 133, changes in fair value are reported
as a component of net income or as a change to share-owners' equity, depending
upon the nature of the derivative. Although the adoption of SFAS No. 133 will
not affect the Company's operations, adoption will introduce volatility into the
Company's reported net income and share-owners' equity as interest rates change.
SFAS No. 133 is effective January 1, 2001.
The FASB has also issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise," and the American Institute of Certified Public
Accountants has issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." The adoption of these
accounting standards in 1999 is not expected to have a material effect on the
Company's financial condition.
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.
INVESTMENTS
The Company generally purchases its investments with the intent to hold
to maturity by purchasing investments that match future cash flow needs.
However, the Company may sell any of its investments to maintain proper matching
of assets and liabilities. Accordingly, the Company has classified its fixed
maturities and certain other securities as "available for sale."
The 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, 1999, the fixed maturity investments (bonds and redeemable preferred
stocks) had a market value of $6,240.9 million, which is 2.3% below amortized
cost (less allowances for uncollectible amounts on investments) of $6,386.9
million. The Company had $1,949.0 million in mortgage loans at June 30, 1999.
While the Company's mortgage loans do not have quoted market values, at June 30,
1999, the Company estimates the market value of its mortgage loans to be
$1,998.3 million (using discounted cash flows from the next call date) which is
2.5% above amortized cost. 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.
<PAGE>
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 June 30, 1999, approximately $535.2 million of the Company's
mortgage loans have this participation feature.
At June 30, 1999, delinquent mortgage loans and foreclosed real estate
were 0.2% of assets. Bonds rated less than investment grade were 2.0% 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 $21.7 million at June 30,
1999.
Policy loans at June 30, 1999, were $232.3 million, a decrease of $0.4
million from December 31, 1998. Policy loan rates are generally in the 4.5% to
8.0% range; such rate is at least equal to the assumed interest rates used for
future policy benefits.
In the ordinary course of its commercial mortgage lending operations,
the Company will commit to provide a mortgage loan before the property to be
mortgaged has been built or acquired. The mortgage loan commitment is a
contractual obligation to fund a mortgage loan when called upon by the borrower.
The commitment is not recognized in the Company's financial statements until the
commitment is actually funded. The mortgage loan commitment contains terms,
including the rate of interest. At June 30, 1999, the Company had outstanding
mortgage loan commitments of $872.3 million.
LIABILITIES
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. Certain stable value and 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.
At June 30, 1999, the Company had policy liabilities and accruals of
$4.8 billion. The Company's life insurance products have a weighted average
minimum credited interest rate of approximately 4.3%.
At June 30, 1999, the Company had $2.8 billion of stable value contract
account balances and $1.5 billion of annuity account balances.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company does not currently use derivative financial instruments for
trading purposes. Combinations of options and futures contracts are sometimes
used as hedges against changes in interest rates for certain investments,
primarily outstanding mortgage loan commitments, mortgage loans and
mortgage-backed securities, and liabilities arising from interest-sensitive
products. Realized investment gains and losses on such contracts are deferred
and amortized over the life of the hedged asset. No realized investment gains or
losses were deferred in 1999 or 1998. At June 30,
<PAGE>
1999, options with a notional amount of $375 million were in a $0.6 million net
unrealized loss position.
The Company uses interest rate swap contracts, swaptions (options to
enter into interest rate swap contracts), caps, and floors to convert certain
investments from a variable to a fixed rate of interest and from a fixed rate of
interest to a variable rate of interest, and 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. Swap contracts are also used to alter the effective durations
of assets and liabilities. At June 30, 1999, interest rate swap contracts,
swaptions, caps and floors with a notional amount of $949 million were in an
$1.5 million net unrealized gain position. During the six months ended June 30,
1999, a $5.4 million loss was recognized on interest rate swap contracts, with a
notional amount of $130.0 million related to the Company's MIPS and 8.25% TOPrS.
ASSET/LIABILITY MANAGEMENT
The Company believes its asset/liability management programs and
procedures and certain product features provide significant protection for the
Company against the effects of changes in interest rates. However, approximately
one-fourth of the Company's liabilities relate to products (primarily whole life
insurance) the profitability of which may be affected by changes in interest
rates. The effect of such changes in any one year is not expected to be
material. Additionally, the Company believes its asset/liability management
programs and procedures provide sufficient liquidity to enable it to fulfill its
obligation to pay benefits under its various insurance and deposit contracts.
The Company's asset/liability management programs and procedures
involve the monitoring of asset and liability durations for various product
lines; cash flow testing under various interest rate scenarios; and the
continuous rebalancing of assets and liabilities with respect to yield, risk,
and cash flow characteristics. It is the Company's policy to generally maintain
asset and liability durations within one half year of one another, although from
time to time a broader interval may be allowed.
Cash outflows related to stable value contracts (primarily maturing
contracts and expected withdrawals) were approximately $1.0 billion during 1998.
Cash outflows related to stable value contracts are estimated to be
approximately $0.9 billion in 1999. The Company's asset/liability management
programs and procedures take into account maturing contracts and expected
withdrawals. Accordingly, the Company does not expect stable value contract
related cash outflows to have an unusual effect on the future operations and
liquidity of the Company.
The life insurance subsidiaries were committed at June 30, 1999, to
fund mortgage loans and to purchase fixed maturity and other long-term
investments in the amount of $1.0 billion. The Company's subsidiaries held
$159.1 million in cash and short-term investments at June 30, 1999. Protective
Life Corporation had an additional $0.8 million in cash available for general
corporate purposes.
While the Company generally anticipates that the cash flows of its
subsidiaries will be sufficient to meet their investment commitments and
operating cash needs, the Company recognizes that investment commitments
scheduled to be funded may from time to time exceed the funds then available.
Therefore, the Company has arranged sources of credit for its insurance
subsidiaries to use when needed. The Company expects that the rate received on
its investments will equal or exceed
<PAGE>
its borrowing rate. Additionally, the Company may from time to time sell
short-duration Stable Value Products to complement its cash management
practices.
CAPITAL
At June 30, 1999, Protective Life Corporation had $30.0 million
outstanding under its $70.0 million revolving line of credit and an additional
$84.0 million of bank borrowings at a weighted average interest rate of 5.6%.
Included in these bank borrowings is a $55.0 million term loan borrowed on June
30, 1999, in order to redeem the MIPS. The remaining increase in borrowing by
Protective Life Corporation since December 31, 1998, was used for general
corporate purposes. In addition, Protective Life Insurance Company had borrowed
$37.0 million at June 30, 1999, at an interest rate of 5.3%.
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, 1998, approximately $275 million of
consolidated share-owners' equity, excluding net unrealized losses on
investments, represented net assets of the Company's insurance subsidiaries that
cannot be transferred to Protective Life Corporation. 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.
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 debt securities,
preferred and common stock, and stock purchase contracts of Protective Life
Corporation, and additional preferred securities of special purpose finance
subsidiaries under the Securities Act of 1933 on a delayed (or shelf) basis.
A life insurance company's statutory capital is computed according to
rules prescribed by the National Association of Insurance Commissioners
("NAIC"), as modified by the insurance company's 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.
OTHER DEVELOPMENTS
The NAIC has adopted the Codification of Statutory Accounting
Principles (Codification). The Codification changes current statutory accounting
rules in several areas. The Company has not
<PAGE>
estimated the potential effect the Codification will have on the statutory
capital of the Company's insurance subsidiaries. The Codification has been
proposed to become effective January 1, 2001.
The NAIC has adopted a model regulation, commonly referred to as
"Triple X" (i.e., roman numeral XXX), for universal life and level premium
term-like insurance products. The Company is currently assessing the impact of
Triple X on its products and what changes to the products might be necessary in
response to Triple X.
Under insurance guaranty fund laws in most states, insurance companies
doing business in a participating state can be assessed up to prescribed limits
for policyholder losses incurred by insolvent companies. The Company does not
believe that any such assessments will be materially different from amounts
already reflected in the financial statements.
The Company is not aware of any material pending or threatened
regulatory action with respect to the Company or any of its subsidiaries.
The United States Congress is considering legislation that would
eliminate the estate tax. Life insurance products are often used to fund estate
tax obligations. If the estate tax was eliminated, the demand for certain life
insurance products would be adversely affected.
The United States Congress is also considering legislation that would
permit commercial banks, insurance companies and investment banks to combine.
Some insurers have recently lowered the premium rates for their level
premium term and term-like products. The Company's Individual Life and West
Coast Divisions' results, in part, depend upon their ability to maintain
competitive level premium term and term-like products.
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 or
alternatively in arbitration. Although the outcome of any such litigation or
arbitration 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.
YEAR 2000 DISCLOSURE
Computer hardware and software often denote the year using two digits
rather than four; for example, the year 1999 often is denoted by such hardware
and software as "99." 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
<PAGE>
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. At that time,
the Company identified and assessed the Company's critical mainframe systems,
and prioritized the remediation efforts that were to follow. During 1998 all
other hardware and software, including non-information technology (non-IT)
related hardware and software, were included in the process. The Company's Year
2000 plan includes all subsidiaries.
The Company estimates that Year 2000 remediation is complete for most
of its insurance administration systems and general administration systems. Of
the general administration systems that are not yet remediated, the majority are
new systems that were implemented during 1998 and are scheduled for year 2000
testing in August 1999 with the compliant, tested version to be placed in
production by September 1999. All remediated systems are currently in
production.
Mainframe application remediation was completed December 31, 1998.
Personal computer network hardware, software, and operating systems have been
reviewed, with upgrades implemented where necessary. Remaining Year 2000
personal computer preparations are expected to be completed by September 30,
1999. In March 1999 a personal computer test lab was established to facilitate
client server system testing. That testing is now materially complete and the
lab facility is being used for desktop application testing. With respect to
non-IT equipment and processes, the assessment and remediation is progressing on
schedule and all known issues are expected to be remediated before December 31,
1999.
Future date tests are complete for the majority of the Company's
mission critical systems and are expected to be completed by August 31, 1999.
Integrated tests involve multiple system testing and are used to verify the Year
2000 readiness of interfaces and connectivity across multiple systems. The
Company is using its mainframe computer to simulate a Year 2000 production
environment and to facilitate integrated testing. Current expectations are that
integrated testing will be completed on or before September 30, 1999.
Significant business partners and suppliers that provide products or
services critical to Company operations are being reviewed for year 2000
readiness. To date, no partners or suppliers have reported that they expect to
be unable to continue supplying products and services after January 1, 2000.
The Company cannot specifically identify all of the costs to develop
and implement its Year 2000 plan. The costs of new systems to replace
non-compliant systems have been capitalized in the ordinary course of business.
Other costs have been expensed as incurred. Through June 30, 1999, costs that
have been specifically identified as relating to the Year 2000 problem total
$4.7 million, with an additional $0.5 million estimated to be required to
support continued Year 2000 preparations. The Company's Year 2000 efforts have
not adversely affected its normal procurement and development of information
technology.
Although the Company believes that a process is in place to
successfully address Year 2000 issues, there can be no assurance that the
Company's efforts will be successful, that interactions with
<PAGE>
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.
A formal contingency plan is being prepared for senior management
approval in September 1999. The plan will also be reviewed with the Finance and
Investments Committee of the Company's Board of Directors at their October
meeting. Those systems and functions identified as mission critical are included
in the contingency plan.
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 to be unable to perform critical functions or to otherwise conduct
business.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change from the disclosure in the Company's
1998 Form 10-K.
<PAGE>
PART II
Item 6. Exhibits and Reports on Form 8-K
(a) 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, 1999,
reporting under Item 5 and Item 7 the Company's 1999 first
quarter earnings press release.
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 13, 1999 /s/ Jerry W. DeFoor
---------------------------------
Jerry W. DeFoor
Vice President and Controller,
and Chief Accounting Officer
(Duly authorized officer)
Exhibit 15
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Protective Life Corporation
We are aware that our report dated July 27, 1999, on our review of interim
consolidated financial information of Protective Life Corporation and
subsidiaries for the period ended June 30, 1999, 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.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Birmingham, Alabama
August 13, 1999
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of Protective Life Corporation and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 6,240,948
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 29,707
<MORTGAGE> 1,949,662
<REAL-ESTATE> 16,339
<TOTAL-INVEST> 8,647,504
<CASH> 53,029
<RECOVER-REINSURE> 846,738
<DEFERRED-ACQUISITION> 914,151
<TOTAL-ASSETS> 12,518,426
<POLICY-LOSSES> 4,396,832
<UNEARNED-PREMIUMS> 467,308
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 125,597
<NOTES-PAYABLE> 274,350
0
0
<COMMON> 34,667
<OTHER-SE> 821,986
<TOTAL-LIABILITY-AND-EQUITY> 12,518,426
393,877
<INVESTMENT-INCOME> 333,253
<INVESTMENT-GAINS> 644
<OTHER-INCOME> 43,247
<BENEFITS> 430,812
<UNDERWRITING-AMORTIZATION> 59,226
<UNDERWRITING-OTHER> 154,607
<INCOME-PRETAX> 126,376
<INCOME-TAX> 45,495
<INCOME-CONTINUING> 74,832<F1>
<DISCONTINUED> 0
<EXTRAORDINARY> (1,763)
<CHANGES> 0
<NET-INCOME> 73,069
<EPS-BASIC> 1.11
<EPS-DILUTED> 1.10
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Net of minority interest in income of consolidated subsidiaries of $6,049.
</FN>
</TABLE>
Exhibit 99
to
Form 10-Q
of
Protective Life Corporation
for the six months
ended June 30, 1999
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. Additionally, the United States Congress is considering
legislation that would permit commercial banks, insurance companies and
investment banks to combine.
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
<PAGE>
maintain low unit costs, and its maintenance of strong claims-paying and
financial strength ratings from rating agencies.
The Company competes against other insurance companies and financial
institutions in the origination of commercial mortgage loans.
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. 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
<PAGE>
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 rather than stockholders. The
Company cannot predict the form of any 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. In addition, life insurance products are often used to fund
estate tax obligations. If the estate tax was eliminated, the demand for certain
life insurance products would be adversely affected. The Company cannot predict
what 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 and derivative
financial instruments 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. The Company has also from time to time acquired other
companies and continued to operate them as subsidiaries. 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.
<PAGE>
RELIANCE UPON THE PERFORMANCE OF OTHERS. The Company's results may be
affected by the performance of others because 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 managers, and a portion of
the sales in the Individual Life, West Coast, Dental, and Financial Institutions
Divisions comes from arrangements with unrelated marketing organizations.
YEAR 2000. Computer hardware and software often denote the year using
two digits rather than four; for example, the year 1999 often is denoted by such
hardware and software as "99." 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.
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. The Company's insurance subsidiaries cede insurance to
other insurance companies. However, the 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.
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
<PAGE>
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.
