- -------------------------------------------------------------------------------
FORM 10-Q
------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 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 May 7, 1999:
64,474,339 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
Months ended March 31, 1999 and 1998 (unaudited).....................
Consolidated Condensed Balance Sheets as of March 31, 1999
(unaudited) and December 31, 1998....................................
Consolidated Condensed Statements of Cash Flows for the
Three Months ended March 31, 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........................................
PART II. OTHER INFORMATION:
Item 4. Submission of Matters to a Vote of Security Holders................
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 March 31, 1999, and the
related consolidated condensed statements of income and consolidated condensed
statements of cash flows for the three-month periods ended March 31, 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 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, 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.
PricewaterhouseCoopers LLP
Birmingham, Alabama
April 23, 1999
2
<PAGE>
PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
------------------------
1999 1998
---- ----
<S> <C> <C>
REVENUES
Premiums and policy fees $ 315,369 $242,832
Reinsurance ceded (117,952) (93,647)
--------- ---------
Premiums and policy fees, net of reinsurance ceded 197,417 149,185
Net investment income 162,435 157,649
Realized investment gains 1,326 11
Other income 18,003 13,515
--------- ---------
379,181 320,360
--------- ---------
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance ceded:
1999 - $63,686; 1998 - $57,363) 213,093 187,724
Amortization of deferred policy acquisition costs 30,952 24,835
Other operating expenses (net of reinsurance ceded:
1999 - $30,404; 1998 - $31,709) 73,187 57,755
--------- ---------
317,232 270,334
INCOME BEFORE INCOME TAX AND MINORITY
INTEREST 61,949 50,026
Income tax expense 22,301 17,009
--------- --------
INCOME BEFORE MINORITY INTEREST 39,648 33,017
Minority interest in net income
of consolidated subsidiaries 3,025 3,024
---------- --------
NET INCOME $ 36,623 $ 29,993
========= ========
NET INCOME PER SHARE - BASIC $ .56 $ .48
=========== ==========
NET INCOME PER SHARE - DILUTED $ .56 $ .47
=========== ==========
DIVIDENDS PAID PER SHARE $ .11 $ .10
=========== ==========
Average shares outstanding - basic 65,489,805 62,606,735
Average shares outstanding - diluted 66,075,522 63,226,180
</TABLE>
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
3
<PAGE>
<TABLE>
<CAPTION>
PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
MARCH 31 DECEMBER 31
1999 1998
-------------------------------------
ASSETS (Unaudited)
<S> <C> <C>
Investments:
Fixed maturities $ 6,361,736 $ 6,437,756
Equity securities 27,023 12,258
Mortgage loans on real estate 1,782,272 1,622,903
Investment real estate, net 15,160 14,868
Policy loans 231,977 232,670
Other long-term investments 75,984 69,906
Short-term investments 94,153 216,249
------------- ------------
Total investments 8,588,305 8,606,610
Cash 49,348 9,486
Accrued investment income 103,468 102,359
Accounts and premiums receivable, net 49,534 40,794
Reinsurance receivables 769,703 756,370
Deferred policy acquisition costs 867,232 841,425
Goodwill, net 202,531 202,615
Property and equipment, net 54,467 50,585
Other assets 83,513 76,211
Assets related to separate accounts
Variable annuity 1,365,035 1,285,952
Variable universal life 17,752 13,606
Other 3,478 3,482
-------------- --------------
$12,154,366 $11,989,495
============= ==============
LIABILITIES
Policy liabilities and accruals $ 4,622,173 $ 4,534,461
Guaranteed investment contract account balances 2,729,461 2,691,697
Annuity account balances 1,529,189 1,519,820
Other policyholders' funds 217,340 222,704
Other liabilities 295,173 327,108
Accrued income taxes 2,806 (15,200)
Deferred income taxes 14,453 44,636
Debt 191,437 152,286
Liabilities related to separate accounts
Variable annuity 1,365,035 1,285,952
Variable universal life 17,752 13,606
Other 3,478 3,482
-------------- --------------
Total Liabilities 10,988,297 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 55,000
8.25% Trust Originated Preferred Securities 75,000 75,000
6.5% FELINE PRIDES 115,000 115,000
------------ -------------
245,000 245,000
------------ -------------
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 255,209 254,705
Treasury stock (1999 - 4,858,778 shares; 1998 - 4,898,100 shares) (13,035) (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 646,717 617,182
Accumulated other comprehensive income
Net unrealized gains on investments
(net of income tax: 1999 - $1,033; 1998 - $29,646) 1,920 55,057
------------- -------------
Total share-owners' equity 921,069 944,194
------------- -------------
$12,154,366 $11,989,495
============= =============
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
THREE MONTHS ENDED
MARCH 31
-------------------------------
<S> <C> <C>
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 36,623 $ 29,993
Adjustments to reconcile net income to net cash provided by
operating activities:
Realized investment gains (1,326) (11)
Amortization of deferred policy acquisition costs 30,952 24,835
Capitalization of deferred policy acquisition costs (48,557) (43,931)
Depreciation expense 2,119 1,964
Deferred income taxes (1,570) (1,224)
Accrued income taxes 18,006 10,207
Amortization of goodwill 1,255 271
Interest credited to universal life and investment products 85,361 84,729
Policy fees assessed on universal life and investment products (36,243) (34,045)
Change in accrued investment income and other receivables (24,066) 8,056
Change in policy liabilities and other policyholders' funds
of traditional life and health products 37,398 114,125
Change in other liabilities (31,051) (48,076)
Other (net) 13,381 (18,923)
------------ -------------
Net cash provided by operating activities 82,281 127,970
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reductions of investments
Investments available for sale 3,696,797 1,806,667
Other 59,209 76,911
Sale of investments
Investments available for sale 214,724 145,772
Other 47,959 234,634
Cost of investments acquired
Investments available for sale (3,947,000) (2,047,391)
Other (163,781) (281,852)
Acquisitions and bulk reinsurance assumptions
Purchase of property and equipment (5,605) (2,684)
Sale of property and equipment 0 22
------------------------------
Net cash used in investing activities (97,698) (67,921)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings under line of credit arrangements and debt 331,100 304,500
Principal payments on line of credit arrangements and debt (311,698) (304,500)
Dividends to share owners (7,088) (6,178)
Investment product deposits and changes in universal life deposits 401,145 330,148
Investment product withdrawals (358,180) (431,521)
----------- ------------
Net cash provided by (used in) financing activities 55,279 (107,551)
----------- ------------
INCREASE (DECREASE) IN CASH 39,862 (47,502)
CASH AT BEGINNING OF PERIOD 9,486 47,502
------------ -------------
CASH AT END OF PERIOD $ 49,348 $ 0
==========================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period:
Interest on debt $ 2,681 $ 1,558
Income taxes $ 0 $ 8,554
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Unallocated stock in ESOP $ 264 $ 315
Reissuance of treasury stock $ 580
Treasury shares acquired by trust $ (366)
Acquisitions
Assets acquired $ 3,398
Liabilities assumed (347)
Reissuance of treasury stock (3,005)
-------------
Net $ 46
=============
</TABLE>
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
5
<PAGE>
PROTECTIVE LIFE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements
of Protective Life Corporation (the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the disclosures required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation have been included. Operating results for the
three month period ended March 31, 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
6
<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
In 1994 a special purpose finance subsidiary of the Company, PLC
Capital L.L.C. ("PLC Capital"), issued $55 million of 9% Cumulative Monthly
Income Preferred Securities, Series A ("MIPSSM"). On April 29, 1997, another
special purpose finance subsidiary, PLC Capital Trust I issued $75 million of
8.25% Trust Originated Preferred Securities ("TOPrSSM"). The MIPS and 8.25%
TOPrS are guaranteed on a subordinated basis by the Company. This guarantee,
considered together with the other obligations of the Company with respect to
the MIPS and 8.25% TOPrS, constitutes a full and unconditional guarantee by the
Company of PLC Capital and PLC Capital Trust I's obligations with respect to the
MIPS and 8.25% TOPrS.
PLC Capital and PLC Capital Trust I were formed solely to issue
securities and use the proceeds thereof to purchase subordinated debentures of
the Company. The sole assets of PLC Capital are $69.6 million of Protective Life
Corporation 9% Subordinated Debentures due September 30, 2024, Series A. The
sole assets of PLC Capital Trust I are $77.3 million of Protective Life
Corporation 8.25% Subordinated Debentures due 2027, Series B. The Company has
the right under the subordinated debentures to extend interest payment periods
up to five consecutive years, and, as a consequence, dividends on the MIPS and
8.25% TOPrS may be deferred (but will continue to accumulate, together with
additional dividends on any accumulated but unpaid dividends at the dividend
rate) by PLC Capital and PLC Capital Trust I, respectively, during any such
extended interest payment period. The MIPS are redeemable by PLC Capital at any
time on or after 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 PRIDESSM which are comprised of
a stock purchase contract and a beneficial ownership of 6.5% TOPrS. The sole
assets of PLC Capital Trust II are $118.6 million of Protective Life Corporation
6.5% Subordinated Debentures due 2003, Series C. Under the stock purchase
contract, on February 16, 2001, the holders will purchase shares of the
Company's Common Stock from the Company. The holders may generally settle the
contract in cash or by exercising their right to put, in effect, the 6.5% TOPrS
back to the Company. The shares of Common Stock issuable range from
approximately 3.5 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 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".
7
<PAGE>
NOTE D - 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
THREE MONTHS ENDED MARCH 31, 1999
--------------------------------------------------------------------------
(IN THOUSANDS)
SPECIALTY INSURANCE
LIFE INSURANCE PRODUCTS
------------------------------------------- ----------------------------
DENTAL AND
INDIVIDUAL CONSUMER FINANCIAL
LIFE WEST COAST ACQUISITION BENEFITS INSTITUTIONS
---------- ---------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C>
Premiums and policy fees $64,420 $18,328 $41,105 $119,349 $66,753
Reinsurance ceded (37,469) (12,788) (8,597) (17,535) (41,563)
------- ------- -------- --------- -------
Net of reinsurance ceded 26,951 5,540 32,508 101,814 25,190
Net investment income 15,588 18,042 33,316 4,105 5,902
Realized investment gains (losses)
Other income 9,522 (6) (9) 612 5,425
-------- --------- ---------- --------- --------
Total revenues 52,061 23,576 65,815 106,531 36,517
------- ------- ------- -------- -------
Benefits and settlement expenses 18,922 14,589 35,523 67,901 11,310
Amortization of deferred policy
acquisition costs 8,825 1,405 6,094 2,538 6,515
Other operating expenses 15,500 2,000 6,605 27,092 13,458
------- -------- -------- -------- --------
Total benefits and expenses 43,247 17,994 48,222 97,531 31,283
------- ------- ------- -------- --------
Income before income tax $ 8,814 $ 5,582 $17,593 $ 9,000 $ 5,234
======= ======= ======= ======== ========
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
-----------------------------
GUARANTEED CORPORATE
INVESTMENT INVESTMENT AND TOTAL
CONTRACTS PRODUCTS OTHER ADJUSTMENTS CONSOLIDATED
---------- ---------- -------- ----------- ------------
Premiums and policy fees $ 5,382 $ 32 $315,369
Reinsurance ceded (117,952)
---------- --------- --------
Net of reinsurance ceded 5,382 32 197,417
Net investment income $51,650 25,566 8,266 162,435
Realized investment gains (losses) 3,070 648 $(2,392) 1,326
Other income 2,384 75 18,003
---------- -------- -------- ---------- ---------
Total revenues 54,720 33,980 8,373 (2,392) 379,181
------- ------- ------- ------- --------
Benefits and settlement expenses 43,927 20,859 62 213,093
Amortization of deferred policy
acquisition costs 192 5,379 4 30,952
Other operating expenses 741 4,682 7,763 (4,654) 73,187
-------- ------- ------ ------- --------
Total benefits and expenses 44,860 30,920 7,829 (4,654) 317,232
------- ------- ------ ------- --------
Income before income tax 9,860 3,060 544 61,949
Income tax expense 22,301 22,301
Minority interest 3,025 3,025
---------
Net income $ 36,623
========
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
OPERATING SEGMENT INCOME FOR THE
THREE MONTHS ENDED MARCH 31, 1998
--------------------------------------------------------------------------
(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 $52,294 $17,686 $28,525 $76,467 $63,706
Reinsurance ceded (18,275) (10,466) (4,322) (25,326) (35,258)
------- ------- -------- ------- -------
Net of reinsurance ceded 34,019 7,220 24,203 51,141 28,448
Net investment income 14,043 15,012 26,732 3,974 6,281
Realized investment gains (losses)
Other income 7,031 599 5,097
-------- ---------- ---------- -------- --------
Total revenues 55,093 22,232 50,935 56,176 39,490
------- ------- ------- ------- -------
Benefits and settlement expenses 27,191 15,395 29,064 35,363 15,503
Amortization of deferred policy
acquisition costs 7,172 (12) 4,541 2,970 5,649
Other operating expense 14,363 2,391 5,856 14,079 14,348
------- -------- ------- ------- -------
Total benefits and expenses 48,726 17,774 39,461 52,412 35,500
------- ------- ------- ------- -------
Income before income tax 6,367 4,458 11,474 3,302 4,326
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
--------------------------------
GUARANTEED CORPORATE
INVESTMENT INVESTMENT AND TOTAL
CONTRACTS PRODUCTS OTHER ADJUSTMENTS CONSOLIDATED
Premiums and policy fees $ 4,062 $ 92 $242,832
Reinsurance ceded (93,647)
----------- ---------- ---------- ---------
Net of reinsurance ceded 4,062 92 149,185
Net investment income $53,435 26,240 11,909 157,626
Realized investment gains (losses) (433) (87) $ 531 11
Other 1,992 (1,201) 13,518
----------- ------- ------- ---------- ---------
Total revenues 53,002 32,207 10,800 531 320,513
------- ------- ------- -------- --------
Benefits and settlement expenses 44,656 20,269 283 187,724
Amortization of deferred policy
acquisition costs 174 4,330 11 24,835
Other operating expenses 185 4,675 6,511 (4,653) 57,755
-------- ------- ------ ------- --------
Total benefits and expenses 45,015 29,274 6,805 (4,653) 270,334
------- ------- ------ ------- --------
Income before tax 7,987 2,933 3,995 50,026
Income tax expense 17,009 17,009
Minority interest 3,024 3,024
---------
Net income $ 29,993
========
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
OPERATING SEGMENT ASSETS
MARCH 31, 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 $1,110,375 $1,162,824 $1,551,513 $279,665 $653,944
Deferred policy acquisition costs
and goodwill 316,898 152,029 249,253 225,228 40,087
----------- ----------- ----------- -------- ---------
Total assets $1,427,273 $1,314,853 $1,800,766 $504,893 $694,031
========== ========== ========== ======== ========
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
------------------------------
GUARANTEED CORPORATE
INVESTMENT INVESTMENT AND TOTAL
CONTRACTS PRODUCTS OTHER CONSOLIDATED
------------ ------------ ---------- ------------
Investments and other assets $2,888,250 $2,851,155 $586,877 $11,084,603
Deferred policy acquisition costs
and goodwill 1,453 84,696 119 1,069,763
------------ ----------- -------- ------------
Total assets $2,889,703 $2,935,851 $586,996 $12,154,366
========== ========== ======== ===========
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
-------------------------------
GUARANTEED CORPORATE
INVESTMENT INVESTMENT AND TOTAL
CONTRACTS 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>
10
<PAGE>
NOTE E - STATUTORY REPORTING PRACTICES
Financial statements prepared in conformity with generally accepted
accounting principles ("GAAP") differ in some respects from the statutory
accounting practices prescribed or permitted by insurance regulatory
authorities. At March 31, 1999 and for the three 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 $538.9
million and $32.2 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
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 March 31, 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>
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Total investments $ 8,578,351 $ 8,501,646
Deferred policy acquisition costs 875,518 857,948
All other assets 2,698,829 2,545,197
------------ ------------
$12,152,698 $11,904,791
=========== ===========
Deferred income taxes $ 14,705 $ 12,798
All other liabilities 10,973,844 10,757,856
----------- -----------
10,988,549 10,770,654
Guaranteed preferred beneficial
interests in Company's sub-
ordinated debentures 245,000 245,000
Share-owners' equity 919,149 889,137
------------- -------------
$12,152,698 $11,904,791
=========== ===========
</TABLE>
NOTE G - 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 ledged asset. No realized investment gains or
losses were deferred in the first three months of 1999
11
<PAGE>
or the full year of 1998. At March 31, 1999, options with a notional amount of
$600 million were in a $0.5 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 March 31, 1999, interest rate swap contracts,
swaptions, caps and floors with a notional amount of $1.0 billion were in an
$8.0 million net unrealized gain position. During the three months ended March
31, 1999, a $2.1 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 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.
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 three months ended March 31 is
summarized as follows:
<TABLE>
<CAPTION>
RECONCILIATION OF NET INCOME AND
AVERAGE SHARES OUTSTANDING
MARCH 31
1999 1998
---- ----
<S> <C> <C>
Net income $36,623(1) $29,993(1)
Dividends on FELINE PRIDES ------- --------
Adjusted net income $36,623 $29,993
======= =======
Average shares issued and outstanding 64,446,665 61,754,156
Issuable under various deferred compensation plans 1,043,140 852,579
----------- ------------
Average shares outstanding - basic 65,489,805 62,606,735
Stock appreciation rights 187,516 144,145
Issuable under various other stock-based compensation plans 398,201(1) 475,300(1)
FELINE PRIDES stock purchase contracts ----------- -----------
Average shares outstanding - diluted 66,075,522 63,226,180
========== ==========
</TABLE>
1 Excluded because the effect is anti-dilutive.
12
<PAGE>
NOTE I - COMPREHENSIVE INCOME (LOSS)
The following table sets forth the Company's comprehensive income
(loss) for the three months ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
--------------------------------
(IN THOUSANDS)
1999 1998
---- ----
<S> <C> <C>
Net income $ 36,623 $29,993
Increase (decrease) in net unrealized gains
on investments (net of income tax:
1999 - $(28,149); 1998 - $83) (52,275) 107
Reclassification adjustment for amounts included
in net income (net of income tax:
1999 - $(464); 1998 - $(4)) (862) 7
---------- ----------
Comprehensive income (loss) $(16,514) $30,093
======== =======
</TABLE>
NOTE J - 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
three months ended March 31, 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
three months ended March 31, 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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1998
---------------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C>
Total revenues $ 361,841
Net income $ 30,211
Net income per share-basic $ 0.46
Net income per share-diluted $ 0.46
</TABLE>
13
<PAGE>
NOTE K - 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 L - 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.
14
<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, Guaranteed Investment
Contracts (GIC), and Investment Products. The Company also has an additional
business segment which is Corporate and Other.
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:
PREMIUMS AND POLICY FEES
THREE MONTHS -----------------------------------
ENDED AMOUNT PERCENTAGE
MARCH 31 (IN THOUSANDS) INCREASE
------------- --------------- ------------
1998 $149,358 15.3%
1999 197,417 32.2
Premiums and policy fees increased $48.1 million or 32.2% in the first
three months of 1999 over the first three months of 1998. Premiums and policy
fees in the Individual Life and West Coast Divisions decreased $7.1 million and
$1.7 million, respectively, in the first three months of 1999 as compared to the
same period in 1998 due to increased usage of reinsurance by these Divisions.
The coinsurance of a block of policies from Lincoln National Corporation
("Lincoln National") in October 1998 resulted in a $9.4 million increase in
premiums and policy fees in the Acquisitions Division, whereas decreases in
older acquired blocks resulted in a $1.1 million decrease in premiums
15
<PAGE>
and policy fees. The September 1998 acquisition of United Dental Care, Inc.
("United Dental Care") resulted in a $36.0 million increase in premiums and
policy fees in the Dental Division. Premiums and policy fees related to the
Dental Division's other businesses increased $14.7 million in the first three
months of 1999 as compared to the same period in 1998. Premiums and policy fees
from the Financial Institutions Division decreased $3.3 million in the first
three months of 1999 as compared to the first three 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 $1.3 million.
NET INVESTMENT INCOME
The following table sets forth for the periods shown the amount of net
investment income and the percentage change from the prior period:
NET INVESTMENT INCOME
THREE MONTHS -------------------------------------
ENDED AMOUNT PERCENTAGE
MARCH 31 (IN THOUSANDS) INCREASE
-------------- --------------- -------------
1998 $157,626 20.9 %
1999 162,435 3.0
Net investment income in the first three months of 1999 was $4.8
million or 3.0% 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 annuity
and GIC 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:
THREE MONTHS REALIZED INVESTMENT
ENDED GAINS
MARCH 31 (IN THOUSANDS)
-------------- -----------------------
1998 $ 11
1999 1,326
Realized investment gains were $1.3 million for the first three months
of 1999 compared to less than $0.1 million for the corresponding period of 1998.
16
<PAGE>
OTHER INCOME
The following table sets forth other income for the periods shown:
THREE MONTHS
ENDED OTHER INCOME
MARCH 31 (IN THOUSANDS)
-------------- -----------------
1998 $13,518
1999 18,003
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 and small noninsurance
subsidiaries, and the results of the Company's joint venture in Hong Kong. Other
income in the first three months of 1999 was $4.5 million higher than the
corresponding period of 1998. Revenues from the Company's broker-dealer
subsidiary increased $3.9 million in the first three months of 1999 as compared
to the same period in 1998. Other income from all other sources increased $0.6
million in the first three months of 1999 as compared with the first three
months of 1998.
17
<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
THREE MONTHS ENDED MARCH 31
(IN THOUSANDS)
1998 1999
---- ----
Operating Income (Loss)1,2
Life Insurance
<S> <C> <C>
Individual Life $ 6,367 $ 8,814
West Coast 4,458 5,582
Acquisitions 11,474 17,593
Specialty Insurance Products
Dental and Consumer Benefits 3,302 9,000
Financial Institutions 4,326 5,234
Retirement Savings and Investment Products
Guaranteed Investment Contracts 8,420 6,790
Investment Products 2,977 3,060
Corporate and Other2 3,995 544
-------- ---------
Total operating income 45,319 56,617
------- -------
Realized Investment Gains (Losses)
Guaranteed Investment Contracts (433) 3,070
Investment Products (87) 648
Unallocated Realized Investment Gains (Losses) 531 (2,392)
Related Amortization of Deferred Policy Acquisition Costs
Investment Products 43 (648)
---------- ---------
Total net 54 678
---------- ---------
Income (Loss) Before Income Tax 2
Life Insurance
Individual Life 6,367 8,814
West Coast 4,458 5,582
Acquisitions 11,474 17,593
Specialty Insurance Products
Dental and Consumer Benefits 3,302 9,000
Financial Institutions 4,326 5,234
Retirement Savings and Investment Products
Guaranteed Investment Contracts 7,987 9,860
Investment Products 2,933 3,060
Corporate and Other2 3,995 544
Unallocated Realized Investment Gains (Losses) 531 (2,392)
--------- --------
Total income before income tax $45,373 $57,295
======= =======
</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 $4,654 and $4,653 in the first three months of
1999 and 1998, respectively. Such minority interest related to payments made
on the Company's MIPSSM, 8.25%TOPrSSM, and FELINE PRIDESSM.
18
<PAGE>
The Individual Life Division's pretax earnings of $8.8 million in the
first three months of 1999 were $2.4 million above the same period of 1998. The
Division's 1999 results include $1.6 million of expenses relating to a venture
to sell term-like products through direct response print, radio, and television
advertising. The Division has reinsured most of its mortality risk, therefore
earnings fluctuations due to mortality experience have been significantly
reduced. In the first quarter last year, the Division's mortality experience was
approximately $1.8 million worse than expected.
West Coast had pretax earnings of $5.6 million for the first three
months of 1999 compared to $4.5 million for the period ended March 31, 1998.
This increase reflects the Division's growth through sales.
Pretax earnings from the Acquisitions Division increased $6.1 million in
the first three months of 1999 as compared to the same period of 1998. The
Division's mortality experience was approximately $1.9 million better than
expected in the first three months of 1999 as compared to being approximately
$2.6 million worse than expected in the first three 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. Earnings relating
to this acquisition were $1.7 million in the first three months of 1999.
The Dental Division's pretax operating earnings of $9.0 million in the
first three months of 1999 were $5.7 million higher than the same period last
year. The recent acquisition of United Dental Care contributed earnings of $4.5
million to 1999 earnings. The pretax operating earnings of the Division's other
dental businesses increased $1.2 million in the first three months of 1999 as
compared to the same period last year.
Pretax earnings of the Financial Institutions Division were $0.9 million
higher in the first three months of 1999 as compared to the same period in 1998.
The increase was primarily due to improved credit disability earnings. Service
contract earnings in the first quarter of 1999 were slightly lower than the same
period last year.
The GIC Division had pretax operating earnings of $6.8 million in the
first three months of 1999 which was $1.6 million less than the corresponding
period of 1998 primarily due to maintaining greater liquidity in the investment
portfolio to fund maturing contracts. Realized investment gains associated with
this Division in the first three months of 1999 were $3.1 million as compared to
losses of $0.4 million in the same period last year. As a result, total pretax
earnings were $9.9 million in the first three months of 1999 compared to $8.0
million for the same period last year.
Investment Products Division pretax operating earnings of $3.1 million
in the first three months of 1999 were slightly higher than the same period of
1998. Revenue growth has been partially offset by the rising cost of interest
rate incentives. The Division had no realized investment gains or losses (net of
related amortization of deferred policy acquisition costs) in the first three
months of 1999 as compared to losses of less than $0.1 million in the same
period of 1998. Total pretax earnings were $3.1 million in the first three
months of 1999 as compared to $2.9 million in the same period of 1998.
19
<PAGE>
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 subsidiaries. Pretax
earnings for this segment decreased $3.5 million in the first three months of
1999 as compared to the first three months of 1998, primarily due to the
allocation of capital to the United Dental Care coinsurance 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:
THREE MONTHS
ENDED ESTIMATED EFFECTIVE
MARCH 31 INCOME TAX RATES
------------------- ----------------------
1998 34%
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
The following table sets forth net income and the net income per share
for the periods shown, and the percentage change from the prior period:
<TABLE>
<CAPTION>
NET INCOME
THREE MONTHS ----------------------------------------------------------------------------------
ENDED TOTAL PER SHARE- PERCENTAGE PER SHARE- PERCENTAGE
MARCH 31 (IN THOUSANDS) BASIC INCREASE DILUTED INCREASE
-------------- ------------- --------------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
1998 $29,993 $.48 20.0% $.47 17.5%
1999 36,623 .56 16.7 .56 19.2
</TABLE>
Compared to the same period in 1998, net income per share-basic in the
first three months of 1999 increased 16.7%, 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 Guaranteed Investment
Contracts Division and the Corporate and Other segment.
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-owner's equity, depending
upon the nature of the
20
<PAGE>
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-owner's equity as interest rates change. SFAS No. 133 is
effective January 1, 2000.
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 March 31, 1999, the fixed maturity investments (bonds and redeemable
preferred stocks) had a market value of $6,361.7 million, which is 0.2% above
amortized cost (less allowances for uncollectible amounts on investments) of
$6,351.9 million. The Company had $1,782.3 million in mortgage loans at March
31, 1999. While the Company's mortgage loans do not have quoted market values,
at March 31, 1999, the Company estimates the market value of its mortgage loans
to be $1,834.0 million (using discounted cash flows from the next call date)
which is 2.9% above of 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.
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 March 31, 1999, approximately $487.3 million of the Company's
mortgage loans have this participation feature.
At March 31, 1999, 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 $26.8 million at March
31, 1999.
21
<PAGE>
Policy loans at March 31, 1999, were $232.0 million, a decrease of $0.7
million from December 31, 1998. Policy loan rates are generally in the 4.5% to
8.0% range, such rate 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 March 31, 1999, the Company had outstanding
mortgage loan commitments of $846.8 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. 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.
At March 31, 1999, the Company had policy liabilities and accruals of
$4,622.2 million. The Company's life insurance products have a weighted average
minimum credited interest rate of approximately 4.3%
At March 31, 1999, the Company had $2,729.5 million of GIC account
balances and $1,529.2 million 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 ledged asset. No realized investment gains or
losses were deferred in 1999 or 1998. At March 31, 1999, options with a notional
amount of $600 million were in a $0.5 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 March 31, 1999, interest rate swap contracts,
swaptions, caps and floors with a notional amount of $1.0 billion were in an
$8.0 million net unrealized gain position. During the three months ended March
31, 1999, a $2.1 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.
22
<PAGE>
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 GICs (primarily maturing contracts and
expected withdrawals) were approximately $1.0 billion during 1998. Cash outflows
related to GICs are estimated to be approximately $0.9 billion in 1999. The
Company's asset/liability management programs and procedures take into account
maturing GICs and expected withdrawals. Accordingly, the Company does not expect
GIC related cash outflows to have an unusual effect on the future operations and
liquidity of the Company.
The life insurance subsidiaries were committed at March 31, 1999, to
fund mortgage loans and to purchase fixed maturity and other long-term
investments in the amount of $871.2 million. The Company's subsidiaries held
$140.9 million in cash and short-term investments at March 31, 1999. Protective
Life Corporation had an additional $2.1 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 its borrowing rate. Additionally, the
Company may from time to time sell short-duration GICs to complement its cash
management practices.
CAPITAL
At March 31, 1999, Protective Life Corporation had $45.0 million
outstanding under its $70.0 million revolving line of credit and an additional
$23.0 million of bank borrowings at a weighted average interest rate of 5.2%.
The increase in borrowing since December 31, 1998, was used for general
corporate purposes.
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
23
<PAGE>
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 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.
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 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 is considering a new reserving standard, 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 to
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 President's Fiscal Year 2000 Budget contains proposals that, if
enacted, would adversely affect the life insurance industry. The first proposal
would require insurers to include in taxable income over 10 years the balances
accumulated in a tax memorandum account designated as
24
<PAGE>
Policyholders' Surplus. The Company's accumulation in this account at December
31, 1998, was approximately $70.5 million. A second proposal would require
insurers to capitalize higher percentages of acquisition expenses for tax
purposes, resulting in the earlier payment of tax. A third proposal would reduce
the attractiveness of corporate-owned life insurance (or COLI) products.
Life insurance products are often used to fund estate tax obligations.
Recently a report issued by the Congressional Joint Economic Committee
recommended the elimination of the estate tax. If the estate tax were
eliminated, the demand for certain life insurance products would be adversely
affected.
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' are currently developing a response. Those 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 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 and general administration systems. Of the
general administration systems that are
25
<PAGE>
not yet remediated, the majority are new systems that were implemented during
1998 and are scheduled to be upgraded to the current release of the system
during the second quarter of 1999. All remediated systems are currently in
production. Personal computer network hardware and software have been reviewed,
with upgrades implemented where necessary. A review of personal computer desktop
software is in progress, but not complete. All Year 2000 personal computer
preparations are expected to be completed by June 30, 1999. 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.
One insurance administration system, a personal computer database
system that processes member information for one subsidiary, has been identified
as mission critical and is not yet fully remediated. This effort is on schedule
and targeted to be complete by June 30, 1999.
Future date tests are used to verify a system's ability to process
transactions dated up to and beyond January 1, 2000. Future date tests are
complete or in-progress for the majority of the Company's mission-critical
systems. A large portion of the testing is conducted by a contract programming
staff dedicated full time to Year 2000 preparations. These resources have been
part of the Company's Year 2000 project since 1995.
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.
Integrated testing will continue throughout 1999.
Business partners and suppliers that provide products or services
critical to the Company's operations are being reviewed and in some cases their
Year 2000 preparations are being monitored by the Company. To date, no partners
or suppliers have reported that they expect to be unable to continue supplying
products and services after January 1, 2000. Monitoring and testing of critical
partners and suppliers will continue throughout 1999. Formal contingency
planning began in March 1999 and will continue throughout the year. These plans
will augment the Company's existing disaster recovery plans.
The Company cannot specifically identify all of the costs to develop
and implement its Year 2000 plan. The cost 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 February 28, 1999, costs
that have been specifically identified as relating to the Year 2000 problem
total $4.1 million, with an additional $1.1 million estimated to be required to
support continued testing activity. 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 assurances that the
Company's efforts will be successful, that interactions with other service
providers with Year 2000 issues will not impair the Company's operations, or
that the Year 2000 issue will not otherwise adversely affect the Company.
Should some of the Company's systems not be available due to Year 2000
problems, in a reasonably likely worst case scenario, the Company may experience
significant delays in its ability
26
<PAGE>
to perform certain functions, but does not expect to be unable to perform
critical functions or to otherwise conduct business.
PART II
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Share Owners was held on April 26, 1999. Shares
entitled to vote at the Annual Meeting totaled 64,448,096 of which 55,331,324
shares were represented. The number of shares entitled to vote was determined as
of March 5.
At the Annual Meeting the following directors were elected. The number
of shares cast for and authorization withheld for each nominee is shown below.
<TABLE>
<CAPTION>
AUTHORIZATION
FOR WITHHELD
<S> <C> <C>
William J. Cabaniss, Jr. 55,153,166 178,158
Drayton Nabers, Jr. 55,144,726 186,598
John J. McMahon, Jr. 55,154,238 177,086
A. W. Dahlberg 55,152,197 179,127
Ronald L. Kuehn, Jr. 55,073,103 258,221
James S. M. French 55,149,080 182,244
Robert A. Yellowlees 55,152,930 178,394
John D. Johns 55,154,568 176,756
Elaine L. Chao 55,149,975 181,349
Donald M. James 55,154,078 177,246
J. Gary Cooper 55,147,305 184,019
</TABLE>
Additionally, at the Annual Meeting share owners approved a proposal to
ratify the appointment by the Board of Directors of PricewaterhouseCoopers LLP
as independent public accountants for the Company and its subsidiaries for 1999.
Shares voting for this proposal were 55,288,401, shares voting against were
11,380, and shares abstaining were 31,543.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
15 Letter re: unaudited interim financial statements
27 Financial Data Schedule
99 Safe harbor for Forward Looking Statements
(b). A current report on Form 8-K was filed February 11, 1999,
reporting under Item 5 and Item 7 the Company's 1998 fourth
quarter earnings press release.
27
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PROTECTIVE LIFE CORPORATION
Date: May 14, 1999 /S/ JERRY W. DEFOOR
----------------------
Jerry W. DeFoor
Vice President and Controller,
and Chief Accounting Officer
(Duly authorized officer)
28
Exhibit 15
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Protective Life Corporation
We are aware that our report dated April 23, 1999, on our review of interim
consolidated financial information of Protective Life Corporation and
subsidiaries for the period ended March 31, 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.
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
May 14, 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 6,361,736
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 27,023
<MORTGAGE> 1,782,272
<REAL-ESTATE> 15,160
<TOTAL-INVEST> 8,588,305
<CASH> 49,348
<RECOVER-REINSURE> 769,703
<DEFERRED-ACQUISITION> 867,232
<TOTAL-ASSETS> 12,154,366
<POLICY-LOSSES> 4,622,173
<UNEARNED-PREMIUMS> 382,063
<POLICY-OTHER> 4,240,110
<POLICY-HOLDER-FUNDS> 217,340
<NOTES-PAYABLE> 191,437
0
0
<COMMON> 34,667
<OTHER-SE> 886,402
<TOTAL-LIABILITY-AND-EQUITY> 12,154,366
197,417
<INVESTMENT-INCOME> 162,435
<INVESTMENT-GAINS> 1,326
<OTHER-INCOME> 18,003
<BENEFITS> 213,093
<UNDERWRITING-AMORTIZATION> 30,952
<UNDERWRITING-OTHER> 73,187
<INCOME-PRETAX> 61,949
<INCOME-TAX> 22,301
<INCOME-CONTINUING> 36,623<F1>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36,623
<EPS-PRIMARY> .56
<EPS-DILUTED> .56
<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 subsidiaries of $3,025
</FN>
</TABLE>
Exhibit 99
to
Form 10-Q
of
Protective Life Corporation
for the three months
ended March 31, 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.
Management believes that the Company's ability to compete is dependent
upon, among other things, its ability to attract and retain distribution
channels to market its insurance and investment products, its ability to develop
competitive and profitable products, its ability to maintain low unit costs, and
its maintenance of strong claims-paying and financial strength ratings from
rating agencies.
<PAGE>
The Company competes against other insurance companies and financial
institutions in the origination of commercial mortgage loans.
RATINGS. Ratings are an important factor in the competitive position of
life insurance companies. Rating organizations periodically review the financial
performance and condition of insurers, including the Company's insurance
subsidiaries. A downgrade in the ratings of the Company's life insurance
subsidiaries could adversely affect its ability to sell its products and its
ability to compete for attractive acquisition opportunities.
Rating organizations assign ratings based upon several factors. While
most of the considered factors relate to the rated company, some of the factors
relate to general economic conditions and circumstances outside the rated
company's control. For the past several years rating downgrades in the industry
have exceeded upgrades.
POLICY CLAIMS FLUCTUATIONS. The Company's results may fluctuate from
year to year on account of fluctuations in policy claims received by the Company
LIQUIDITY AND INVESTMENT PORTFOLIO. Many of the products offered by the
Company's life insurance subsidiaries allow policyholders and contractholders to
withdraw their funds under defined circumstances. The Company's insurance
subsidiaries design products and configure investment portfolios so as to
provide and maintain sufficient liquidity to support anticipated withdrawal
demands and contract benefits and maturities. Formal asset/liability management
programs and procedures are used to monitor the relative duration of the
Company's assets and liabilities. While the Company's life insurance
subsidiaries own a significant amount of liquid assets, many of their assets are
relatively illiquid. Significant unanticipated withdrawal or surrender activity
could, under some circumstances, compel the Company's insurance subsidiaries to
dispose of illiquid assets on unfavorable terms, which could have a material
adverse effect on the Company.
INTEREST RATE FLUCTUATIONS. Sudden and/or significant changes in
interest rates expose insurance companies to the risk of not earning anticipated
spreads between the interest rate earned on investments and the credited rates
paid on outstanding policies. Both rising and declining interest rates can
negatively affect the Company's spread income. For example, certain of the
Company's insurance and investment products guarantee a minimum credited
interest rate. While the Company develops and maintains asset/liability
management programs and procedures designed to preserve spread income in rising
or falling interest rate environments, no assurance can be given that
significant changes in interest rates will not materially affect such spreads.
Lower interest rates may result in lower sales of the Company's
insurance and investment products.
REGULATION AND TAXATION. The Company's insurance subsidiaries are
subject to government regulation in each of the states in which they conduct
business. Such regulation is vested in state agencies having broad
administrative power dealing with many aspects of the insurance business, which
may include premium rates, marketing practices, advertising, policy
<PAGE>
forms, and capital adequacy, and is concerned primarily with the protection of
policyholders rather than stockholders. The Company cannot predict the form of
any future regulatory initiatives.
Under the Internal Revenue Code of 1986, as amended (the Code), income
tax payable by policyholders on investment earnings is deferred during the
accumulation period of certain life insurance and annuity products. This
favorable tax treatment may give certain of the Company's products a competitive
advantage over other non-insurance products. To the extent that the Code is
revised to reduce the tax-deferred status of life insurance and annuity
products, or to increase the tax-deferred status of competing products, all life
insurance companies, including the Company's subsidiaries, would be adversely
affected 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 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.
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
<PAGE>
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
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 TO PLACE UNDUE RELIANCE ON
FORWARD-LOOKING STATEMENTS. IN ADDITION, THE COMPANY UNDERTAKES
<PAGE>
NO OBLIGATION TO UPDATE OR REVISE FORWARD-LOOKING STATEMENTS TO REFLECT CHANGED
ASSUMPTIONS, THE OCCURRENCE OF UNANTICIPATED EVENTS, OR CHANGES TO PROJECTIONS
OVER TIME.
