- ------------------------------------------------------------------------------
FORM 10-Q
------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 November 5,
1999: 64,502,092 shares.
<PAGE>
PROTECTIVE LIFE CORPORATION
INDEX
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Report of Independent Accountants
Consolidated Condensed Statements of Income for the Three and Nine
Months ended September 30, 1999 and 1998 (unaudited)
Consolidated Condensed Balance Sheets as of September 30, 1999
(unaudited) and December 31, 1998
Consolidated Condensed Statements of Cash Flows for the
Nine Months ended September 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 September 30, 1999, and the
related consolidated condensed statements of income for the three-month and
nine-month periods ended September 30, 1999 and 1998 and consolidated condensed
statements of cash flows for the nine-month periods ended September 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
October 26, 1999, except for Note N
as to which the date is
November 1, 1999
<PAGE>
<TABLE>
<CAPTION>
PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in thousands except per share amounts)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------------- -----------------------------
1999 1998 1999 1998
---- ---- ---- ----
REVENUES
<S> <C> <C> <C> <C>
Premiums and policy fees $325,654 $275,411 $ 967,828 $776,767
Reinsurance ceded (134,573) (107,677) (382,870) (305,015)
-------- -------- ----------- --------
Premiums and policy fees, net of reinsurance ceded 191,081 167,734 584,958 471,752
Net investment income 170,318 164,537 503,570 475,192
Realized investment gains (losses) (3,984) 411 (3,340) 2,445
Other income 23,808 15,912 67,056 48,577
--------- --------- ----------- ---------
381,223 348,594 1,152,244 997,966
-------- -------- ---------- --------
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance ceded:
three months: 1999 - $85,055; 1998 - $109,513
nine months: 1999 - $242,578; 1998 - $236,241) 212,869 197,282 643,681 571,082
Amortization of deferred policy acquisition costs 23,088 30,784 82,315 89,053
Other operating expenses (net of reinsurance ceded:
three months: 1999 - $33,457; 1998 - $47,133
nine months: 1999 - $102,828; 1998 - $112,985) 83,465 64,325 238,071 176,114
--------- --------- ----------- --------
319,422 292,391 964,067 836,249
-------- -------- ----------- --------
INCOME BEFORE INCOME TAX 61,801 56,203 188,177 161,717
Income tax expense 22,248 19,671 67,744 56,601
--------- -------- ----------- ---------
INCOME BEFORE MINORITY INTEREST AND
EXTRAORDINARY LOSS 39,553 36,532 120,433 105,116
Minority interest in net income
of consolidated subsidiaries 2,220 3,024 8,269 9,073
--------- --------- ------------ ---------
INCOME BEFORE EXTRAORDINARY LOSS 37,333 33,508 112,164 96,043
Extraordinary loss on early extinguishment of debt 1,763
------------ ------------ ------------ ------------
NET INCOME $ 37,333 $ 33,508 $ 110,401 $ 96,043
======== ======== ========== ========
EARNINGS PER SHARE - BASIC
Income before extraordinary loss $ .57 $ .53 $ 1.71 $ 1.53
Extraordinary loss .03
------------ ------------ ------------- ------------
Net income $ .57 $ .53 $ 1.68 $ 1.53
========== ========== ============ =========
EARNINGS PER SHARE - DILUTED
Income before extraordinary loss $ .57 $ .52 $ 1.70 $ 1.51
Extraordinary loss .03
------------ ------------ ------------- ------------
Net income $ .57 $ .52 $ 1.67 $ 1.51
========== ========== ============ =========
DIVIDENDS PAID PER SHARE $ .12 $ .11 $ .35 $ .32
========== ========== ============ ==========
Average shares outstanding - basic 65,725,022 63,272,089 65,578,965 62,863,523
Average shares outstanding - diluted 66,180,351 63,790,168 66,148,748 63,439,194
</TABLE>
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
<PAGE>
<TABLE>
<CAPTION>
PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
SEPTEMBER 30 DECEMBER 31
1999 1998
---------------------------------------------
ASSETS (Unaudited)
Investments:
<S> <C> <C>
Fixed maturities $ 6,265,531 $ 6,437,756
Equity securities 29,707 12,258
Mortgage loans on real estate 1,894,874 1,622,903
Investment real estate, net 16,201 14,868
Policy loans 231,824 232,670
Other long-term investments 68,740 69,906
Short-term investments 104,137 216,249
------------- ------------
Total investments 8,611,014 8,606,610
Cash 90,745 9,486
Accrued investment income 102,645 102,359
Accounts and premiums receivable, net 76,093 40,794
Reinsurance receivables 802,808 756,370
Deferred policy acquisition costs 962,381 841,425
Goodwill, net 208,438 202,615
Property and equipment, net 57,267 50,585
Other assets 68,604 76,211
Assets related to separate accounts
Variable annuity 1,494,634 1,285,952
Variable universal life 29,086 13,606
Other 3,408 3,482
-------------- --------------
$12,507,123 $11,989,495
============== ==============
LIABILITIES
Policy liabilities and accruals $ 4,925,064 $ 4,534,461
Stable value contract account balances 2,669,845 2,691,697
Annuity account balances 1,559,579 1,519,820
Other policyholders' funds 122,720 222,704
Other liabilities 411,885 327,108
Accrued income taxes (7,440) (15,200)
Deferred income taxes (22,041) 44,636
Debt 236,349 172,035
Liabilities related to separate accounts
Variable annuity 1,494,634 1,285,952
Variable universal life 29,086 13,606
Other 3,408 3,482
-------------- --------------
11,423,089 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 705,018 617,182
Accumulated other comprehensive income
Net unrealized gains (losses) on investments
(net of income tax: 1999 - $(45,413); 1998 - $29,646) (84,339) 55,057
-------------- --------------
894,034 944,194
-------------- --------------
$12,507,123 $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)
NINE MONTHS ENDED
SEPTEMBER 30
------------------------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 110,401 $ 96,043
Adjustments to reconcile net income to net cash provided by
operating activities:
Realized investment gains (losses) 3,340 (2,445)
Amortization of deferred policy acquisition costs 82,315 89,053
Capitalization of deferred policy acquisition costs (178,319) (156,148)
Depreciation expense 5,415 5,494
Deferred income taxes 18,508 9,389
Accrued income taxes 7,760 (31,101)
Amortization of goodwill 4,083 832
Interest credited to universal life and investment products 234,402 259,672
Policy fees assessed on universal life and investment products (118,452) (104,173)
Change in accrued investment income and other receivables (69,521) (90,238)
Change in policy liabilities and other policyholders' funds
of traditional life and health products 123,193 514,633
Change in other liabilities 92,242 (4,224)
Other (net) (7,153) (113,329)
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 308,214 473,458
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reductions of investments
Investments available for sale 3,585,675 6,727,599
Other 208,300 149,765
Sale of investments
Investments available for sale 291,153 524,624
Other 267,676 270,257
Cost of investments acquired
Investments available for sale (3,868,246) (7,640,041)
Other (742,912) (433,390)
Acquisition and bulk reinsurance assumptions 46,508 (76,896)
Purchase of property and equipment (15,360) (9,754)
Sale of property and equipment 3,130 15
------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES (224,076) (487,821)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings under line of credit arrangements and debt 4,430,677 1,634,996
Principal payments on line of credit arrangements and debt (4,366,363) (1,255,566)
Payment of preferred securities (55,000)
Dividends to share owners (22,565) (19,769)
Investment product deposits and changes in universal life deposits 866,850 739,488
Investment product withdrawals (856,478) (1,099,299)
------------ -----------
NET CASH USED IN FINANCING ACTIVITIES (2,879) (150)
------------- --------------
INCREASE (DECREASE) IN CASH 81,259 (14,513)
CASH AT BEGINNING OF PERIOD 9,486 47,502
------------- -------------
CASH AT END OF PERIOD $ 90,745 $ 32,989
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period:
Interest on debt $ 13,438 $ 6,824
Income taxes $ 39,406 $ 62,388
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Reissuance of treasury stock to ESOP $ 205
Unallocated stock in ESOP $ 264 $ 315
Reissuance of treasury stock $ 1,500 $ 3,097
Acquisitions
Assets acquired $ 198,676
Liabilities assumed (33,236)
Issuance of common stock (88,131)
-------------
Net $ 77,309
=============
</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 and subsidiaries (the "Company") have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the disclosures required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation have been included. Operating
results for the nine month period ended September 30, 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 (where the Company maintains its headquarters), juries have substantial
discretion in awarding punitive and non-economic compensatory damages, which
creates the potential for unpredictable material adverse judgments in any given
lawsuit. The Company, like other insurers, in the ordinary course of business,
is involved in such litigation or alternatively in arbitration.
<PAGE>
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.
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 ("TOPRSSM"). 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 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 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
NINE MONTHS ENDED SEPTEMBER 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 $200,912 $62,520 $113,526 $360,295 $212,751
Reinsurance ceded (126,454) (42,802) (24,420) (56,961) (132,233)
-------- ------- --------- --------- --------
Net of reinsurance ceded 74,458 19,718 89,106 303,334 80,518
Net investment income 45,492 56,779 99,587 13,380 17,632
Realized investment gains (losses)
Other income 32,738 1,302 (9) 3,395 19,923
-------- -------- ----------- --------- ---------
Total revenues 152,688 77,799 188,684 320,109 118,073
-------- ------- -------- -------- --------
Benefits and settlement expenses 55,265 50,471 98,237 201,349 40,586
Amortization of deferred policy
acquisition costs 20,317 5,055 15,309 7,629 18,654
Other operating expenses 52,469 2,839 23,266 82,348 42,235
-------- -------- -------- --------- ---------
Total benefits and expenses 128,051 58,365 136,812 291,326 101,475
-------- ------- -------- -------- --------
Income before income tax 24,637 19,434 51,872 28,783 16,598
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
-----------------------------
STABLE CORPORATE
VALUE INVESTMENT AND TOTAL
PRODUCTS PRODUCTS OTHER ADJUSTMENTS CONSOLIDATED
--------- ------------- ---------- ------------ -------------
Premiums and policy fees $ 17,610 $ 214 $ 967,828
Reinsurance ceded (382,870)
------------ ---------- ----------
Net of reinsurance ceded 17,610 214 584,958
Net investment income $155,634 78,736 36,330 503,570
Realized investment gains (losses) (82) 892 $ (4,150) (3,340)
Other income 7,111 2,596 67,056
------------ --------- ------- ----------- -----------
Total revenues 155,552 104,349 39,140 (4,150) 1,152,244
-------- -------- ------- -------- ----------
Benefits and settlement expenses 131,016 64,477 2,280 643,681
Amortization of deferred policy
acquisition costs 575 14,777 (1) 82,315
Other operating expenses 2,963 15,785 28,888 (12,722) 238,071
--------- -------- ------- ------- ----------
Total benefits and expenses 134,554 95,039 31,167 (12,722) 964,067
-------- -------- ------- ------- ----------
Income before income tax 20,998 9,310 7,973 8,572 188,177
Income tax expense 67,744 67,744
Minority interest 8,269 8,269
Extraordinary loss 1,763 1,763
-----------
Net income $ 110,401
=========
<PAGE>
OPERATING SEGMENT INCOME FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1998
------------------------------------------------------------------------------
(IN THOUSANDS)
SPECIALTY INSURANCE
LIFE INSURANCE PRODUCTS
------------------------------------------ ----------------------------
DENTAL AND
INDIVIDUAL CONSUMER FINANCIAL
LIFE WEST COAST ACQUISITIONS BENEFITS INSTITUTIONS
---------- ------------ ------------ ------------ --------------
Premiums and policy fees $167,329 $55,740 $ 82,435 $253,330 $203,954
Reinsurance ceded (69,504) (36,490) (11,651) (70,147) (117,223)
-------- ------- -------- --------- --------
Net of reinsurance ceded 97,825 19,250 70,784 183,183 86,731
Net investment income 40,401 46,837 79,860 12,206 17,085
Realized investment gains (losses)
Other income 26,161 1,600 2,475 12,293
--------- ----------- --------- --------- ---------
Total revenues 164,387 66,087 152,244 197,864 116,109
-------- ------- -------- -------- --------
Benefits and settlement expenses 80,768 42,944 84,171 126,141 39,806
Amortization of deferred policy
acquisition costs 24,376 3,866 13,594 7,731 25,182
Other operating expenses 38,902 3,604 17,489 51,229 36,810
-------- -------- -------- --------- --------
Total benefits and expenses 144,046 50,414 115,254 185,101 101,798
-------- ------- -------- -------- --------
Income before income tax 20,341 15,673 36,990 12,763 14,311
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
-----------------------------
STABLE CORPORATE
VALUE INVESTMENT AND TOTAL
PRODUCTS PRODUCTS OTHER ADJUSTMENTS CONSOLIDATED
--------- ------------- ---------- ------------ -------------
Premiums and policy fees $ 13,827 $ 152 $776,767
Reinsurance ceded (305,015)
------------ ----------- --------
Net of reinsurance ceded 13,827 152 471,752
Net investment income $160,735 79,525 38,543 475,192
Realized investment gains (losses) (895) 678 $ 2,662 2,445
Other income 6,599 (551) 48,577
------------ --------- --------- ------------ ---------
Total revenues 159,840 100,629 38,144 2,662 997,966
-------- -------- -------- --------- --------
Benefits and settlement expenses 134,531 62,283 438 571,082
Amortization of deferred policy
acquisition costs 554 13,752 (2) 89,053
Other operating expenses 1,864 15,308 24,867 (13,959) 176,114
--------- -------- -------- -------- --------
Total benefits and expenses 136,949 91,343 25,303 (13,959) 836,249
-------- -------- -------- -------- --------
Income before income tax 22,891 9,286 12,841 16,621 161,717
Income tax expense 56,601 56,601
Minority interest 9,073 9,073
---------
Net income $ 96,043
========
<PAGE>
OPERATING SEGMENT ASSETS
SEPTEMBER 30, 1999
------------------------------------------------------------------------------
(IN THOUSANDS)
SPECIALTY INSURANCE
LIFE INSURANCE PRODUCTS
-------------------------------------------- --------------------------
DENTAL AND
INDIVIDUAL CONSUMER FINANCIAL
LIFE WEST COAST ACQUISITIONS BENEFITS INSTITUTIONS
------------- ------------ ------------ ----------- ------------
Investments and other assets $1,180,493 $1,292,180 $1,618,478 $277,537 $732,272
Deferred policy acquisition costs
and goodwill 352,654 183,164 240,037 233,726 53,324
----------- ----------- ----------- -------- ---------
Total assets $1,533,147 $1,475,344 $1,858,515 $511,263 $785,596
========== ========== ========== ======== ========
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
------------------------------
STABLE CORPORATE
VALUE INVESTMENT AND TOTAL
PRODUCTS PRODUCTS OTHER CONSOLIDATED
------------- ----------- ---------- -------------
Investments and other assets $2,781,357 $2,838,258 $615,729 $11,336,304
Deferred policy acquisition costs
and goodwill 1,240 106,557 117 1,170,819
------------ ----------- ---------- ------------
Total assets $2,782,597 $2,944,815 $615,846 $12,507,123
========== ========== ======== ===========
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 September 30, 1999 and for the nine 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 $534.9
million and $49.1 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 September 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>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
(IN THOUSANDS)
<S> <C> <C>
Total investments $ 8,749,231 $ 8,501,646
Deferred policy acquisition costs 953,916 857,948
All other assets 2,933,728 2,545,197
------------ ------------
$12,636,875 $11,904,791
=========== ===========
Deferred income taxes $ 23,372 $ 12,798
All other liabilities 11,445,130 10,757,856
----------- -----------
11,468,502 10,770,654
Guaranteed preferred beneficial
interests in Company's sub-
ordinated debentures 190,000 245,000
Share-owners' equity 978,373 889,137
------------- -------------
$12,636,875 $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 swaps, 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 nine months of 1999
<PAGE>
or the full year of 1998. At September 30, 1999, options with a notional amount
of $400 million were in a $1.1 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 (prior to their redemption), 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 September 30, 1999,
interest rate swap contracts, swaptions, caps and floors with a notional amount
of $1,138 million were in a $1.0 million net unrealized loss position. During
the nine months ended September 30, 1999, a $6.4 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 nine months ended September 30 is
summarized as follows:
<TABLE>
<CAPTION>
RECONCILIATION OF NET INCOME AND
AVERAGE SHARES OUTSTANDING
SEPTEMBER 30
-------------------------------
1999 1998
---- ----
<S> <C> <C>
Net income $110,401 $96,043
Dividends on FELINE PRIDES (1) (1)
--------- --------
Adjusted net income $110,401 $96,043
======== =======
Average shares issued and outstanding 64,475,225 61,919,841
Issuable under various deferred compensation plans 1,103,740 943,682
---------- -----------
Average shares outstanding - basic 65,578,965 62,863,523
Stock appreciation rights 188,465 164,105
Issuable under various other stock-based compensation plans 381,318 411,566
FELINE PRIDES stock purchase contracts (1) (1)
----------- -----------
Average shares outstanding - diluted 66,148,748 63,439,194
========== ==========
</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 nine months ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------------------------------------------
(IN THOUSANDS)
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C>
Net income $37,333 $33,508 $110,401 $ 96,043
Increase (decrease) in net unrealized gains
on investments (net of income tax:
three months:1999-$2,800; 1998-$23,220
nine months:1999-$(76,228); 1998-$24,526) 5,198 43,123 (141,567) 45,549
Reclassification adjustment for amounts included
in net income (net of income tax:
three months: 1999-$1,394; 1998-$(144)
nine months: 1999-$1,169; 1998-$(856)) 2,590 (267) 2,171 (1,589)
----- ----- -------- --------
Comprehensive income (loss) $45,121 $76,364 $(28,995) $140,003
====== ===== ======== ========
</TABLE>
NOTE K - ACQUISITIONS
In September 1999, the Company acquired a block of credit life and
disability policies which it had ceded to NationsCredit Insurance Corporation.
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.
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
nine months ended September 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
nine months ended September 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.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1998
-----------------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C>
Total revenues $ 1,092,935
Net income $ 93,877
Net income per share-basic $ 1.44
Net income per share-diluted $ 1.42
</TABLE>
<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.
NOTE N - SUBSEQUENT EVENTS
On October 20, 1999, the Company announced that it has agreed to
acquire the Lyndon Insurance Group ("Lyndon") from the Frontier Insurance Group,
Inc. Headquartered in St. Louis, Lyndon manufactures and markets a variety of
specialty insurance products, including credit life and disability insurance,
and vehicle and marine service agreements. Lyndon distributes products on a
national basis through financial institutions and automobile dealers. The
transaction is subject to regulatory approval and certain customary closing
conditions.
On November 1, 1999, the Company announced that it has made an equity
investment in Matrix Direct, a privately-owned firm located in San Diego. Matrix
Direct is a leading direct marketer of life insurance products and offers a full
complement of direct marketing services, including market research, media
buying, fulfillment, a nationally-licensed sales group and new business
processing.
<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 herein 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
NINE MONTHS ---------------------------------
ENDED AMOUNT PERCENTAGE
SEPTEMBER 30 (IN THOUSANDS) INCREASE
------------- --------------- ------------
<S> <C> <C>
1998 $471,752 29.7 %
1999 584,958 24.0
</TABLE>
Premiums and policy fees increased $113.2 million or 24.0% in the first
nine months of 1999 as compared to the first nine months of 1998. Premiums and
policy fees in the Individual Life Division decreased $23.4 million in the first
nine months of 1999 as compared to the same period in 1998 due to increased
usage of reinsurance. Premiums and policy fees from the West Coast Division
<PAGE>
increased $0.5 million in the first nine months of 1999 as compared to the first
nine months of 1998. The coinsurance of a block of policies from Lincoln
National Corporation ("Lincoln National") in October 1998 resulted in a $23.3
million increase in premiums and policy fees in the Acquisitions Division,
whereas decreases in older acquired blocks resulted in a $5.0 million decrease
in premiums and policy fees. The September 1998 acquisition of United Dental
Care, Inc. ("United Dental Care") resulted in a $82.7 million increase in
premiums and policy fees in the Dental Division for the first nine months of
1999 as compared to the same period in 1998. Premiums and policy fees related to
the Dental Division's other businesses increased $37.4 million in the first nine
months of 1999 as compared to the same period in 1998. Overall premiums and
policy fees from the Financial Institutions Division decreased $6.2 million in
the first nine months of 1999 as compared to the first nine months of 1998 of
which $8.9 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 $2.7 million in the
first nine months of 1999 as compared to the first nine months of 1998. The
increase in premiums and policy fees from the Investment Products Division was
$3.8 million.
NET INVESTMENT INCOME
The following table sets forth for the periods shown the amount of net
investment income and the percentage change from the prior period:
<TABLE>
<CAPTION>
NET INVESTMENT INCOME
NINE MONTHS ---------------------------------
ENDED AMOUNT PERCENTAGE
SEPTEMBER 30 (IN THOUSANDS) INCREASE
------------- --------------- ------------
<S> <C> <C>
1998 $475,192 11.6 %
1999 503,570 6.0
</TABLE>
Net investment income in the first nine months of 1999 was $28.4
million or 6.0% higher than the corresponding period of the preceding year
primarily due to increases in the average amount of invested assets.
REALIZED INVESTMENT GAINS (LOSSES)
The Company generally purchases its investments with the intent to hold
to maturity by purchasing investments that match future cash-flow needs. 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 (losses)
for the periods shown:
NINE MONTHS REALIZED INVESTMENT
ENDED GAINS (LOSSES)
SEPTEMBER 30 (IN THOUSANDS)
----------------- ---------------------
1998 $2,445
1999 (3,340)
<PAGE>
Realized investment losses were $3.3 million for the first nine months
of 1999 compared to gains of $2.4 million for the corresponding period of 1998.
OTHER INCOME
The following table sets forth other income for the periods shown:
NINE MONTHS
ENDED OTHER INCOME
SEPTEMBER 30 (IN THOUSANDS)
----------------- ---------------
1998 $48,577
1999 67,056
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 nine months of 1999 was
$18.5 million higher than the corresponding period of 1998. Revenues from the
Company's broker-dealer subsidiary and automobile warranty business increased
$7.8 million and $7.6 million, respectively, in the first nine months of 1999 as
compared to the same period in 1998. Other income from all other sources
increased $3.1 million in the first nine months of 1999 as compared with the
first nine 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
NINE MONTHS ENDED SEPTEMBER 30
(IN THOUSANDS)
1998 1999
---- ----
Operating income (loss) (1)(2)
Life Insurance
<S> <C> <C>
Individual Life $ 20,341 $ 24,637
West Coast 15,673 19,434
Acquisitions 36,990 51,872
Specialty Insurance Products
Dental and Consumer Benefits 12,763 28,783
Financial Institutions 14,311 16,598
Retirement Savings and Investment Products
Stable Value Products 23,786 21,080
Investment Products 8,975 9,310
Corporate and other (2) 12,841 7,973
--------- ---------
Total operating income 145,680 179,687
-------- --------
Realized Investment Gains (Losses)
Stable Value Products (895) (82)
Investment Products 678 892
Unallocated Realized Investment Gains (Losses) 2,662 (4,150)
Related Amortization of Deferred Policy Acquisition Costs
Investment products (367) (892)
--------- ----------
Total net 2,078 (4,232)
-------- ---------
Income (loss) before income tax (2)
Life Insurance
Individual Life 20,341 24,637
West Coast 15,673 19,434
Acquisitions 36,990 51,872
Specialty Insurance Products
Dental and Consumer Benefits 12,763 28,783
Financial Institutions 14,311 16,598
Retirement Savings and Investment Products
Stable Value Products 22,891 20,998
Investment Products 9,286 9,310
Corporate and other (2) 12,841 7,973
Unallocated realized investment gains (losses) 2,662 (4,150)
---------- ---------
Total income before income tax $147,758 $175,455
======== ========
(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 $12,722 and $13,959 in the first nine months of
1999 and 1998, respectively. 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 $24.6 million
in the first nine months of 1999 compared to $20.3 million in the same period of
1998, an increase of 21%. The Division's mortality experience was $3.8 million
more favorable in the first nine months of 1999 as compared to the same period
of 1998. The Division's 1999 results include a $4.1 million loss relating to a
venture to sell term and term-like products through direct response and other
expenses to support future growth.
West Coast had pretax operating income of $19.4 million for the first
nine months of 1999 compared to $15.7 million for the same period last year.
This increase reflects the Division's growth through sales.
Pretax operating income from the Acquisitions Division was $51.9 million
in the first nine months of 1999 as compared to $37.0 million in the same period
of 1998. The Division's mortality experience was approximately $6.2 million
better than expected in the first nine months of 1999 as compared to being
approximately $2.1 million worse than expected in the first nine 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 $7.0 million in the first nine months of 1999.
The Dental Division's pretax operating income was $28.8 million in the
first nine months of 1999 compared to $12.8 million in the first nine months of
1998. The recent acquisition of United Dental Care contributed earnings of $13.9
million in 1999. The pretax operating earnings of the Division's other
businesses increased $2.1 million in the first nine months of 1999 as compared
to the same period last year.
Pretax operating income of the Financial Institutions Division was $16.6
million in the first nine months of 1999 as compared to $14.3 million last year.
In September 1999, the Company reacquired a block of credit life and disability
policies which it had ceded to NationsCredit Insurance Corporation. This
transaction resulted in $1.0 million of earnings in the third quarter of 1999.
In addition, the Division's other lines of business improved in the first nine
months of 1999 as compared to the same period of 1998.
The Stable Value Products Division had pretax operating income of $21.1
million in the first nine months of 1999 as compared to $23.8 million in the
corresponding period of 1998. This decrease was primarily due to lower interest
rate spreads. Realized investment losses associated with this Division in the
first nine months of 1999 were $0.1 million as compared to losses of $0.9
million in the same period last year. As a result, total pretax earnings were
$21.0 million in the first nine months of 1999 compared to $22.9 million for the
same period last year.
Investment Products Division pretax operating income was $9.3 million in
the first nine months of 1999 compared to $9.0 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 nine months of
1999 as compared to approximately $0.3 million of realized gains in the same
period of 1998. Total pretax earnings were $9.3 million in the first nine months
of 1999 as compared to $9.3 million in the same period of 1998.
<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 $4.9 million in the first nine months of
1999 as compared to the first nine 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:
NINE MONTHS
ENDED ESTIMATED EFFECTIVE
SEPTEMBER 30 INCOME TAX RATES
- ----------------- -----------------------
1998 35%
1999 36
The effective income tax rate for the full year of 1998 was
approximately 35%. 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 BEFORE EXTRAORDINARY LOSS
NINE MONTHS ----------------------------------------------------------------------------------
ENDED TOTAL PER SHARE- PERCENTAGE PER SHARE- PERCENTAGE
SEPTEMBER 30 (IN THOUSANDS) BASIC INCREASE DILUTED INCREASE
------------ ------------- --------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
1998 $ 96,043 $1.53 15.0% $1.51 14.4%
1999 112,164 1.71 11.8 1.70 12.6
</TABLE>
Compared to the same period in 1998, net income per share-diluted in
the first nine months of 1999 increased 12.6%, reflecting improved operating
earnings in the Individual Life, West Coast, Acquisitions, Dental, Financial
Institutions, and Investment Products Divisions, which were partially offset by
lower operating earnings in the Stable Value Products Division and the Corporate
and Other segment and realized investment losses (net of related amortization of
deferred policy acquisition costs).
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
<PAGE>
related to the termination of related interest rate swap agreements, net of an
income tax benefit of $0.9 million.
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 September 30, 1999, the fixed maturity investments (bonds and redeemable
preferred stocks) had a market value of $6,265.5 million, which is 2.1% below
amortized cost (less allowances for uncollectible amounts on investments) of
$6,401.6 million. The Company had $1,894.8 million in mortgage loans at
September 30, 1999. While the Company's mortgage loans do not have quoted market
values, at September 30, 1999, the Company estimates the market value of its
mortgage loans to be $1,926.8 million (using discounted cash flows from the next
call date) which is 1.7% above amortized cost. Most of the Company's mortgage
loans have significant prepayment penalties. These assets are
<PAGE>
invested for terms approximately corresponding to anticipated future benefit
payments. Thus, market value fluctuations should not adversely affect liquidity.
For several years the Company has offered a type of commercial loan
under which the Company will permit a slightly higher loan-to-value ratio in
exchange for a participating interest in the cash flows from the underlying real
estate. As of September 30, 1999, approximately $538.7 million of the Company's
mortgage loans have this participation feature.
At September 30, 1999, delinquent mortgage loans and foreclosed real
estate were 0.2% of assets. Bonds rated less than investment grade were 1.9% 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 $21.1 million
at September 30, 1999.
Policy loans at September 30, 1999, were $231.8 million, a decrease of
$0.8 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 September 30, 1999, the Company had
outstanding mortgage loan commitments of $682.4 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 September 30, 1999, the Company had policy liabilities and accruals
of $4.9 billion. The Company's life insurance products have a weighted average
minimum credited interest rate of approximately 4.3%.
At September 30, 1999, the Company had $2.7 billion of stable value
contract account balances and $1.6 billion of annuity account balances.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company does not currently use derivative financial instruments for
trading purposes. Combinations of swaps, 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.
<PAGE>
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 September 30, 1999, options with a
notional amount of $400 million were in a $1.1 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 September 30, 1999, interest rate swap contracts,
swaptions, caps and floors with a notional amount of $1,138 million were in an
$1.0 million net unrealized loss position. During the nine months ended
September 30, 1999, a $6.4 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 has $0.1 billion of contracts
which may be terminated by the contract holder upon seven or thirty days notice.
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 September 30, 1999,
to fund mortgage loans and to purchase fixed maturity and other long-term
investments in the amount of $754.0 million. The Company's subsidiaries held
$190.0 million in cash and short-term investments at September 30, 1999.
Protective Life Corporation had an additional $4.9 million in cash and
short-term investments available for general corporate purposes.
While the Company generally anticipates that the cash flows of its
subsidiaries will be sufficient to meet their investment commitments and
operating cash needs, the Company recognizes that investment commitments
scheduled to be funded may from time to time exceed the funds then
<PAGE>
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 Stable Value
Products to complement its cash management practices.
CAPITAL
At September 30, 1999, Protective Life Corporation had $59.0 million
outstanding under its $70.0 million revolving line of credit and an additional
$57.6 million of bank borrowings at a weighted average interest rate of 5.7%.
Included in these bank borrowings is a $55.0 million term loan, the proceeds of
which were used to redeem the MIPS. The remaining increase in borrowing by
Protective Life Corporation 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
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
and term-like insurance products. It is likely that many states will adopt
Triple X effective January 1, 2000. Triple X potentially increases the amount of
regulatory capital employed in the sale of these products. Insurers may react to
Triple X by changing product features and/or premium rates, or by maintaining
the status quo. Therefore, the competitive environment after January 1 is
unclear. 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. The Company cannot predict what effect Triple X may have on its life
insurance sales.
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 may consider 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 has approved legislation that would permit
commercial banks, insurance companies and investment banks to combine, provided
certain requirements are satisfied. While the Company cannot predict the impact
of this legislation, it could cause the Company to experience increased
competition as larger more efficient organizations emerge from such
combinations.
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 (where the Company maintains its headquarters), juries have substantial
discretion in awarding punitive and non-economis compensatory damages which
creates the potential for unpredictable material adverse judgments in any given
lawsuit. The Company, like other insurers, in the ordinary course of business,
is 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.
<PAGE>
Earlier this year, an unrelated insurer was placed under insurance
department supervision due to its inability to redeem approximately $6.8 billion
of contracts under which contract holders could terminate the contracts upon
seven or thirty days notice. The Company cannot predict what effect this
unrelated insurer's difficulties will have on certain markets in which the
Company participates.
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 its
insurance administration systems and general administration systems. 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. 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 Company's mission critical
systems. Integrated tests involve multiple system testing and are used to verify
the Year 2000 readiness of interfaces and connectivity across multiple systems.
The Company used its mainframe computer to simulate a Year 2000 production
environment and to facilitate integrated testing. Integrated tests were
completed during August 1999. Additional testing will be conducted whenever
changing circumstances warrant additional testing.
Significant business partners and suppliers that provide products or
services critical to Company operations are being reviewed for year 2000
readiness. To date, no significant 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
<PAGE>
ordinary course of business. Other costs have been expensed as incurred. Through
August 31, 1999, costs that have been specifically identified as relating to the
Year 2000 problem total $4.9 million, with an additional $0.3 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 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 has been prepared and approved by senior
management. 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 October 26, 1999,
reporting under Item 5 and Item 7 the Company's 1999 third
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: NOVEMBER 12, 1999 /S/JERRY W. DEFOOR
-----------------------
Jerry W. DeFoor
Vice President and Controller,
and Chief Accounting Officer
(Duly authorized officer)
<PAGE>
Exhibit 15
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Protective Life Corporation
We are aware that our report dated October 26, 1999, except for Note N as to
which the date is November 1, 1999, on our review of interim consolidated
financial information of Protective Life Corporation and subsidiaries for the
period ended September 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
November 12, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 6,265,531
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 29,707
<MORTGAGE> 1,894,874
<REAL-ESTATE> 16,201
<TOTAL-INVEST> 8,611,014
<CASH> 90,745
<RECOVER-REINSURE> 802,808
<DEFERRED-ACQUISITION> 962,381
<TOTAL-ASSETS> 12,507,123
<POLICY-LOSSES> 4,403,003
<UNEARNED-PREMIUMS> 522,061
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 122,720
<NOTES-PAYABLE> 236,349
0
0
<COMMON> 34,667
<OTHER-SE> 859,367
<TOTAL-LIABILITY-AND-EQUITY> 12,507,123
584,958
<INVESTMENT-INCOME> 503,570
<INVESTMENT-GAINS> (3,340)
<OTHER-INCOME> 67,056
<BENEFITS> 643,681
<UNDERWRITING-AMORTIZATION> 82,315
<UNDERWRITING-OTHER> 238,071
<INCOME-PRETAX> 188,177
<INCOME-TAX> 67,744
<INCOME-CONTINUING> 112,164<F1>
<DISCONTINUED> 0
<EXTRAORDINARY> (1,763)
<CHANGES> 0
<NET-INCOME> 110,401
<EPS-BASIC> 1.68
<EPS-DILUTED> 1.67
<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 $8,269.
</FN>
</TABLE>
<PAGE>
Exhibit 99
to
Form 10-Q
of
Protective Life Corporation
for the nine months
ended September 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.
WE OPERATE IN A MATURE, HIGHLY COMPETITIVE INDUSTRY, WHICH COULD LIMIT OUR
ABILITY TO GAIN OR MAINTAIN OUR POSITION IN THE INDUSTRY.
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 has approved
legislation that would permit commercial banks, insurance companies and
investment banks to combine, provided certain requirements are satisfied.
<PAGE>
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
financial strength and claims-paying-ability ratings from rating agencies.
The Company competes against other insurance companies and financial
institutions in the origination of commercial mortgage loans.
A RATINGS DOWNGRADE COULD ADVERSELY AFFECT OUR ABILITY TO COMPETE.
Ratings are an important factor in the Company's competitive position.
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 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.
OUR POLICY CLAIMS FLUCTUATE FROM YEAR TO YEAR.
The Company's results may fluctuate from year to year on account of
fluctuations in policy claims received by the Company.
WE COULD BE FORCED TO SELL ILLIQUID INVESTMENTS AT A LOSS TO COVER POLICYHOLDER
WITHDRAWALS.
Many of the products offered by the Company's life insurance
subsidiaries allow policyholders and contract holders 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 COULD NEGATIVELY AFFECT OUR SPREAD INCOME.
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
<PAGE>
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.
INSURANCE COMPANIES ARE HIGHLY REGULATED.
The Company's insurance subsidiaries are subject to government
regulation in each of the states in which they conduct business. Such regulation
is vested in state agencies having broad administrative power dealing with many
aspects of the insurance business, which may include premium rates, marketing
practices, advertising, policy forms, and capital adequacy, and is concerned
primarily with the protection of policyholders rather than share owners. The
Company cannot predict the form of any regulatory initiatives.
The Company's insurance subsidiaries act as fiduciaries and are subject
to regulation by the United States Department of Labor when providing a variety
of products and services to employee benefit plans governed by ERISA. Severe
penalties are imposed by ERISA on fiduciaries that breach their duties to the
plans under ERISA's prohibited transaction provisions.
Certain policies, contracts and annuities offered by the Company's
insurance subsidiaries are subject to regulation under the federal securities
laws administered by the Securities and Exchange Commission. The federal
securities laws contain regulatory restrictions and criminal, administrative and
private remedial provisions.
A TAX LAW CHANGE COULD ADVERSELY AFFECT OUR ABILITY TO COMPETE WITH
NON-INSURANCE PRODUCTS.
Under the Internal Revenue Code of 1986, as amended, 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 Internal Revenue 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 future tax initiatives may be proposed which could affect the Company.
<PAGE>
INDUSTRYWIDE LITIGATION CONCERNING SALES PRACTICES, AGENT MISCONDUCT, FAILURE TO
SUPERVISE AGENTS, AND OTHER MATTERS COULD RESULT IN SUBSTANTIAL JUDGEMENTS
AGAINST US.
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 (where the Company maintains its headquarters), juries have
substantial discretion in awarding punitive and non-economic compensatory
damages, which creates the potential for unpredictable material adverse
judgments in any given lawsuit. The Company, like other insurers, in the
ordinary course of business, is involved in such litigation or alternatively in
arbitration. The outcome of any such litigation or arbitration cannot be
predicted with certainty. In addition, in some class action and other lawsuits
involving insurers' sales practices, insurers have made material settlement
payments.
OUR INVESTMENTS ARE SUBJECT TO RISKS.
The Company's invested assets (including 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.
OUR ACQUISITION STRATEGY INVOLVES RISKS.
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.
WE ARE DEPENDENT ON 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.
<PAGE>
YEAR 2000 COMPUTER COMPLIANCE ISSUES MAY ADVERSELY AFFECT US.
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.
Because 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.
OUR REINSURANCE PROGRAM INVOLVES RISKS.
The Company's insurance subsidiaries cede insurance to other insurance
companies through reinsurance. 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 NO OBLIGATION TO
UPDATE OR REVISE FORWARD-LOOKING STATEMENTS TO REFLECT CHANGED ASSUMPTIONS, THE
OCCURRENCE OF UNANTICIPATED EVENTS, OR CHANGES TO PROJECTIONS OVER TIME.
