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Delaware 95-2492236
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
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 and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No[ ]
Number of shares of Common Stock, $.50 par value, outstanding as of May 5, 2000: 64,540,700 shares.
Page Number
Part I. Financial Information:
Item 1. Financial Statements:
Report of Independent Accountants......................................
Consolidated Condensed Statements of Income for the Three
Months ended March 31, 2000 and 1999 (unaudited).....................
Consolidated Condensed Balance Sheets as of March 31, 2000
(unaudited) and December 31, 1999....................................
Consolidated Condensed Statements of Cash Flows for the
Three Months ended March 31, 2000 and 1999 (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 4. Submission of matters to a Vote of Security Holders................
Item 6. Exhibits and Reports on Form 8-K...................................
Signature......................................................................
We have reviewed the accompanying consolidated condensed balance sheet of Protective Life Corporation and subsidiaries as of March 31, 2000, and the related consolidated condensed statements of income for the three-month periods ended March 31, 2000 and 1999 and consolidated condensed statements of cash flows for the three-month periods ended March 31, 2000 and 1999. 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 auditing standards generally accepted in the United States, 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 accounting principles generally accepted in the United States.
We previously audited in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet as of December 31, 1999, 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 23, 2000, 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, 1999, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.
PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in thousands except per share amounts)
(Unaudited)
Three Months Ended
March 31
------------------
2000 1999
REVENUES ---- ----
Premiums and policy fees $359,796 $315,369
Reinsurance ceded (145,487) (117,952)
------- -------
Premiums and policy fees, net of reinsurance ceded 214,309 197,417
Net investment income 173,213 162,435
Realized investment gains 2,696 1,326
Other income (2000 - includes $24,128 from sale of
affiliate) 59,059 18,003
------- -------
449,277 379,181
------- -------
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance ceded:
2000 - $96,754; 1999 - $63,868) 256,322 213,093
Amortization of deferred policy acquisition costs 37,518 30,952
Other operating expenses (net of reinsurance ceded:
2000 - $48,662; 1999 - $30,404)
84,590 73,187
------- -------
378,430 317,232
------- -------
INCOME BEFORE INCOME TAX 70,847 61,949
Income tax expense 25,505 22,301
------ ------
INCOME BEFORE MINORITY INTEREST 45,342 39,648
Minority interest in net income
of consolidated subsidiaries 2,307 3,025
------ ------
NET INCOME $43,035 $36,623
======= =======
NET INCOME PER SHARE - BASIC $.65 $.56
======= =======
NET INCOME PER SHARE - DILUTED $.65 $.56
======= =======
DIVIDENDS PAID PER SHARE $.12 $.11
======= =======
Average shares outstanding - basic 65,717,818 65,489,805
Average shares outstanding - diluted 66,148,004 66,075,522
See notes to consolidated condensed financial statements
PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
March 31 December 31
2000 1999
----------- ------------
ASSETS (Unaudited)
Investments:
Fixed maturities $6,799,141 $6,311,822
Equity securities 36,038 36,446
Mortgage loans on real estate 1,968,002 1,945,990
Investment real estate, net 15,643 15,582
Policy loans 230,160 232,126
Other long-term investments 79,990 66,386
Short-term investments 140,352 113,657
--------- ---------
Total investments 9,269,326 8,722,009
Cash 74,678 51,642
Accrued investment income 110,434 103,387
Accounts and premiums receivable, net 73,916 80,130
Reinsurance receivables 979,431 860,122
Deferred policy acquisition costs 1,107,127 1,011,524
Goodwill, net 245,431 218,483
Property and equipment, net 58,158 57,489
Other assets 42,809 66,950
Assets related to separate accounts
Variable annuity 1,910,097 1,778,618
Variable universal life 50,720 40,293
Other 3,573 3,517
----------- -----------
$13,925,700 $12,994,164
=========== ===========
LIABILITIES
Policy liabilities and accruals $5,512,810 $5,078,125
Stable value contract account balances 2,907,050 2,680,009
Annuity account balances 1,694,932 1,639,231
Other policyholders' funds 120,603 121,644
Other liabilities 415,184 405,010
Accrued income taxes 5,953 (5,701)
Deferred income taxes (31,398) (37,828)
Debt 246,922 236,023
Liabilities related to separate accounts
Variable annuity 1,910,097 1,778,618
Variable universal life 50,720 40,293
Other 3,573 3,517
---------- ----------
12,836,446 11,938,941
---------- ----------
COMMITMENTS AND CONTINGENT LIABILITIES - NOTE B
GUARANTEED PREFERRED BENEFICIAL INTERESTS
IN COMPANY’S SUBORDINATED DEBENTURES
8.25% Trust Originated Preferred Securities 75,000 75,000
6.5% FELINE PRIDES 115,000 115,000
------- -------
190,000 190,000
------- -------
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 256,455 256,057
Treasury stock (2000 - 4,792,417 shares; 1999- 4,831,025 shares) (12,856) (12,960)
Stock held in trust (2000 - 37,015 shares; 1999 - 18,681 shares) (1,067) (621)
Unallocated stock in Employee Stock Ownership Plan
(2000 - 1,112,668 shares; 1999 - 1,220,534 shares) (3,686) (4,043)
Retained earnings 773,496 738,204
Accumulated other comprehensive income
Net unrealized gains (losses) on investments
(net of income tax: 2000 - $(79,560); 1999 - $(78,659)) (147,755) (146,081)
----------- -----------
899,254 865,223
----------- -----------
$13,925,700 $12,994,164
=========== ===========
See notes to consolidated condensed financial statements
PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three Months Ended
March 31
-----------------------
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $43,035 $36,623
Adjustments to reconcile net income to net cash provided by
operating activities:
Realized investment gains (2,696) (1,326)
Amortization of deferred policy acquisition costs 37,518 30,952
Capitalization of deferred policy acquisition costs (94,812) (48,557)
Depreciation expense 2,335 2,119
Deferred income taxes 8,735 (1,570)
Accrued income taxes 12,020 18,006
Amortization of goodwill 1,891 1,255
Interest credited to universal life and investment products 92,818 85,361
Policy fees assessed on universal life and investment products (48,498) (36,243)
Change in accrued investment income and other receivables (270) (24,066)
Change in policy liabilities and other policyholders' funds
of traditional life and health products 98,206 37,398
Change in other liabilities (12,930) (31,051)
Other (net) 20,746 13,745
-------- ------
Net cash provided by operating activities 158,098 82,646
-------- ------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reductions of investments
Investments available for sale 2,414,138 3,696,797
Other 14,873 59,209
Sale of investments
Investments available for sale 260,445 214,724
Other 17,096 47,959
Cost of investments acquired
Investments available for sale (2,883,586) (3,947,000)
Other (59,275) (163,781)
Acquisition and bulk reinsurance assumptions, net of cash received (150,903)
Purchase of property and equipment (1,962) (5,605)
--------- --------
Net cash used in investing activities (389,174) (97,697)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings under line of credit arrangements and debt 1,084,212 331,100
Principal payments on line of credit arrangements and debt (1,073,307) (311,698)
Dividends to share owners (7,743) (7,088)
Purchase of common stock held in trust (447) (366)
Investment product deposits and changes in universal life deposits 564,747 401,145
Investment product withdrawals (313,350) (358,180)
--------- ---------
Net cash provided by financing activities 254,112 54,913
--------- ---------
INCREASE IN CASH 23,036 39,862
CASH AT BEGINNING OF PERIOD 51,642 9,486
------- -------
CASH AT END OF PERIOD $74,678 $49,348
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period:
Interest on debt $4,718 $2,681
Income taxes $2,986
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Reissurance of treasury stock to ESOP $255 $440
Unallocated stock in ESOP $357 $234
Reissuance of treasury stock $247 $169
Acquisitions and related reinsurance transactions:
Assets acquired $496,221
Liabilities assumed (345,318)
-------
Net $150,903
=======
See notes to consolidated condensed financial statements
The accompanying unaudited consolidated condensed financial statements of Protective Life Corporation and subsidiaries (the "Company") have been prepared in accordance with accounting principles generally accepted in the United States 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 accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 2000, are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. The year-end consolidated condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. 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, 1999.
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 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. In addition, in some class action and other lawsuits involving insurers’ sales practices, insurers have made material settlement payments. The Company, like other financial services companies, 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, 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.
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".
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.
In the 2000 first quarter, certain health insurance lines were transferred from the Dental and Consumer Benefits Division to the Corporate and Other segment in order to reflect management’s current focus. Prior period results have been restated to reflect the change.
Operating Segment Income for the
Three Months Ended March 31, 2000
---------------------------------------------------------------------------
(In Thousands)
Specialty Insurance
Life Insurance Products
Dental and
Individual Consumer Financial
Life West Coast Acquisitions Benefits Institutions
---------- ---------- ------------ ---------- ------------
Premiums and policy fees $81,854 $23,270 $34,790 $108,401 $87,087
Reinsurance ceded (56,081) (16,005) (7,942) (27,410) (38,049)
------ ------ ------ ------- ------
Net of reinsurance ceded 25,773 7,265 26,848 80,991 49,038
Net investment income 14,370 21,795 28,915 3,144 11,265
Realized investment gains (losses)
Other income 18,280 3,545 9,793
------ ------ ------ ------ ------
Total revenues 58,423 29,060 55,763 87,680 70,096
------ ------ ------ ------ ------
Benefits and settlement expenses 23,235 20,141 33,363 55,795 31,270
Amortization of deferred policy
acquisition costs 7,216 3,102 3,930 2,712 13,290
Other operating expenses 18,502 (2,805) 6,968 23,104 19,624
------ ------ ------ ------ ------
Total benefits and expenses 48,953 20,438 44,261 81,611 64,184
------ ------ ------ ------
Income before income tax 9,470 8,622 11,502 6,069 5,912
Retirement Savings and
Investment Products
Stable Corporate
Value Investment and Total
Products Products Other Adjustments Consolidated
-------- ---------- ------- ----------- -------------
Premiums and policy fees $7,291 $17,103 $359,796
Reinsurance ceded (145,487)
----- ------ -------
Net of reinsurance ceded 7,291 17,103 214,309
Net investment income $58,996 29,122 5,606 173,213
Realized investment gains (losses) (58) 429 $ 2,325 2,696
Other income 2,533 24,908 59,059
------ ------ ------ ----- -------
Total revenues 58,938 39,375 47,617 2,325 449,277
------ ------ ------ ----- -------
Benefits and settlement expenses 49,057 23,624 19,837 256,322
Amortization of deferred policy
acquisition costs 208 6,539 521 37,518
Other operating expenses 1,076 5,798 15,739 (3,416) 84,590
------ ------ ------ ----- -------
Total benefits and expenses 50,341 35,961 36,097 (3,416) 378,430
------ ------ ------ ----- -------
Income before income tax 8,597 3,414 11,520 70,847
Income tax expense 25,505 25,505
Minority interest 2,307 2,307
------
Net income $43,035
======
Operating Segment Income for the
Three Months Ended March 31, 1999
---------------------------------------------------------------------------
(In Thousands)
Specialty Insurance
Life Insurance Products
Dental and
Individual Consumer Financial
Life West Coast Acquisitions Benefits Institutions
---------- ---------- ------------ -------- ------------
Premiums and policy fees $64,420 $18,328 $41,105 $101,420 $66,753
Reinsurance ceded (37,469) (12,788) (8,597) (17,535) (41,563)
------ ------ ------ ------- ------
Net of reinsurance ceded 26,951 5,540 32,508 83,885 25,190
Net investment income 15,588 18,042 33,316 3,159 5,902
Realized investment gains (losses)
Other income 9,522 (6) (9) 1,373 5,425
------ ------ ------ ------ ------
Total revenues 52,061 23,576 65,815 88,417 36,517
------ ------ ------ ------ ------
Benefits and settlement expenses 18,922 14,589 35,523 56,207 11,310
Amortization of deferred policy
acquisition costs 8,825 1,405 6,094 1,732 6,515
Other operating expenses 15,500 2,000 6,605 21,872 13,458
------ ------ ------ ------ ------
Total benefits and expenses 43,247 17,994 48,222 79,811 31,283
------ ------ ------ ------ ------
Income before income tax 8,814 5,582 17,593 8,606 5,234
Retirement Savings and
Investment Products
Stable Corporate
Value Investment and Total
Products Products Other Adjustments Consolidated
-------- -------- ----- ----------- ------------
Premiums and policy fees $ 5,382 $17,961 $315,369
Reinsurance ceded (117,952)
----- ------ -------
Net of reinsurance ceded 5,382 17,961 197,417
Net investment income $51,650 25,566 9,212 162,435
Realized investment gains (losses) 3,070 648 $(2,392) 1,326
Other income 2,384 (686) 18,003
------ ------ ------ ----- -------
Total revenues 54,720 33,980 26,487 (2,392) 379,181
------ ------ ------ ----- -------
Benefits and settlement expenses 43,927 20,859 11,756 213,093
Amortization of deferred policy
acquisition costs 192 5,379 810 30,952
Other operating expenses 741 4,682 12,983 (4,654) 73,187
------ ------ ------ ----- -------
Total benefits and expenses 44,860 30,920 25,549 (4,654) 317,232
------ ------ ------ ----- -------
Income before income tax 9,860 3,060 938 61,949
Income tax expense 22,301 22,301
Minority interest 3,025 3,025
-----
Net income $ 36,623
======
Operating Segment Assets
March 31, 2000
---------------------------------------------------------------------------
(In Thousands)
Specialty Insurance
Life Insurance Products
Dental and
Individual Consumer Financial
Life West Coast Acquisitions Benefits Institutions
--------- ---------- ------------ -------- ------------
Investments and other assets $1,254,304 $1,374,304 $1,557,194 $280,080 $1,241,660
Deferred policy acquisition costs
and goodwill 395,875 221,477 231,973 236,109 132,369
--------- --------- --------- ------- ---------
Total assets $1,650,179 $1,595,781 $1,789,167 $516,189 $1,374,029
========= ========= ========= ======= =========
Retirement Savings and
Investment Products
Stable Corporate
Value Investment and Total
Products Products Other Consolidated
---------- ---------- --------- ------------
Investments and other assets $2,998,370 $3,566,461 $300,769 $12,573,142
Deferred policy acquisition costs
and goodwill 1,933 127,449 5,373 1,352,558
--------- --------- ------- ----------
Total assets $3,000,303 $3,693,910 $306,142 $13,925,700
========= ========= ======= ==========
Operating Segment Assets
December 31, 1999
---------------------------------------------------------------------------
(In Thousands)
Specialty Insurance
Life Insurance Products
Dental and
Individual Consumer Financial
Life West Coast Acquisitions Benefits Institutions
----------- ----------- ------------ --------- ------------
Investments and other assets $1,214,428 $1,343,517 $1,553,954 $283,475 $745,733
Deferred policy acquisition costs
and goodwill 379,117 200,605 235,903 235,213 53,567
--------- --------- --------- ------- -------
Total assets $1,593,545 $1,544,122 $1,789,857 $518,688 $799,300
========= ========= ========= ======= =======
Retirement Savings and
Investment Products
Stable Corporate
Value Investment and Total
Products Products Other Consolidated
----------- ---------- ---------- ------------
Investments and other assets $2,766,177 $3,352,911 $503,962 $11,764,157
Deferred policy acquisition costs
and goodwill 1,156 124,335 111 1,230,007
--------- --------- ------- ----------
Total assets $2,767,333 $3,477,246 $504,073 $12,994,164
========= ========= ======= ==========
Financial statements prepared in conformity with generally accepted accounting principles ("GAAP") differ in some respects from the statutory accounting practices prescribed or permitted by insurance regulatory authorities. At March 31, 2000 and for the three months then ended, the Company's life insurance subsidiaries had consolidated share-owner's equity and net income prepared in conformity with statutory reporting practices of $619.5 million and $21.7 million, respectively.
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 application of SFAS No. 115 does not affect the Company’s operations, its reported share-owners’ equity will fluctuate significantly as interest rates change.
The Company's balance sheets at March 31, 2000 and December 31, 1999, prepared on the basis of reporting investments at amortized cost rather than at market values, are as follows:
March 31 December 31
-------- -----------
(in thousands)
------------
Total investments $ 9,515,085 $ 8,965,673
Deferred policy acquisition costs 1,088,683 992,518
All other assets 3,549,247 3,260,631
---------- ----------
$14,153,015 $13,218,822
========== ==========
Deferred income taxes $ 48,162 $ 40,749
All other liabilities 12,867,844 11,976,769
---------- ----------
12,916,006 12,017,518
Guaranteed preferred beneficial
interests in Company’s sub-
ordinated debentures 190,000 190,000
Share-owners’ equity 1,047,009 1,011,304
---------- ----------
$14,153,015 $13,218,822
========== ==========
The Company has not used derivative financial instruments for trading purposes. Combinations of interest rate swap contracts, 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 or liability. No realized investment gains or losses were deferred in the first three months of 2000 or the full year of 1999.
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, Monthly Income Preferred Securities (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 March 31, 2000, contracts with a notional amount of $1.8 billion were in a $5.9 million net unrealized loss position. During the three months ended March 31, 2000, the Company recognized $0.3 million in realized investment gains related to derivative financial instruments.
The Company’s derivative financial instruments are with highly rated counterparties.
In March, 2000, the Company issued $125 million of Senior Notes which are summarized as follows:
(IN THOUSANDS)
8.00% Senior Notes due 2010 $ 50,000
8.10% Senior Notes due 2015 40,000
8.25% Senior Notes due 2030 35,000
---------
$125,000
=========
The Senior Notes due in 2010 and 2015 may be redeemed after three years. The Senior Notes due in 2030 may be redeemed after five years. The Company will also redeem the Senior Notes, subject to certain conditions, at the option of the representative of any deceased note holder.
Net income per share - basic is net income divided by the average number of shares of Common Stock outstanding including shares that are issuable under various deferred compensation plans.
Net income per share - diluted is adjusted net income divided by the average number of shares outstanding including all dilutive potentially issuable shares that are issuable under various stock- based compensation plans and stock purchase contracts.
A reconciliation of net income and adjusted net income, and basic and diluted average shares outstanding for the three-month period ended March 31, 2000 and 1999 is summarized as follows:
Reconciliation of Net Income and
Average Shares Outstanding
March 31
------------------------------
2000 1999
---- ----
Net income $43,035 $36,623
Dividends on FELINE PRIDES -----1 -----1
------ ------
Adjusted net income $43,035 $36,623
====== ======
Average shares issued and outstanding 64,520,395 64,446,665
Stock held in trust (37,015)
Issuable under various deferred compensation plans 1,234,438 1,043,140
---------- ----------
Average shares outstanding - basic 65,717,818 65,489,805
Stock held in trust 37,015
Stock appreciation rights 113,113 187,516
Issuable under various other stock-based compensation plans 280,058 398,201
FELINE PRIDES stock purchase contracts -----1 -----1
---------- ----------
Average shares outstanding - diluted 66,148,004 66,075,522
========== ==========
1 Excluded because the effect is anti-dilutive.
The following table sets forth the Company’s comprehensive income (loss) for the three-month periods ended March 31, 2000 and 1999:
Three Months Ended
March 31
-------------------
(In Thousands)
2000 1999
---- ----
Net income $43,035 $ 36,623
Increase (decrease) in net unrealized gains
on investments (net of income tax:
2000 - $43; 1999 - $(28,149)) 78 (52,275)
Reclassification adjustment for amounts included
in net income (net of income tax:
2000 - $1,821; 1999 - $(464)) 3,383 (862)
------ ------
Comprehensive income (loss) $46,496 $(16,514)
====== ======
In January 2000, the Company acquired the Lyndon Insurance Group (“Lyndon”). The transaction has been accounted for as a purchase, and the results of the transaction have been included in the accompanying financial statements since its effective date.
Summarized below are the consolidated results of operations for the three months ended March 31, 1999, on an unaudited pro forma basis, as if the Lyndon acquisition had occurred as of January 1, 1999. The pro forma information is based on the Company’s consolidated results of operations for the three months ended March 31, 1999, and on data provided by Lyndon, 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.
Three Months Ended
March 31, 1999
----------------------------------------
(In thousands, except per share amounts)
(Unaudited)
Total revenues $403,660
Net income $ 39,465
Net income per share-basic $0.60
Net income per share-diluted $0.60
On March 23, 2000, the company completed the sale of its Hong Kong affiliate. Included as a component of other income is $24.1 million relating to the transaction.
In 1999, the Company adopted Statements of Financial Accounting Standards ("SFAS") No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise," and Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," and Statement of Position 97-3, "Accounting by Insurance and Other Enterprises for Insurance Related Assessments" issued by the American Institute of Certified Public Accountants. The adoption of these accounting standards did not have a material effect on the Company's financial statements.
The Financial Accounting Standards Board has issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." Effective January 1, 2001, 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. The effects of adoption will depend upon the nature, purpose and volume of derivatives held by the Company at the date of adoption.
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.
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.
This report includes "forward-looking statements" which express 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.
The following table sets forth for the periods shown the amount of premiums and policy fees, net of reinsurance (“premiums and policy fees”) and the percentage change from the prior period:
Premiums and Policy Fees
Three Months ----------------------------------
Ended Amount Percentage
March 31 (in thousands) Increase
------------ -------------- ----------
1999 $197,417 32.2%
2000 214,309 8.6
Premiums and policy fees increased $16.9 million or 8.6% in the first three months of 2000 as compared to the first three months of 1999. Premiums and policy fees in the Individual Life Division decreased $1.2 million in the first three months of 2000 as compared to the same period in 1999 due to increased usage of reinsurance. Premiums and policy fees from the West Coast Division increased $1.7 million in the first three months of 2000 as compared to the first three months of 1999. Premiums and policy fees in the Acquisition Division are expected to decline with time unless new acquisitions are made. No transactions were completed in this Division in 1999 or the first quarter of 2000, therefore decreases in older acquired blocks resulted in a decrease of $5.7 million in premiums and policy fees. Premiums and policy fees in the Dental Division decreased $2.9 million in the first three months of 2000 as compared to the same period in 1999. On January 20, 2000, the Financial Institutions Division acquired the Lyndon Insurance Group (“Lyndon”) which resulted in a $21.1 million increase in premiums and policy fees. Premiums and policy fees related to the Financial Institutions Division’s other businesses increased $2.7 million in the first three months of 2000 as compared to the first three months of 1999. The increase in premiums and policy fees from the Investment Products Division was $1.9 million. Premiums and policy fees relating to various health insurnace lines in the Corporate and Other Segment decreased $0.9 million.
The following table sets forth for the periods shown the amount of net investment income and the percentage change from the prior period:
Net Investment Income
Three Months ----------------------------------
Ended Amount Percentage
March 31 (in thousands) Increase
------------ -------------- ----------
1999 $162,435 3.0%
2000 173,213 6.6
Net investment income in the first three months of 2000 was $10.8 million or 6.6% higher than the corresponding period of the preceding year primarily due to increases in the average amount of invested assets and to acquisitions. The Lyndon acquisition increased net investment income $2.3 million.
The Company generally purchases its investments with the intent to hold to maturity by purchasing investments that match future cash-flow needs. The sales of investments that have occurred have resulted principally from portfolio management decisions to maintain approximate matching of assets and liabilities.
The following table sets forth net realized investment gains for the periods shown:
Three Months Realized Investment
Ended Gains
March 31 (in thousands)
------------ -------------------
1999 $1,326
2000 2,696
Realized investment gains were $2.7 million for the first three months of 2000 compared to gains of $1.3 million for the corresponding period of 1999.
The following table sets forth other income for the periods shown:
Three Months
Ended Other Income
March 31 (In thousands)
------------ --------------
1999 $18,003
2000 59,059
Other income consists primarily of revenues of the Company's broker-dealer subsidiary and service contract business, fees from variable insurance products, and revenues of the Company’s noninsurance subsidiaries. Other income in the first three months of 2000 was $41.1 million higher than the corresponding period of 1999. Revenues from the Company’s broker-dealer subsidiary and service contract business increased $5.5 million and $4.9 million, respectively, in the first three months of 2000 as compared to the same period in 1999. On March 23, 2000, the Company completed the sale of its Hong Kong affiliate, resulting in $24.1 million of other income. Other income from all other sources increased $6.6 million in the first three months of 2000 as compared with the first three months of 1999.
In the 2000 first quarter, certain health insurance lines were transferred from the Dental and Consumer Benefits Division to the Corporate and Other segment. Prior period results have been restated to reflect the change.
The following table sets forth operating income or loss and income or loss before income tax for the periods shown:
Operating Income (Loss) and Income (Loss) Before Income Tax
Three Months Ended March 31
(In Thousands)
1999 2000
---- ----
Operating Income (Loss)1,2,3
Life Insurance
Individual Life 2 $8,814 $9,391
West Coast 5,582 8,622
Acquisitions 17,593 11,502
Specialty Insurance Products
Dental and Consumer Benefits 8,607 6,069
Financial Institutions 5,234 5,912
Retirement Savings and Investment Products
Stable Value Products 6,790 8,655
Investment Products 3,060 3,414
Corporate and Other3 937 11,520
------ ------
Total operating income 56,617 65,085
------ ------
Realized Investment Gains (Losses)
Stable Value Products 3,070 (58)
Investment Products 648 429
Unallocated Realized Investment Gains (Losses) (2,392) 2,325
Related Amortization of Deferred Policy Acquisition Costs
Investment Products (648) (429)
--- -----
Total net 678 2,267
--- -----
Income (Loss) Before Income Tax 2,3
Life Insurance
Individual Life 2 8,814 9,391
West Coast 5,582 8,622
Acquisitions 17,593 11,502
Specialty Insurance Products
Dental and Consumer Benefits 8,607 6,069
Financial Institutions 5,234 5,912
Retirement Savings and Investment Products
Stable Value Products 9,860 8,597
Investment Products 3,060 3,414
Corporate and Other3 937 11,520
Unallocated Realized Investment Gains (Losses) (2,392) 2,325
------ ------
Total income before income tax $57,295 $67,352
====== ======
1 Income before income tax excluding realized investment gains and losses and
related amortization of deferred acquisition costs.
2 Operating income and income before tax for the Individual Life Division
have been reduced by pretax minority interest in income of consolidated
subsidiaries of $79 in 2000.
3 Operating income and income before income tax for the Corporate and Other
segment have been reduced by pretax minority interest in income of
consolidated subsidiaries of $3,416 and $4,654 in the first three months of
2000 and 1999, respectively. Such minority interest related to payments
made on the Company’s MIPSSM, 8.25% TOPrSSM, and FELINE PRIDESSM.
The Individual Life Division’s pretax operating income was $9.4 million in the first three months of 2000 compared to $8.8 million in the same period of 1999. The Division’s mortality experience was approximately $2.2 million more favorable in the first three months of 2000 as compared to the same period of 1999. The Division’s 2000 results include a loss of $0.8 million relating to the Company’s broker dealer.
West Coast had pretax operating income of $8.6 million for the first three months of 2000 compared to $5.6 million for the same period last year. This increase reflects the Division’s growth through sales.
Pretax operating income from the Acquisitions Division was $11.5 million in the first three months of 2000 as compared to $17.6 million in the same period of 1999. The Division’s mortality experience was at expected levels in the first three months of 2000 as compared to being approximately $1.9 million better than expected in the first three months of 1999. Additionally, in the fourth quarter of 1999, adjustments were made to the Division’s investment portfolio which had the effect of transferring approximately $3.0 million of investment income to the Corporate and Other Segment. 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.
The Dental Division’s pretax operating income was $6.1 million in the first three months of 2000 compared to $8.6 million in the first three months of 1999. Indemnity dental earnings were slightly above the same period last year though claims were approximately $1.0 million higher than expected. Prepaid dental earnings decreased due to higher than expected lapses. The Company does not expect revenue growth in the prepaid dental line before the fourth quarter. The pretax operating earnings of the Division’s other businesses increased $0.2 million in the first three months of 2000 as compared to the same period last year.
Pretax operating income of the Financial Institutions Division was $5.9 million in the first three months of 2000 as compared to $5.2 million last year. Included in the Division’s results were $4.0 million of earnings from the Lyndon acquisition. Earnings of the Division’s other business decreased due to higher than expected claims in most lines.
The Stable Value Products Division had pretax operating income of $8.7 million in the first three months of 2000 as compared to $6.8 million in the corresponding period of 1999. The increase was due to higher interest rate spreads and higher account balances. Realized investment losses associated with this Division in the first three months of 2000 were $0.1 million as compared to gains of $3.1 million in the same period last year. As a result, total pretax earnings were $8.6 million in the first three months of 2000 compared to $9.9 million for the same period last year.
The Investment Products Division’s pretax operating income was $3.4 million in the first three months of 2000 compared to $3.1 million in the same period of 1999. The Division had no realized investment gains or losses (net of related amortization of deferred policy acquisition costs) in the first three months of 2000 and 1999.
Earnings from the Corporate and Other segment consist primarily of net investment income on unallocated capital, interest expense on substantially all debt, several lines of business which the Company is not actively marketing (mostly health insurance), and the operations of several small noninsurance subsidiaries. Pretax earnings for this segment increased $10.6 million in the first three months of 2000 as compared to the first three months of 1999. The segment’s results include $24.1 million from the sale of the Company’s Hong Kong affiliate. Earnings from health insurance lines decreased $5.5 million. The segment also had $4.6 million less net investment income (partially due to the allocation of capital to the Division to fund acquisitions) and $4.0 million higher expenses than in the same period last year.
The following table sets forth the effective income tax rates for the periods shown:
Three Months
Ended Estimated Effective
March 31 Income Tax Rates
-------- -------------------
1999 36%
2000 36
The effective income tax rate for the full year of 1999 was approximately 36%. Management’s estimate of the effective income tax rate for 2000 is approximately 36%.
The following table sets forth net income and net income per shares per share for the periods shown, and the percentage change from the prior period:
Net Income Before Extraordinary Loss
Three Months --------------------------------------------
Ended Total Per Share- Percentage Per Share- Percentage
March 31 (In thousands) Basic Increase Diluted Increase
--------- ------------- --------- ---------- ---------- ----------
1999 $36,623 $.56 16.7% $.56 19.2%
2000 43,035 .65 16.1 .65 16.1
Compared to the same period in 1999, net income per share-diluted in the first three months of 2000 increased 16.1%, reflecting improved operating earnings in the Individual Life, West Coast, Financial Institutions, Stable Value Products, and Investment Products Divisions, and the Corporate and Other segment and higher realized investment gains (net of related amortization of deferred policy acquisition costs) which were partially offset by lower operating earnings in the Acquisitions and Dental Divisions.
The Financial Accounting Standards Board (FASB) has issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." Effective January 1, 2001, 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. The effects of adoption will depend upon the nature, purpose and volume of derivatives held by the Company at the date of adoption.
In 1999, the Company adopted SFAS No.134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise," and Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," and Statement of Position 97-3, "Accounting by Insurance and Other Enterprises for Insurance Related Assessments" issued by the American Institute of Certified Public Accountants. The adoption of these accounting standards did not have a material effect on the Company's financial statements.
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.
The Company generally purchases its investments with the intent to hold to maturity by purchasing investments that match future cash flow needs. However, the Company may sell any of its investments to maintain proper matching of assets and liabilities. Accordingly, the Company has classified its fixed maturities and certain other securities as "available for sale."
The Company's investments in debt and equity securities are reported at market value, and investments in mortgage loans are reported at amortized cost. At March 31, 2000, the fixed maturity investments (bonds and redeemable preferred stocks) had a market value of $6,799.1 million, which is 3.4% below amortized cost (less allowances for uncollectible amounts on investments) of $7,041.9 million. The Company had $1,971.3 million in mortgage loans at March 31, 2000. While the Company's mortgage loans do not have quoted market values, at March 31, 2000, the Company estimates the market value of its mortgage loans to be $1,971.3 million (using discounted cash flows from the next call date) which is 0.2% above amortized cost. Most of the Company's mortgage loans have significant prepayment penalties. These assets are invested for terms approximately corresponding to anticipated future benefit payments. Thus, market value fluctuations should not adversely affect liquidity.
For several years the Company has offered a type of commercial loan under which the Company will permit a slightly higher loan-to-value ratio in exchange for a participating interest in the cash flows from the underlying real estate. As of March 31, 2000, approximately $484.8 million of the Company's mortgage loans have this participation feature.
At March 31, 2000, delinquent mortgage loans and foreclosed real estate were 0.3% of assets. Bonds rated less than investment grade were 2.2% of assets. The Company does not expect these investments to adversely affect its liquidity or ability to maintain proper matching of assets and liabilities. The Company's allowance for uncollectible amounts on investments was $21.8 million at March 31, 2000.
Policy loans at March 31, 2000, were $230.2 million, a decrease of $2.0 million from December 31, 1999. 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 March 31, 2000, the Company had outstanding mortgage loan commitments of $541.2 million.
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 March 31, 2000, the Company had policy liabilities and accruals of $5.5 billion. The Company’s life insurance products have a weighted average minimum credited interest rate of approximately 4.4%.
At March 31, 2000, the Company had $2.9 billion of stable value contract account balances and $1.7 billion of annuity account balances.
The Company has not used derivative financial instruments for trading purposes. Combinations of interest rate swap contracts, 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 or liability. No realized investment gains or losses were deferred in the first three months of 2000 or the full year of 1999.
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, Monthly Income Preferred Securities (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 March 31, 2000, contracts with a notional amount of $1.8 billion were in a $5.9 million net unrealized loss position. During the three months ended March 31, 2000, the Company recognized $0.3 million in realized investment gains related to derivative financial instruments.
The Company’s derivative financial instruments are with highly rated counterparties.
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 $1.1 billion during 1999. Cash outflows related to stable value contracts are estimated to be approximately $1.0 billion in 2000. At March 31, 2000, the Company had $55.3 million, $50.3 million, and $50.5 million of contracts which may be terminated by the contract holder upon seven, thirty, or ninety days notice, respectively. 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 March 31, 2000, to fund mortgage loans and to purchase fixed maturity and other long-term investments in the amount of $541.2 million. The Company's subsidiaries held $215.0 million in cash and short-term investments at March 31, 2000.
While the Company generally anticipates that the cash flows of its subsidiaries will be sufficient to meet their investment commitments and operating cash needs, the Company recognizes that investment commitments scheduled to be funded may from time to time exceed the funds then available. Therefore, the Company has arranged sources of credit for its insurance subsidiaries to use when needed. The Company expects that the rate received on its investments will equal or exceed its borrowing rate. Additionally, the Company may from time to time sell short-duration stable value products to complement its cash management practices.
The Company has also used securitization transaction’s (commercial mortgage loans) to increase its liquidity.
At March 31, 2000, Protective Life Corporation had no borrowings outstanding under its $70.0 million revolving line of credit.
On March 20, 2000, the Company issued Senior Notes totaling $125 million in aggregate principal amount with 10, 15 and 30 year maturities. Interest rates range from 8.00% to 8.25%. The proceeds were used to repay bank borrowings.
Protective Life Corporation's cash flow is dependent on cash dividends and payments on surplus notes from its subsidiaries, revenues from investment, data processing, legal and management services rendered to the subsidiaries, and investment income. At December 31, 1999, approximately $408.3 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.
The NAIC has adopted the Codification of Statutory Accounting Principles (Codification). The Codification changes current statutory accounting rules in several areas. The Company has not estimated the potential effect the Codification will have on the statutory capital of the Company’s insurance subsidiaries. The Codification will 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. Over half of the states have already adopted Triple X effective January 1, 2000 or have indicated they plan to adopt Triple X in 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 regulatory and competitive environments are unclear. The Company has assessed the probable impact of Triple X on its products and has introduced new products in response to Triple X. The Company cannot predict what effect Triple X may have on its life insurance sales, or how its response to Triple X will affect its competitive positions.
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 believes that at the present time there are no pending or threatened lawsuits that are reasonably likely to have a material adverse effect on the financial position, results of operations, or liquidity of the Company.
The Company is not aware of any material pending or threatened regulatory action with respect to the Company or any of its subsidiaries.
Legislation has been enacted that 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, potentially more efficient organizations emerge from such combinations.
During 1999 and the first quarter of 2000, most financial services companies, including the Company, experienced a decrease in the market price of their common stock. Although the Company believes it has sufficient, internally generated capital to fund its immediate growth and capital needs, a lower stock price may limit the Company’s ability to raise capital to fund other growth opportunities and acquisitions.
The President’s fiscal year 2001 budget contains proposals that, if enacted, could adversely affect the life insurance industry. The proposals represents $12.9 billion in new taxes on the life insurance industry. Most of the proposals were proposed and defeated in the 2000 budget. One proposal would tax the balances accumulated in tax memorandum account designated as Policyholders’ Surplus. The Company’s accumulation in this account at December 31, 1999, was approximately $70.5 million. A second proposal would require insurers to capitalize higher percentages of acquisition expenses for tax purposes, resulting in the earlier payment of tax. A third proposal would reduce the attractiveness of corporate-owned life insurance products. The Company has not estimated the potential effect these proposals may have on the Company.
There has been no material change from the disclosure in the Company’s Annual Report on Form 10-K for the year ended December 31, 1999.
The Annual Meeting of Share Owners was held on May 1, 2000. Shares entitled to vote at the Annual Meeting totaled 64,526,574 of which 56,465,619 shares were represented. The number of shares entitled to vote was determined as of March 10, 2000.
At the Annual Meeting the following directors were elected. The number of shares cast for and authorization withheld for each nominee is shown below.
AUTHORIZATION
FOR WITHHELD
---------- -------------
William J. Cabaniss, Jr. 56,050,506 415,113
Drayton Nabers, Jr. 52,530,289 3,935,330
John J. McMahon, Jr. 56,034,613 431,006
A. W. Dahlberg 56,048,808 416,811
Ronald L. Kuehn, Jr. 56,043,153 422,466
James S. M. French 56,045,399 420,220
Robert A. Yellowlees 56,048,606 417,013
John D. Johns 52,800,130 3,665,489
Elaine L. Chao 56,048,622 416,997
Donald M. James 56,045,184 420,435
J. Gary Cooper 56,038,930 426,689
H. Corbin Day 56,048,342 417,277
Additionally, at the Annual Meeting share owners approved a proposal to ratify the appointment by the Board of Directors of PricewaterhouseCoopers LLP as independent public accountants for the Company and its subsidiaries for 2000. Shares voting for this proposal were 56,362,352, shares voting against were 40,090, and shares abstaining were 63,177.
(a) 15 Letter re: unaudited interim financial statements
27 Financial Data Schedule
99 Safe harbor for Forward Looking Statements
(b) A current report on Form 8-K was filed April 26, 2000, reporting under Item
5 and Item 7 the Company’s 2000 first quarter earnings press release.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PROTECTIVE LIFE CORPORATION
Date: May 15, 2000 /s/ Jerry W. DeFoor
Jerry W. DeFoor
Vice President and Controller,
and Chief Accounting Officer
(Duly authorized officer)
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