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| DELAWARE | 95-2492236 | ||
|---|---|---|---|
| (State or other jurisdiction | (IRS Employer | ||
| incorporation or organization) | Identificiation 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 November 10, 2000: 64,557,567 shares.
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, 2000 and 1999 (unaudited)......................
Consolidated Condensed Balance Sheets as of September 30, 2000
(unaudited) and December 31, 1999....................................
Consolidated Condensed Statements of Cash Flows for the
Nine Months ended September 30, 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 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 September 30, 2000, and the related consolidated condensed statements of income for the three-month and nine-month periods ended September 30, 2000 and 1999 and consolidated condensed statements of cash flows for the nine-month periods ended September 30, 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 of America, 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 of America.
We previously audited in accordance with auditing standards generally accepted in the United States of America, 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 Nine Months Ended
September 30 September 30
--------------------------------------------------------
2000 1999 2000 1999
------- ------- ------- -------
REVENUES
Premiums and policy fees $370,332 $325,654 $1,195,186 $ 967,828
Reinsurance ceded (157,791) (134,573) (556,448) (382,870)
------------ ----------- ----------- ----------
Premiums and policy fees, net of reinsurance ceded 212,541 191,081 638,738 584,958
Net investment income 187,625 170,318 545,416 503,570
Realized investment losses (4,646) (3,984) (5,056) (3,340)
Other income 35,649 23,808 134,374 67,056
------------ ----------- ----------- ----------
431,169 381,223 1,313,472 1,152,244
------------ ----------- ----------- ----------
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance ceded:
three months: 2000 - $165,205; 1999 - $85,055
nine months: 2000 - $404,455; 1999 - $242,578) 254,185 212,869 755,768 643,681
Amortization of deferred policy acquisition costs 40,146 23,088 111,866 82,315
Amortization of goodwill 2,023 1,568 5,866 4,083
Other operating expenses (net of reinsurance ceded:
three months: 2000 - $98,048; 1999 - $33,457
nine months: 2000 - $180,855; 1999 - $102,828) 78,215 81,897 247,750 233,988
------------ ----------- ---------- ---------
374,569 319,422 1,121,250 964,067
------------ ----------- ---------- ---------
INCOME BEFORE INCOME TAX 56,600 61,801 192,222 188,177
Income tax expense 20,263 22,248 68,815 67,744
------------ ----------- ---------- ----------
INCOME BEFORE MINORITY INTEREST AND
EXTRAORDINARY LOSS 36,337 39,553 123,407 120,433
Minority interest in net income
of consolidated subsidiaries 2,358 2,220 7,091 8,269
------------ ----------- ---------- ---------
INCOME BEFORE EXTRAORDINARY LOSS 33,979 37,333 116,316 112,164
Extraordinary loss on early extinguishment of debt 1,763
------------ ----------- ---------- ----------
NET INCOME $ 33,979 $ 37,333 $ 116,316 $110,401
============ =========== ========== =========
EARNINGS PER SHARE - BASIC
Income before extraordinary loss $ .52 $ .57 $ 1.77 $ 1.71
Extraordinary loss .03
------------ ----------- ---------- --------
Net income $ .52 $ .57 $ 1.77 $ 1.68
============ =========== ========== ========
EARNINGS PER SHARE - DILUTED
Income before extraordinary loss $ .52 $ .57 $ 1.76 $ 1.70
Extraordinary loss .03
----------- ----------- ---------- --------
Net income $ .52 $ .57 $ 1.76 $ 1.67
=========== =========== ========== ========
DIVIDENDS PAID PER SHARE $ .13 $ .12 $ .38 $ .35
=========== =========== ========== ========
Average shares outstanding - basic 65,912,449 65,725,022 65,797,684 65,578,965
Average shares outstanding - diluted 66,350,622 66,180,351 66,258,911 66,148,748
See notes to consolidated condensed financial statements
PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
September 30 December 31
2000 1999
-------------- -------------
ASSETS (Unaudited)
Investments:
Fixed maturities, at market $ 7,245,912 $ 6,311,822
Equity securities, at market 58,319 36,446
Mortgage loans on real estate 2,146,972 1,945,990
Investment real estate, net 12,713 15,582
Policy loans 230,181 232,126
Other long-term investments 87,678 66,386
Short-term investments 137,809 113,657
-------------- ------------
Total investments 9,919,584 8,722,009
Cash 77,010 51,642
Accrued investment income 120,978 103,387
Accounts and premiums receivable, net 71,137 80,130
Reinsurance receivables 914,493 860,122
Deferred policy acquisition costs 1,194,634 1,011,524
Goodwill, net 243,860 218,483
Property and equipment, net 54,695 57,489
Other assets 41,088 66,950
Assets related to separate accounts
Variable annuity 1,946,487 1,778,618
Variable universal life 63,318 40,293
Other 3,687 3,517
-------------- ------------
$14,650,971 $12,994,164
============== ============
LIABILITIES
Policy liabilities and accruals $ 5,650,940 $ 5,078,125
Stable value contract account balances 3,060,268 2,680,009
Annuity account balances 1,906,779 1,639,231
Other policyholders' funds 117,453 121,644
Other liabilities 403,572 405,010
Accrued income taxes (8,859) (5,701)
Deferred income taxes 18,010 (37,828)
Debt 276,198 236,023
Liabilities related to separate accounts
Variable annuity 1,946,487 1,778,618
Variable universal life 63,318 40,293
Other 3,687 3,517
-------------- ------------
13,437,853 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 256,631 256,057
Treasury stock (2000 - 4,775,550 shares; 1999 - 4,831,025 shares) (12,831) (12,960)
Stock held in trust (2000 - 45,715 shares; 1999 - 18,681 shares) (1,303) (621)
Unallocated stock in Employee Stock Ownership Plan
(2000 - 1,112,668 shares; 1999 - 1,220,534 shares) (3,686) (4,043)
Retained earnings 829,993 738,204
Accumulated other comprehensive income
Net unrealized gains (losses) on investments
(net of income tax: 2000 - $(43,267); 1999 - $(78,659)) (80,353) (146,081)
-------------- ------------
1,023,118 865,223
-------------- ------------
$14,650,971 $12,994,164
============== ============
See notes to consolidated condensed financial statements
PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine Months Ended
September 30
------------------------------
2000 1999
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 116,316 $ 110,401
Adjustments to reconcile net income to net cash provided by
operating activities:
Realized investment losses 5,056 3,340
Amortization of deferred policy acquisition costs 111,866 82,315
Capitalization of deferred policy acquisition costs (266,820) (178,319)
Depreciation expense 6,574 5,415
Deferred income taxes 21,345 18,508
Accrued income taxes (2,792) 7,760
Amortization of goodwill 5,866 4,083
Interest credited to universal life and investment products 294,981 234,402
Policy fees assessed on universal life and investment products (147,933) (118,452)
Change in accrued investment income and other receivables 56,902 (69,521)
Change in policy liabilities and other policyholders' funds
of traditional life and health products 254,369 123,193
Change in other liabilities (24,882) 92,242
Other (net) 20,841 (7,153)
---------- ---------
Net cash provided by operating activities 451,689 308,214
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reductions of investments
Investments available for sale 9,559,553 3,585,675
Other 35,696 208,300
Sale of investments
Investments available for sale 580,406 291,153
Other 66,795 267,676
Cost of investments acquired
Investments available for sale (10,714,474) (3,868,246)
Other (307,318) (742,912)
Acquisition and bulk reinsurance assumptions, net of cash received (150,903) 46,508
Purchase of property and equipment (4,294) (15,360)
Sale of property and equipment 3,130
---------- ----------
Net cash used in investing activities (934,539) (224,076)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings under line of credit arrangements and debt 1,754,479 4,430,677
Principal payments on line of credit arrangements and debt (1,714,287) (4,366,363)
Payment of guaranteed preferred beneficial interests (55,000)
Dividends to share owners (24,526) (22,565)
Investment product deposits and changes in universal life deposits 1,533,505 866,850
Investment product withdrawals (1,040,953) (856,478)
---------- ----------
Net cash provided by (used in) financing activities 508,218 (2,879)
---------- ----------
INCREASE IN CASH 25,368 81,259
CASH AT BEGINNING OF PERIOD 51,642 9,486
---------- ----------
CASH AT END OF PERIOD $ 77,010 $ 90,745
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period:
Interest on debt $ 16,630 $ 13,438
Income taxes $ 44,220 $ 39,406
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Reissuance of treasury stock to ESOP $ 440
Unallocated stock in ESOP $ 234 $ 264
Reissuance of treasury stock $ 221 $ 1,500
Acquisitions and related reinsurance transactions:
Assets acquired $ 496,221
Liabilities assumed (345,318)
----------
Net $ 150,903
==========
See notes to consolidated condensed financial statements
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 accounting principles generally accepted in the United States of America 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 of America for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation have been included. Operating results for the nine month period ended September 30, 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 of America. 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.
NOTE B - COMMITMENTS AND CONTINGENT LIABILITIESThe 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.
NOTE C - GUARANTEED PREFERRED BENEFICIAL INTERESTSOn 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”.
NOTE D - OPERATING SEGMENTSThe 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 segment results have been restated to reflect the change.
Operating Segment Income for the
Nine Months Ended September 30, 2000
-----------------------------------------------------------------------------
(In Thousands)
Specialty Insurance
Life Insurance Products
Dental and
Individual Consumer Financial
Life West Coast Acquisitions Benefits Institutions
------------ ------------ -------------- ----------- -------------
Premiums and policy fees $297,080 $99,939 $101,803 $304,123 $280,273
Reinsurance ceded (225,465) (78,426) (22,151) (60,069) (121,943)
------------ ------------ -------------- ----------- -------------
Net of reinsurance ceded 71,615 21,513 79,652 244,054 158,330
Net investment income 45,095 66,999 87,992 8,720 34,125
Realized investment gains (losses)
Other income 53,274 9 12,728 31,947
------------ ------------ -------------- ----------- -------------
Total revenues 169,984 88,512 167,653 265,502 224,402
------------ ------------ -------------- ----------- -------------
Benefits and settlement expenses 62,365 64,670 96,691 164,772 99,674
Amortization of deferred policy
acquisition costs 22,957 10,120 13,179 9,563 35,371
Amortization of goodwill 256 4,044 1,558
Other operating expenses 54,643 (12,651) 19,291 64,122 64,775
------------ ------------ -------------- ----------- -------------
Total benefits and expenses 140,221 62,139 129,161 242,501 201,378
------------ ------------ -------------- ----------- -------------
Income before income tax 29,763 26,373 38,492 23,001 23,024
Retirement Savings and
Investment Products
Stable Corporate
Value Investment and Total
Products Products Other Adjustments Consolidated
------------ ------------ -------------- ----------- -------------
Premiums and policy fees $ 22,858 $89,110 $1,195,186
Reinsurance ceded (48,394) (556,448)
------------ ------------ -------------- ----------- -------------
Net of reinsurance ceded 22,858 40,716 638,738
Net investment income $178,850 95,888 27,747 545,416
Realized investment gains (losses) (2,272) 457 $ (3,241) (5,056)
Other income 8,379 28,037 134,374
------------ ------------ -------------- ----------- -------------
Total revenues 176,578 127,582 96,500 (3,241) 1,313,472
------------ ------------ -------------- ----------- -------------
Benefits and settlement expenses 152,299 78,837 36,460 755,768
Amortization of deferred policy
acquisition costs 658 18,298 1,720 111,866
Amortization of goodwill 8 5,866
Other operating expenses 2,907 18,469 46,894 (10,700) 247,750
------------ ------------ -------------- ----------- -------------
Total benefits and expenses 155,864 115,604 85,082 (10,700) 1,121,250
------------ ------------ -------------- ----------- -------------
Income before income tax 20,714 11,978 11,418 192,222
Income tax expense 68,815 68,815
Minority interest 7,091 7,091
------------ ------------ -------------- ----------- -------------
Net income $ 116,316
=============
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
Premiums and policy fees $200,912 $62,520 $113,526 $286,647 $212,751
Reinsurance ceded (126,454) (42,802) (24,420) (36,960) (132,233)
------------ ------------ -------------- ----------- -------------
Net of reinsurance ceded 74,458 19,718 89,106 249,687 80,518
Net investment income 45,492 56,779 99,587 10,461 17,632
Realized investment gains (losses)
Other income 32,738 1,302 (9) 4,503 19,923
------------ ------------ -------------- ----------- -------------
Total revenues 152,688 77,799 188,684 264,651 118,073
------------ ------------ -------------- ----------- -------------
Benefits and settlement expenses 55,265 50,471 98,237 160,718 40,586
Amortization of deferred policy
acquisition costs 20,317 5,055 15,309 5,724 18,654
Amortization of goodwill 3,889 186
Other operating expenses 52,469 2,839 23,266 64,637 42,049
------------ ------------ -------------- ----------- -------------
Total benefits and expenses 128,051 58,365 136,812 234,968 101,475
------------ ------------ -------------- ----------- -------------
Income before income tax 24,637 19,434 51,872 29,683 16,598
Retirement Savings and
Investment Products
Stable Corporate
Value Investment and Total
Products Products Other Adjustments Consolidated
------------ ------------ -------------- ----------- -------------
Premiums and policy fees $ 17,610 $73,862 $ 967,828
Reinsurance ceded (20,001) (382,870)
------------ ------------ -------------- ----------- -------------
Net of reinsurance ceded 17,610 53,861 584,958
Net investment income $155,634 78,736 39,249 503,570
Realized investment gains (losses) (82) 892 $ (4,150) (3,340)
Other income 7,111 1,488 67,056
------------ ------------ -------------- ----------- -------------
Total revenues 155,552 104,349 94,598 (4,150) 1,152,244
------------ ------------ -------------- ----------- -------------
Benefits and settlement expenses 131,016 64,477 42,911 643,681
Amortization of deferred policy
acquisition costs 575 14,777 1,904 82,315
Amortization of goodwill 8 4,083
Other operating expenses 2,963 15,785 42,702 (12,722) 233,988
------------ ------------ -------------- ----------- -------------
Total benefits and expenses 134,554 95,039 87,525 (12,722) 964,067
------------ ------------ -------------- ----------- -------------
Income before income tax 20,998 9,310 7,073 188,177
Income tax expense 67,744 67,744
Minority interest 8,269 8,269
Extraordinary loss 1,763 1,763
------------ ------------ -------------- ----------- -------------
Net income $ 110,401
=============
Operating Segment Assets
September 30, 2000
------------------------------------------------------------------------------
(In Thousands)
Specialty Insurance
Life Insurance Products
Dental and
Individual Consumer Financial
Life West Coast Acquisitions Benefits Institutions
------------ ------------ -------------- ----------- -------------
Investments and other assets $1,215,091 $1,437,714 $1,549,613 $268,483 $1,174,146
Deferred policy acquisition costs
and goodwill 342,829 269,594 228,875 236,228 145,463
------------ ------------ -------------- ----------- -------------
Total assets $1,557,920 $1,707,308 $1,778,488 $504,711 $1,319,609
============ ============ ============== =========== =============
Retirement Savings and
Investment Products
Stable Corporate
Value Investment and Total
Products Products Other Consolidated
------------ ------------ -------------- -------------
Investments and other assets $3,189,891 $3,902,413 $475,126 $13,212,477
Deferred policy acquisition costs
and goodwill 2,350 130,744 82,411 1,438,494
------------- ------------- -------------- ------------
Total assets $3,192,241 $4,033,157 $557,537 $14,650,971
============= ============= ============== ============
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 September 30, 2000 and for the nine months then ended, the Company’s insurance subsidiaries had consolidated share-owner’s equity and net income prepared in conformity with statutory reporting practices of $608.1 million and $31.0 million, respectively.
NOTE F - INVESTMENTSAs 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 September 30, 2000 and December 31, 1999, prepared on the basis of reporting investments at amortized cost rather than at market values, are as follows:
September 30 December 31
-----------------------------------------------
(in thousands)
Total investments $10,051,495 $ 8,965,673
Deferred policy acquisition costs 1,186,343 992,518
All other assets 3,536,753 3,260,631
----------- ------------
$14,774,591 $ 13,218,822
=========== ============
Deferred income taxes $ 61,277 $ 40,749
All other liabilities 13,419,843 11,976,769
----------- ------------
13,481,120 12,017,518
Guaranteed preferred beneficial
interests in Company's sub-
ordinated debentures 190,000 190,000
Share-owners' equity 1,103,471 1,011,304
------------ ------------
$14,774,591 $ 13,218,822
============ ============
NOTE G - DERIVATIVE FINANCIAL INSTRUMENTS
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. Realized investment gains and losses on contracts which qualify as hedges are deferred and amortized over the life of the hedged asset or liability. Realized investment losses of $1.2 million were deferred during the first nine months of 2000. No realized investment gains or losses were deferred in 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. The Company uses foreign exchange contracts in connection with certain stable value contracts denominated in foreign currencies.
At September 30, 2000, contracts with a notional amount of $2.3 billion were in a $14.1 million net unrealized loss position. During the nine months ended September 30, 2000, the Company recognized $9.3 million in realized investment losses related to derivative financial instruments. In addition, certain stable value contracts were recorded at market value at September 30, 2000, resulting in a realized investment gain of $11.4 million for the nine months ended September 30, 2000.
The Company's derivative financial instruments are with highly rated counterparties.
The Company has entered into a total return swap in connection with a portfolio of investments managed by the Company for an unrelated party. The notional amount was $278 million at September 30, 2000. There was no unrealized gain or loss relating to the swap at September 30, 2000.
NOTE H - SENIOR NOTESIn 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.
NOTE I - NET INCOME PER SHARENet 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 month periods ended September 30, 2000 and 1999 is summarized as follows:
Reconciliation of Net Income and
Average Shares Outstanding
September 30
----------------------------------
2000 1999
--------------- -------------
Net income $116,316 $110,401
Dividends on FELINE PRIDES ---1 ---1
--------------- -------------
Adjusted net income $116,316 $110,401
=============== =============
Average shares issued and outstanding 64,539,632 64,475,225
Stock held in trust (43,673)
Issuable under various deferred compensation plans 1,301,725 1,103,740
--------------- -------------
Average shares outstanding - basic 65,797,684 65,578,965
Stock held in trust 43,673
Stock appreciation rights 132,594 188,465
Issuable under various other stock-based compensation plans 284,960 381,318
--------------- -------------
FELINE PRIDES stock purchase contracts ---1 ---1
--------------- -------------
Average shares outstanding - diluted 66,258,911 66,148,748
=============== =============
1 Excluded because the effect is anti-dilutive.
NOTE J - COMPREHENSIVE INCOME (LOSS)
The following table sets forth the Company's comprehensive income (loss) for the three and nine month periods ended September 30, 2000 and 1999:
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------- --------------------------
(In Thousands)
2000 1999 2000 1999
------------ ---------- ---------- ---------
Net income $ 33,979 $37,333 $116,316 $110,401
Increase (decrease) in net unrealized gains
on investments (net of income tax:
three months: 2000 - $40,385; 1999 - $2,800
nine months: 2000 - $33,622; 1999 - $(76,228)) 75,004 5,198 62,442 (141,567)
Reclassification adjustment for amounts included
in net income (net of income tax:
three months: 2000 - $1,627; 1999 - $1,394
nine months: 2000 - $1,770; 1999 - $1,169) 3,019 2,590 3,286 2,171
------------ --------- ---------- ---------
Comprehensive income (loss) $112,002 $45,121 $182,044 $(28,995)
========== ========= ========== =========
NOTE K - ACQUISITION
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 nine months ended September 30, 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 nine months ended September 30, 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.
Nine Months Ended
September 30, 1999
-----------------------
(In thousands, except
per share amounts)
(Unaudited)
Total revenues $ 1,225,171
Net income $ 117,219
Net income per share-basic $ 1.79
Net income per share-diluted $ 1.77
NOTE L - SALE OF AFFILIATE
On March 22, 2000, the Company completed the sale of its Hong Kong affiliate. Included in other income for the nine months ended September 30, 2000 is $24.8 million relating to the transaction.
NOTE M - RECENTLY ISSUED ACCOUNTING STANDARDSThe 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, as amended by SFAS No.138, will require the Company to record derivative financial instruments, including certain derivative instruments embedded in other contracts, on its balance sheet and to carry such derivatives at fair value. Derivatives that are not designated to be part of a qualifying hedging relationship must be adjusted to fair value each period through net income. If the derivative is a hedge, its change in fair value is either offset against the change in fair value of the hedged item through net income or recorded in share-owners' equity until the hedged item is recognized in net income. The fair value of derivatives increase or decrease as interest rates and general economic conditions change. 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.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of SFAS No. 125". SFAS No. 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures. The statement is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ended after December 15, 2000. This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001.
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 O - SUBSEQUENT EVENTOn November 7, 2000, the Company announced that its principal operating subsidiary, Protective Life Insurance Company, has agreed to coinsure a block of approximately 70,000 individual life policies from Standard Insurance Company. The transaction represents approximately $725 million of life insurance reserves and approximately $80 million of annual premium. The transaction is subject to regulatory approval.
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
Nine Months ------------------------------------
Ended Amount Percentage
September 30 (in thousands) Increase
--------------- ------------- -------------
1999 $584,958 24.0%
2000 638,738 9.2
Premiums and policy fees increased $53.8 million or 9.2% in the first nine months of 2000 as compared to the first nine months of 1999. Premiums and policy fees in the Individual Life Division decreased $2.8 million in the first nine months of 2000 as compared to the same period in 1999 due to a higher amount of reinsurance ceded. Premiums and policy fees from the West Coast Division increased $1.8 million in the first nine months of 2000 as compared to the first nine months of 1999. Premiums and policy fees in the Acquisition Division are expected to decline with time (due to the lapsing of policies resulting from deaths of insureds or terminations of coverage) unless new acquisitions are made. No acquisitions were completed in this Division in 1999 or the first nine months of 2000, therefore decreases in older acquired blocks resulted in a decrease of $9.5 million in premiums and policy fees. Premiums and policy fees in the Dental Division decreased $5.6 million in the first nine 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 $69.6 million increase in premiums and policy fees. Premiums and policy fees related to the Financial Institutions Division's other businesses increased $8.2 million in the first nine months of 2000 as compared to the first nine months of 1999. The increase in premiums and policy fees from the Investment Products Division was $5.2 million. Premiums and policy fees relating to various health insurance lines in the Corporate and Other Segment decreased $13.1 million.
Net Investment IncomeThe 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
Nine Months --------------------------------------
Ended Amount Percentage
September 30 (in thousands) Increase
--------------------- ---------------- --------------
1999 $503,570 6.0%
2000 545,416 8.3
Net investment income in the first nine months of 2000 was $41.8 million or 8.3% 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 $12.8 million.
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. Accordingly, the Company has classified all of its investments in fixed maturities, equity securities, and short-term investments as "available for sale".
The following table sets forth net realized investment losses for the periods shown:
Nine Months Realized Investment
Ended Losses
September 30 (in thousands)
--------------- ---------------------
1999 $(3,340)
2000 (5,056)
Realized investment losses were $5.1 million for the first nine months of 2000 compared to losses of $3.3 million for the corresponding period of 1999. The Company could experience significant realized investment losses were it to make adjustments to its existing fixed maturities portfolio.
Other IncomeThe following table sets forth other income for the periods shown:
Nine Months
Ended Other Income
September 30 (In thousands)
----------------- -----------------
1999 $ 67,056
2000 134,374
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 nine months of 2000 was $67.3 million higher than the corresponding period of 1999. Revenues from the Company's broker-dealer subsidiary, direct response subsidiary, consumer direct dental business, and service contract business increased $12.6 million, $8.3 million, $5.9 million, and $9.5 million, respectively, in the first nine months of 2000 as compared to the same period in 1999. On March 22, 2000, the Company completed the sale of its Hong Kong affiliate, resulting in $24.8 million of other income. Other income from all other sources increased $6.2 million in the first nine months of 2000 as compared with the first nine 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 segment results have been restated to reflect the change.
The following table sets forth operating income or loss and income or loss before income tax by business segment for the periods shown:
Operating Income (Loss) and Income (Loss) Before Income Tax
Nine Months Ended September 30
(In Thousands)
2000 1999
------------ ----------
Operating Income (Loss)(1),(2), (3)
Life Insurance
Individual Life (2) $ 29,763 $ 24,637
West Coast 26,373 19,434
Acquisitions 38,492 51,872
Specialty Insurance Products
Dental and Consumer Benefits 23,001 29,683
Financial Institutions 23,024 16,598
Retirement Savings and Investment Products
Stable Value Products 22,986 21,080
Investment Products 11,978 9,310
Corporate and Other (3) 11,418 7,073
----------- ---------
Total operating income 187,035 179,687
----------- ---------
Realized Investment Gains (Losses)
Stable Value Products (2,272) (82)
Investment Products 457 892
Unallocated Realized Investment Gains (Losses) (3,241) (4,150)
Related Amortization of Deferred Policy Acquisition Costs
Investment Products (457) (892)
----------- ---------
Total net (5,513) (4,232)
----------- ---------
Income (Loss) Before Income Tax (2), (3)
Life Insurance
Individual Life (2) 29,763 24,637
West Coast 26,373 19,434
Acquisitions 38,492 51,872
Specialty Insurance Products
Dental and Consumer Benefits 23,001 29,683
Financial Institutions 23,024 16,598
Retirement Savings and Investment Products
Stable Value Products 20,714 20,998
Investment Products 11,978 9,310
Corporate and Other (3) 11,418 7,073
Unallocated Realized Investment Gains (Losses) (3,241) (4,150)
----------- ---------
Total income before income tax $181,522 $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 tax for the Individual Life Division have been reduced by pretax minority interest in income of consolidated
subsidiaries of $453 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 $10,247 and $12,722 in the first nine 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 $29.8 million in the first nine months of 2000 compared to $24.6 million in the same period of 1999. The Division has grown through sales. The Division’s mortality experience was approximately $3.8 million better than expected in the first nine months of 2000 as compared to being approximately $2.9 million better than expected in the first nine months of 1999.
West Coast had pretax operating income of $26.4 million for the first nine months of 2000 compared to $19.4 million for the same period last year. The increase reflects the Division’s growth through sales.
Pretax operating income from the Acquisitions Division was $38.5 million in the first nine months of 2000 as compared to $51.9 million in the same period of 1999. The Division’s mortality was approximately $2.9 million better than expected in the first nine months of 2000 as compared to being approximately $6.4 million better than expected in the first nine 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 in the first nine months of 2000 approximately $10 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 Division did not made an acquisition in 1999 or the first nine months of 2000.
The Dental Division’s pretax operating income was $23.0 million in the first nine months of 2000 compared to $29.7 million in the first nine months of 1999. Dental earnings have decreased due to higher than expected lapses in the first quarter of 2000. Claims returned to more normal levels in the 2000 second and third quarters after having been higher than normal in the first quarter.
Pretax operating income of the Financial Institutions Division was $23.0 million in the first nine months of 2000 as compared to $16.6 million for the same period last year. Included in the Division’s 2000 results were $12.4 million of earnings from the Lyndon acquisition. Earnings of the Division’s other business decreased due to higher than expected claims in most lines in the 2000 first quarter.
The Stable Value Products Division had pretax operating income of $23.0 million in the first nine months of 2000 as compared to $21.1 million in the corresponding period of 1999. The increase was due to higher account balances which was partially offset by lower interest rate spreads. Operating spreads in the 2000 third quarter were compressed due to higher interest rates and an inverted yield curve. Realized investment losses associated with this Division in the first nine months of 2000 were $2.3 million as compared to losses of $0.1 million in the same period last year. As a result, total pretax earnings were $20.7 and $21.0 million in the first nine months of 2000 and 1999, respectively.
The Investment Products Division’s pretax operating income was $12.0 million in the first nine months of 2000 compared to $9.3 million in the same period of 1999. The increase reflects the Division’s growth through sales. The Division had no realized investment gains or losses (net of related amortization of deferred policy acquisition costs) in the first nine 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 $4.3 million in the first nine months of 2000 as compared to the first nine months of 1999. The segment’s 2000 results include $24.8 million from the sale of the Company’s Hong Kong affiliate. Earnings from health insurance lines decreased $6.4 million resulting in a net loss of $7.3 million. The segment also had $11.5 million less net investment income as compared to the same period in 1999 (partially due to the allocation of capital to the Financial Institutions Division to fund the Lyndon acquisition). Higher short-term interest rates and an inverted yield curve have increased interest expense and reduced investment income.
Income TaxesThe following table sets forth the effective income tax rates for the periods shown:
Nine Months
Ended Estimated Effective
September 30 Income Tax Rates
-------------------- ----------------------
1999 36.0%
2000 35.8
The effective income tax rate for the full year of 1999 was approximately 36.0%. Management's estimate of the effective income tax rate for 2000 is approximately 35.8%.
Net IncomeThe following table sets forth net income before extraordinary loss and net income per share before extraordinary loss for the periods shown, and the percentage change from the prior period:
Net Income Before Extraordinary Loss
Nine Months --------------------------------------------------------------------------------
Ended Total Per Share- Percentage Per Share- Percentage
September 30 (In thousands) Basic Increase Diluted Increase
------------------- --------------- ----------- ------------- ------------ ------------
1999 $112,164 $1.71 11.8% $1.70 12.6%
2000 116,316 1.77 3.5 1.76 3.5
Compared to the same period in 1999, net income per share-diluted in the first nine months of 2000 increased 3.5%, 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 which were partially offset by lower operating earnings in the Acquisitions and Dental Divisions and higher realized investment losses.
In the first nine months of 1999 the Company incurred an extraordinary loss of $0.03 per share relating to the early extinguishment of debt. Therefore net income per share-diluted in the first nine months of 2000 was $1.76 compared to $1.67 in the same period of 1999.
Recently Issued Accounting StandardsThe 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, as amended, will require the Company to record derivative financial instruments, including certain derivative instruments embedded in other contracts, on its balance sheet and to carry such derivatives at fair value. Derivatives that are not designated to be part of a qualifying hedging relationship must be adjusted to fair value each period through net income. If the derivative is a hedge, its change in fair value is either offset against the change in fair value of the hedged item through net income or recorded in share-owners’ equity until the hedged item is recognized in net income. The fair value of derivatives increase or decrease as interest rates and general economic conditions change. 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.
The FASB and the Derivatives Implementation Group (“DIG”), a task force specifically created to assist the FASB in addressing SFAS No. 133 implementation issues, are continuing to issue guidance with respect to SFAS No. 133. The Company is in the process of completing its assessment of the application of SFAS No. 133. This assessment includes a review of the Company’s insurance and investment product contracts and financial instruments with respect to SFAS No. 133‘s definitions of derivative and embedded derivative instruments, as further clarified by the FASB and DIG. The assessment also includes an evaluation of existing hedging relationships to determine if such relationships meet the specific hedging criteria of SFAS No. 133.
Traditional life insurance, property and casualty insurance, and variable annuity products are excluded from the definition of a derivative instrument. However, non-traditional forms of such products may include embedded derivative instruments, as defined in SFAS No. 133, that must be accounted for separately in financial statements at fair value. With the possible exception of variable
life insurance as discussed below, the Company has determined that its insurance and investment products do not contain such terms that meet the definition of an embedded derivative instrument.
The FASB and the DIG are in the process of evaluating variable life insurance products with respect to the embedded derivative provisions of SFAS No. 133. The Company expects that its variable life insurance products will ultimately be excluded from the provisions of SFAS No. 133. However, the Company will not be able to complete its assessment until the issue is resolved by the FASB in the fourth quarter.
Within its investment portfolio, the Company owns various forms of remarketable put bond securities, with an aggregate par value of approximately $140 million. Each security includes a call option at par ultimately held by a third party unrelated to the debt issuer. Depending on the legal structure of the security and call option, the call option may represent an attached freestanding derivative subject to separate accounting under SFAS No. 133. The Company is currently reviewing each security’s specific structure as well as its ability to designate the attached call option as a qualifying hedge of the embedded put option held by the Company.
The Company also owns convertible bond securities, which include embedded equity options that must be separately accounted for under SFAS No. 133. Concurrent with the purchase of each security, the Company entered into a derivative contract (“asset swap”) with an investment banker that provides the banker with a call option on the security in exchange for a favorable interest rate swap. The asset swaps effectively offset much of the change in fair value of the equity options but do not meet the specific hedging criteria of SFAS No. 133. As of September 30, 2000, the asset swaps’ aggregate fair value was a loss of $21.7 million. The aggregate market and carrying values of the convertible bonds were $116.3 million and $95.9 million, respectively, representing an unrealized gain of $20.4 million. The Company is in the process of valuing the embedded equity options in the bond securities for purposes of determining the necessary transition adjustment on January 1, 2001.
Under existing guidance, the Company is currently accounting for certain derivative instruments as a hedge of the interest rate risk associated with specific Senior Notes, Medium-Term Notes, mortgage loan commitments and fixed-rate guaranteed investment contracts. The Company has determined that the specific hedge criteria of SFAS No. 133 will not be met for certain of these derivative contracts. The aggregate fair value of the non-qualifying contracts was less than $0.1 million at September 30, 2000. The qualifying contracts will be accounted for as fair value hedges under SFAS No. 133 and, as a result, the earnings impact of the derivative instruments is expected to be offset by the adjustment of the hedged items’ change in fair value attributable to interest rate risk.
The Company has issued foreign-currency-denominated funding agreements that provide for a variable interest rate. Concurrent with their issuance, the Company entered into foreign currency swaps with dual floating legs as a compound hedge of the foreign exchange risk and the interest rate risk associated with the foreign currencies. Under SFAS No. 133, the relationship is expected to qualify as a foreign currency, fair value hedge.
The Company is not able to estimate the effect of adoption of SFAS No. 133 on its financial statements until it completes its assessment as noted above. In addition, the FASB and DIG continue to address implementation issues, including insurance-related issues, for which the ultimate resolution may effect the Company’s assessment. Furthermore, the actual transition adjustment to be recorded at January 1, 2001 will depend on the nature, purpose and fair value of the derivatives held by the Company on that date.
In September 2000, the FASB issued SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of SFAS No. 125". SFAS No. 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures. The statement is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ended after December 15, 2000. This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001.
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.
InvestmentsThe 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, 2000, the fixed maturity investments (bonds and redeemable preferred stocks) had a market value of $7,245.9 million, which is 1.7% below amortized cost (less allowances for uncollectible amounts on investments) of $7,371.3 million. The Company had $2,147.0 million in mortgage loans at September 30, 2000. While the Company’s mortgage loans do not have quoted market values, at September 30, 2000, the Company estimates the market value of its mortgage loans to be $2,175.2 million (using discounted cash flows from the next call date) which is 1.3% 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 September 30, 2000, approximately $462.2 million of the Company’s mortgage loans have this participation feature.
At September 30, 2000, delinquent mortgage loans and foreclosed real estate were 0.2% of invested assets. Bonds rated less than investment grade were 2.7% of invested 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 September 30, 2000.
Policy loans at September 30, 2000, were $230.2 million, a decrease of $1.9 million from December 31, 1999. Policy loan rates are generally in the 4.0% 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 which may be less than prevailing interest rates. At September 30, 2000, the Company had outstanding mortgage loan commitments of $358.6 million.
LiabilitiesMany 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, 2000, the Company had policy liabilities and accruals of $5.7 billion. The Company’s life insurance products have a weighted average minimum credited interest rate of approximately 4.4%.
At September 30, 2000, the Company had $3.1 billion of stable value contract account balances and $1.9 billion of annuity account balances.
Derivative Financial InstrumentsThe 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. Realized investment gains and losses on contracts which qualify as hedges are deferred and amortized over the life of the hedged asset or liability. Realized investment losses of $1.2 million were deferred during the first nine months of 2000. No realized investment gains or losses were deferred in 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, 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. The Company uses foreign exchange contracts in connection with certain stable value contracts denominated in foreign currencies.
At September 30, 2000, contracts with a notional amount of $2.3 billion were in a $14.1 million net unrealized loss position. During the nine months ended September 30, 2000, the Company recognized $9.3 million in realized investment losses related to derivative financial instruments. In addition, certain stable value contracts were recorded at market value at September 30, 2000, resulting in a realized investment gain of $11.4 million for the nine months ended September 30, 2000.
The Company’s derivative financial instruments are with highly rated counterparties.
The Company has entered into a total return swap in connection with a portfolio of investments managed by the Company for an unrelated party. The notional amount was $278 million at September 30, 2000. There was no unrealized gain or loss relating to the swap at September 30, 2000.
Asset/Liability ManagementThe 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.
The Company believes its asset/liability management programs and procedures and certain product features provide protection for the Company against the effects of changes in interest rates under various scenarios. 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. However, the Company’s asset/liability management programs and procedures incorporate assumptions about the relationship between short-term and long-term interest rates (i.e., the slope of the yield curve), relationships between risk-adjusted and risk-free interest rates, market liquidity and other factors, and the effectiveness of the Company’s asset/liability management programs and procedures may be negatively affected whenever actual results differ from those assumptions. Recently, market conditions and an inverted yield curve have limited the Company’s ability to offset the effects of rising short-term interest rates.
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.
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 September 30, 2000, the Company had $30.2 million, $50.3 million, and $75.8 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 September 30, 2000, to fund mortgage loans and to purchase fixed maturity and other long-term investments in the amount of $437.3 million. The Company’s subsidiaries held $210.0 million in cash and short-term investments at September 30, 2000. Protective Life Corporation had an additional $4.8 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 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 transactions (commercial mortgage loans) to increase its liquidity.
CapitalAt September 30, 2000, Protective Life Corporation had borrowings of $18.0 million under its $70.0 million revolving line of credit at a weighted average interest rate of 6.8%. In addition, Protective Life Insurance Company had $11.9 million of short-term borrowings with an interest rate of 6.7%.
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.
Other DevelopmentsThe NAIC has adopted the Codification of Statutory Accounting Principles (Codification). The Codification changes current statutory accounting rules in several areas. The Company has not completed its estimate of 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. In the first six months of 2000, the Company issued a significant number of policies which were applied for prior to the effective date of Triple X. Triple X potentially increases the amount of regulatory capital employed in the sale of these products. Insurers have reacted to Triple X by changing product features and/or premium rates. 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.
In 1999, 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 represent $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 a 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.
The Congress has proposed legislation that would significantly change or possibly eliminate the estate tax. Life insurance products are often used to fund estate tax obligations. If the estate tax were eliminated, the demand for certain life insurance products would be adversely affected.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKThere 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.
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, 2000, reporting under
Item 5 and Item 7 the Company's 2000 third 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: | November 14, 2000 | /s/ Jerry W. Defoor | |
| Jerry W. DeFoor | |||
| Vice President and Controller | |||
| and Chief Accounting Officer | |||
| (Duly authrorized officer) |
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