| TENNESSEE | 63-0169720 | ||
|---|---|---|---|
| (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, $1.00 par value, outstanding as of August 3, 2000: 5,000,000 shares.
The registrant meets the conditions set forth in General Instruction H(1)(a)and (b) of Form 10-Q and
PROTECTIVE LIFE INSURANCE COMPANY
INDEX
Page Number
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Part I. Financial Information:
Item 1. Financial Statements:
Report of Independent Accountants................................................................2
Consolidated Condensed Statements of Income for the Three and Six Months
ended June 30, 2000 and 1999 (unaudited).......................................................3
Consolidated Condensed Balance Sheets as of June 30, 2000
(unaudited) and December 31, 1999..............................................................4
Consolidated Condensed Statements of Cash Flows for the
Six Months ended June 30, 2000 and 1999 (unaudited).......................................... 5
Notes to Consolidated Condensed Financial Statements (unaudited).................................6
Item 2. Management's Narrative Analysis of the Results of Operations...............................13
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................18
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K.............................................................19
Signature...............................................................................................19
To the Directors and Share Owner
Protective Life Insurance Company
Birmingham, Alabama
We have reviewed the accompanying consolidated condensed balance sheet of Protective Life Insurance Company and subsidiaries as of June 30, 2000, and the related consolidated condensed statements of income for the three-month and six-month periods ended June 30, 2000 and 1999, and consolidated condensed statements of cash flows for the six-month periods ended June 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, 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-owner’s 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.
Birmingham, Alabama
July 27, 2000
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in thousands)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
REVENUES
Premiums and policy fees $429,585 $282,718 $753,230 $552,456
Reinsurance ceded (253,170) (130,345) (398,657) (248,297)
-------- -------- -------- --------
Premiums and policy fees, net of reinsurance ceded 176,415 152,373 354,573 304,159
Net investment income 172,845 157,141 336,666 306,595
Realized investment gains (losses) (3,856) 2,215 (1,410) 3.664
Other income 15,118 7,843 26,103 11,215
-------- --------- -------- --------
360,522 319,572 715,932 625,633
-------- -------- -------- --------
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance ceded:
three months: 2000 - $142,496; 1999 - $77,085
six months: 2000 - $239,250; 1999 - $157,523) 224,093 191,284 458,512 376,720
Amortization of deferred policy acquisition costs 34,202 28,272 71,720 59,225
Other operating expenses (net of reinsurance ceded:
three months: 2000 - $34,145; 1999 - $36,941
six months: 2000 - $82,807; 1999 - $69,371) 47,179 42,970 91,643 86,258
-------- --------- --------- ---------
305,474 262,526 621,875 522,203
-------- -------- -------- --------
INCOME BEFORE INCOME TAX 55,048 57,046 94,057 103,430
Income tax expense 20,097 21,391 33,230 37,890
-------- -------- -------- --------
NET INCOME $ 34,951 $ 35,655 $ 60,827 $ 65,540
======== ======== ======== ========
See notes to consolidated condensed financial statements
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
JUNE 30 DECEMBER 31
2000 1999
----------------------------------
(Unaudited)
ASSETS
Investments:
Fixed maturities $ 6,889,880 $ 6,275,607
Equity securities 18,754 30,696
Mortgage loans on real estate 2,037,477 1,946,690
Investment in real estate, net of accumulated depreciation 13,528 15,582
Policy loans 230,167 232,126
Other long-term investments 86,843 68,890
Short-term investments 230,848 81,171
------------ ------------
Total investments 9,507,497 8,650,762
Cash 11,353
Accrued investment income 110,892 101,120
Accounts and premiums receivable, net of allowance for
uncollectible amounts 57,101 45,852
Reinsurance receivables 985,066 859,684
Deferred policy acquisition costs 1,166,415 1,011,524
Goodwill,net 30,129
Property and equipment, net 53,266 49,002
Other assets 30,635 27,712
Receivable from related parties 59 13,059
Assets related to separate accounts
Variable Annuity 1,911,968 1,778,618
Variable Universal Life 56,624 40,293
Other 3,631 3,517
------------ ------------
$ 13,924,636 $ 12,581,143
============ ============
LIABILITIES
Policy liabilities and accruals $ 5,633,614 $ 5,074,085
Stable value investment contract deposits 3,033,639 2,680,009
Annuity deposits 1,809,602 1,639,231
Other policyholders' funds 114,566 116,815
Other liabilities 287,136 293,862
Accrued income taxes (19,248) (25,833)
Deferred income taxes (25,604) (32,335)
Notes payable 2,327 2,338
Indebtedness to related parties 12,000 14,000
Liabilities related to separate accounts
Variable Annuity 1,911,968 1,778,618
Variable Universal Life 56,624 40,293
Other 3,631 3,517
------------ ------------
12,820,255 11,584,600
------------ ------------
COMMITMENTS AND CONTINGENT LIABILITIES - NOTE B
SHARE-OWNER'S EQUITY
Preferred Stock, $1.00 par value, shares authorized and
issued: 2,000, liquidation preference $2,000 2 2
Common Stock, $1 par value
Shares authorized and issued: 5,000,000 5,000 5,000
Additional paid-in capital 386,992 327,992
Note receivable from PLC Employee Stock Ownership Plan (4,841) (5,148)
Retained earnings 875,604 814,777
Accumulated other comprehensive income
Net unrealized gains (losses) on investments
(net of income tax (benefit): 2000 - $(85,279); 1999 - $(78,658)) (158,376) (146,080)
------------ ------------
1,104,381 996,543
------------ ------------
$ 13,924,636 $ 12,581,143
============ ============
See notes to consolidated condensed financial statements
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
SIX MONTHS ENDED
JUNE 30
-----------------------
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 60,827 $ 65,540
Adjustments to reconcile net income to net cash provided by operating activities:
Realized investment (gains) losses 1,410 (3,664)
Amortization of deferred policy acquisition costs 71,720 59,225
Capitalization of deferred policy acquisition costs (182,247) (110,849)
Depreciation expense 4,861 4,040
Deferred income tax 13,235 1,581
Accrued income tax 6,950 8,077
Interest credited to universal life and investment products 190,413 162,794
Policy fees assessed on universal life and investment products (97,882) (73,423)
Change in accrued investment income and other receivables (13,531) (120,874)
Change in policy liabilities and other policyholders'
funds of traditional life and health products 237,150 81,131
Change in other liabilities (29,830) 96,877
Other (net) 25,156 17,825
---------- ----------
Net cash provided by operating activities 288,232 188,280
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reductions of investments
Investments available for sale 5,722,521 1,928,571
Other 24,918 144,736
Sale of investments
Investments available for sale 331,438 181,712
Other 36,246 3,368
Cost of investments acquired
Investments available for sale (6,584,526) (2,104,730)
Other (138,427) (478,758)
Cost of Acquisitions (150,903) 0
Purchase of property and equipment (4,282) (10,594)
Sale of property and equipment 49
----------- -----------
Net cash used in investing activities (763,015) (335,646)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings under line of credit arrangements and debt 1,182,700 2,002,804
Principal payments on line of credit arrangements and debt (1,182,700) (1,965,804)
Capital contribution from PLC 59,000 0
Principal payment on surplus note to PLC (2,000) (2,000)
Investment product deposits and change in universal life deposits 1,079,674 659,108
Investment product withdrawals (650,538) (546,742)
---------- ---------
Net cash provided by financing activities 486,136 147,366
---------- ---------
INCREASE IN CASH 11,353 0
CASH AT BEGINNING OF PERIOD 0 0
---------- ---------
CASH AT END OF PERIOD $ 11,353 $ 0
========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period:
Interest on debt $ 1,722 $ 2,509
Income taxes $ 11,954 $ 26,043
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Reduction of principal on note from ESOP $ 307 $ 51
Acquisitions and bulk reinsurance assumptions
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 Insurance Company and subsidiaries (“Protective Life”) 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 six month period ended June 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 . For further information, refer to the consolidated financial statements and notes thereto included in Protective Life’s annual report on Form 10-K for the year ended December 31, 1999.
Protective Life is a wholly-owned subsidiary of Protective Life Corporation (“PLC”).
NOTE B - COMMITMENTS AND CONTINGENT LIABILITIESUnder 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. Protective Life 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 Protective Life 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 insurers that are disproportionate to the actual damages, including material amounts of punitive damages. In addition, in some class action and other lawsuits involving insurers’ sales practices, insurers have made material settlement payments. In some states, including Alabama (where Protective Life maintains its headquarters), juries have substantial discretion in awarding punitive damages, which creates the potential for unpredictable material adverse judgments in any given lawsuit. Protective Life, like other insurers, in the ordinary course of business, is involved in such litigation or alternatively in arbitration. Although the outcome of any such litigation or arbitration cannot be predicted with certainty, Protective Life 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 Protective Life.
Protective Life 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 operating segment income and assets for the periods shown. Adjustments represent the inclusion of unallocated realized investment gains (losses) 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
Six Months Ended June 30, 2000
-------------------------------------------------------------------------
(In Thousands)
Specialty Insurance
Life Insurance Products
Dental and
Individual Consumer Financial
Life West Coast Acquisitions Benefits Institutions
------------ ---------- ------------ ------------ ------------
Premiums and policy fees $166,396 $68,961 $68,758 $138,785 $237,117
Reinsurance ceded (116,634) (54,249) (14,911) (47,374) (133,412)
-------- ------- ------- -------- --------
Net of reinsurance ceded 49,762 14,712 53,847 91,411 103,705
Net investment income 29,336 44,212 58,915 4,764 22,302
Realized investment gains (losses)
Other income (1,567) 6,737 15,028
-------- ------- ------- -------- ---------
Total revenues 77,531 58,924 112,762 102,912 141,035
-------- ------- ------- -------- --------
Benefits and settlement expenses 46,010 43,418 64,550 67,673 64,949
Amortization of deferred policy
acquisition costs 14,534 5,915 8,927 5,795 22,773
Other operating expenses (2,701) (7,294) 12,706 20,978 36,895
-------- ------- ------- -------- ---------
Total benefits and expenses 57,843 42,039 86,183 94,446 124,617
-------- ------- ------- -------- --------
Income before income tax 19,688 16,885 26,579 8,466 16,418
Retirement Savings and
Investment Products
Stable Corporate
Value Investment and Total
Products Products Other Adjustments Consolidated
-------- ------- --------- ---------- ------------
Premiums and policy fees $15,009 $58,204 $753,230
Reinsurance ceded (32,077) (398,657)
------- ------- --------
Net of reinsurance ceded 15,009 26,127 354,573
Net investment income $117,433 60,672 (968) 336,666
Realized investment gains (losses) (89) 420 $(1,741) (1,410)
Other income 1,390 4,515 26,103
-------- ------- ------- -------- --------
Total revenues 117,344 77,491 29,674 (1,741) 715,932
-------- ------- ------- -------- --------
Benefits and settlement expenses 99,029 49,874 23,009 458,512
Amortization of deferred
acquisition costs 429 12,068 1,279 71,720
Other operating expenses 2,028 8,662 20,369 91,643
-------- ------- ------- --------
Total benefits and expenses 101,486 70,604 44,657 621,875
-------- ------- ------- --------
Income (loss) before income tax 15,858 6,887 (14,983) 94,057
Income tax expense 33,230 33,230
--------
Net income $ 60,827
========
Operating Segment Income for the
Six Months Ended June 30, 1999
-------------------------------------------------------------------------
(In Thousands)
Specialty Insurance
Life Insurance Products
Dental and
Individual Consumer Financial
Life West Coast Acquisitions Benefits Institutions
------------ ---------- ------------ ------------ ------------
Premiums and policy fees $130,663 $ 37,649 $ 80,032 $103,704 $139,864
Reinsurance ceded (79,143) (26,269) (16,995) (23,061) (89,863)
--------- -------- -------- --------- ---------
Net of reinsurance ceded 51,520 11,380 63,037 80,643 50,001
Net investment income 30,247 37,158 66,197 5,794 11,410
Realized investment gains (losses)
Other income (1,329) 484 (9) 2,564 6,319
--------- --------- ----------- --------- ---------
Total revenues 80,438 49,022 129,225 89,001 67,730
-------- ------- -------- -------- --------
Benefits and settlement expenses 37,137 31,466 65,969 60,544 24,938
Amortization of deferred policy
acquisition costs 17,569 2,512 12,497 3,591 11,249
Other operating expense 8,970 2,676 14,314 18,293 20,951
-------- -------- -------- -------- --------
Total benefits and expenses 63,676 36,654 92,780 82,428 57,138
-------- ------- -------- -------- --------
Income before income tax 16,762 12,368 36,445 6,573 10,592
Retirement Savings and
Investment Products
Stable Corporate
Value Investment and Total
Products Products Other Adjustments Consolidated
-------- ------- --------- ---------- ----------
Premiums and policy fees $11,331 $49,213 $552,456
Reinsurance ceded (12,966) (248,297)
------ ------- --------
Net of reinsurance ceded 11,331 36,247 304,159
Net investment income $102,951 51,922 916 306,595
Realized investment gains (losses) 222 892 $2,550 3,664
Other income 1,408 1,778 11,215
-------- ------ ------ ------ --------
Total revenues 103,173 65,553 38,941 2,550 625,633
-------- ------ ------ ------ --------
Benefits and settlement expenses 86,835 42,432 27,399 376,720
Amortization of deferred policy
acquisition costs 382 9,982 1,443 59,225
Other operating expenses 1,656 6,899 12,499 86,258
-------- ------ ------ --------
Total benefits and expenses 88,873 59,313 41,341 522,203
-------- ------ ------ --------
Income (loss) before income tax 14,300 6,240 (2,400) 103,430
Income tax expense 37,890 37,890
--------
Net income $ 65,540
========
Operating Segment Assets
June 30, 2000
----------------------------------------------------------------------------
(In Thousands)
Specialty Insurance
Life Insurance Products
Dental and
Individual Consumer Financial
Life West Coast Acquisitions Benefits Institutions
------------ ---------- ------------ ------------ ------------
Investments and other assets $1,270,520 $1,414,075 $1,547,944 $205,948 $1,197,951
Deferred policy acquisition costs
and goodwill 408,168 246,872 235,237 29,905 135,393
------------ ----------- ----------- --------- -----------
Total assets $1,678,688 $1,660,947 $1,783,181 $235,853 $1,333,344
=========== ========== ========== ======== ==========
Retirement Savings and
Investment Products
Stable Corporate
Value Investment and Total
Products Products Other Consolidated
-------- ----------- ----------- ------------
Investments and other assets $3,129,308 $3,721,704 $240,642 $12,728,092
Deferred policy acquisition costs
and goodwill 1,779 125,473 13,717 1,196,544
------------- ----------- --------- -----------
Total assets $3,131,087 $3,847,177 $254,359 $13,924,636
========== ========== ======== ===========
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 $1,205,968 $1,343,517 $1,553,954 $197,673 $727,857
Deferred policy acquisition costs 379,117 200,605 235,903 25,819 51,339
----------- ----------- ----------- --------- --------
Total assets $1,585,085 $1,544,122 $1,789,857 $223,492 $779,196
========== =========== ========== ======== ========
Retirement Savings and
Investment Products
Stable Corporate
Value Investment and Total
Products Products Other Consolidated
-------- ----------- ------------ ------------
Investments and other assets $2,766,178 $3,355,863 $418,609 $11,569,619
Deferred policy acquisition costs 1,156 117,577 8 1,011,524
------------ ----------- ------------ ------------
Total assets $2,767,334 $3,473,440 $418,617 $12,581,143
========== ========== ======== ===========
Financial statements prepared in conformity with generally accepted accounting principles (i.e., GAAP) differ in some respects from the statutory accounting practices prescribed or permitted by insurance regulatory authorities. At June 30, 2000, and for the six months then ended, Protective Life and its life insurance subsidiaries had consolidated share-owner’s equity and net income prepared in conformity with statutory reporting practices of $588.1 million and $41.0 million, respectively.
NOTE E - INVESTMENTSAs prescribed by Statement of Financial Accounting Standards (“SFAS”) No. 115, certain investments are recorded at their market values with the resulting net unrealized gains and losses reduced by a related adjustment to deferred policy acquisition costs, net of income tax, recorded as a component of share-owner’s 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 Protective Life’s operations, its reported share-owner’s equity will fluctuate significantly as interest rates change.
Protective Life’s balance sheets at June 30, 2000 and December 31, 1999, prepared on the basis of reporting investments at amortized cost rather than at market values, are as follows:
JUNE 30 DECEMBER 31
---------- -----------
(IN THOUSANDS)
Total investments $ 9,775,651 $ 8,894,426
Deferred policy acquisition costs 1,141,916 992,518
All other assets 3,250,724 2,918,857
------------ ------------
$14,168,291 $12,805,801
=========== ===========
Deferred income taxes $ 59,675 $ 46,243
All other liabilities 12,845,859 11,616,935
----------- -----------
12,905,534 11,663,178
Share-owner's equity 1,262,757 1,142,623
------------ ------------
$14,168,291 $12,805,801
=========== ===========
NOTE F - DERIVATIVE FINANCIAL INSTRUMENTSProtective Life 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 six months of 2000 or the full year of 1999. At June 30, 2000, contracts with a notional amount of $1.4 billion were in a $1.1 million net unrealized loss position. During
the six months ended June 30, 2000, the Company recognized $0.5 million in realized investment losses related to derivative financial instruments.
NOTE G - COMPREHENSIVE INCOME (LOSS)The following table sets forth Protective Life’s comprehensive income (loss) for the six-month periods ended June 30, 2000 and 1999:
Three Months Ended Six Months Ended
June 30 June 30
----------------------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
Net income $34,951 $35,655 $60,827 $65,540
Increase (decrease) in net unrealized gains
on investments (net of income tax:
three months: 2000 - $(7,068); 1999 - $(49,866)
six months: 2000 - $(7,114); 1999 - $(77,971)) (13,128) (92,607) (13,212) (144,803)
Reclassification adjustment for amounts
included in net income (net of income tax:
three months: 2000 - $1,349; 1999 - $(775)
six months: 2000 - $494; 1999 - $(1,282)) 2,507 (1,440) 916 (2,382)
-------- --------- --------- ---------
Comprehensive income (loss) $24,330 $(58,392) $48,531 $(81,645)
======= ======== ======= ========
NOTE H - ACQUISITIONSIn January, 2000, Protective Life 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 six months ended June 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 Protective Life’s consolidated results of operations for the six months ended June 30, 2000, 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.
Six Months Ended
June 30, 2000
-----------------
(In Thousands)
(Unaudited)
Total revenues $ 673,350
Net income $ 70,956
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-owner’s equity.
NOTE J - RECENTLY ISSUED ACCOUNTING STANDARDSThe 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 Protective Life to report derivative financial instruments on the balance sheet and to carry such derivatives at fair value. The fair values of derivatives increase or decrease as interest rates change. Under SFAS No. 133, changes in fair value are reported as a component of net income or as a change to share-owner’s equity, depending upon the nature of the derivative. Although the adoption of SFAS No. 133 will not affect Protective Life’s operations, adoption will introduce volatility into Protective Life’s reported net income and share-owner’s equity as interest rates change. The effects of adoption will depend upon the nature, purpose and volume of derivatives held by Protective Life at the date of adoption.
Protective Life Insurance Company (“Protective Life”) is a wholly-owned subsidiary of Protective Life Corporation (“PLC”), an insurance holding company whose common stock is traded on the New York Stock Exchange under the symbol “PL”. Founded in 1907, Protective Life provides financial services through the production, distribution, and administration of insurance and investment products. Unless the context otherwise requires “Protective Life” refers to the consolidated group of Protective Life Insurance Company and its subsidiaries.
In accordance with General Instruction H(2)(a), Protective Life includes the following analysis with the reduced disclosure format.
Protective Life 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 life insurance divisions are: Individual Life, West Coast, Acquisitions, Dental and Consumer Benefits (Dental), Financial Institutions, Stable Value Products, and Investment Products. Protective Life 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 Protective Life 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.
SIX MONTHS PERCENTAGE
ENDED INCREASE/
JUNE 30 (DECREASE)
--------------------------- ------------
(IN THOUSANDS)
2000 1999
---- ----
Premiums and policy fees $354,573 $304,159 16.6 %
Net investment income 336,666 306,595 9.8
Realized investment gains (losses) (1,410) 3,664 (138.5)
Other income 26,103 11,215 132.8
--------- ---------
$715,932 $625,633
======== ========
Premiums and policy fees, net of reinsurance ceded, increased $50.4 million or 16.6% in the first six months of 2000 over the first six months of 1999. Premiums and policy fees in the Individual Life Division decreased $1.8 million in the first six months of 2000 as compared to the same period in 1999 primarily due to a higher amount of reinsurance ceded. Premiums and policy fees
in the West Coast Division increased $3.3 million in the first six months of 2000 as compared to the same period in 1999. Premiums and policy fees in the Acquisitions Division are expected to decline with time unless new acquisitions are made. No transactions were completed in this Division in 1999 or the first six months of 2000. As a result, decreases in older acquired blocks resulted in a $9.2 million decrease in premiums and policy fees. In the Dental Division premiums and policy fees related to dental indemnity insurance increased $16.7 million in the first six months of 2000 as compared to the same period in 1999. Premiums and policy fees related to the Dental Division’s other businesses decreased $5.9 million in the first six months of 2000 as compared to the same period in 1999. Premiums and policy fees from the Financial Institutions Division increased $53.7 million in the first six months of 2000 as compared to the first six months of 1999. On January 20, 2000, the Financial Institutions Division acquired the Lyndon Insurance Group (“Lyndon”) which resulted in a $46.0 million increase in premiums and policy fees. Premiums and policy fees related to the Financial Institutions Division’s other businesses increased $7.7 million in the first six months of 2000 as compared to the same period in 1999. The increase in premiums and policy fees from the Investment Products Division was $3.7 million. Premiums and policy fees relating to various health insurance lines in the Corporate and Other segment decreased $0.9 million.
Net investment income in the first six months of 2000 increased by $30.1 million over the corresponding period of the preceding year primarily due to an increase in the average amount of invested assets and due to acquisitions. The Lyndon acquisition resulted in a $4.6 million increase in investment income. The Company could experience significant realized investment losses were it to make adjustments to its existing fixed maturity portfolio.
Protective Life generally purchases its investments with the intent to hold to maturity by purchasing investments that match future cash-flow needs. However, Protective Life may sell any of its investments to maintain proper matching of assets and liabilities. Accordingly, Protective Life has classified its fixed maturities and certain other securities as “available for sale.” The sales of investments that have occurred have resulted principally from portfolio management decisions to maintain approximate matching of assets and liabilities.
Realized investment losses for the first six months of 2000 were $1.4 million as compared to $3.7 millions of realized investment gains in the corresponding period of 1999.
Other income consists primarily of fees from the sale of service contracts, administrative-services-only types of group accident and health insurance contracts, and from rental of space in its administrative building to PLC and affiliates. Other income from all sources increased $14.9 million in the first six months of 2000 as compared with the first six months of 1999. Revenues from Protective Life’s service contract business and consumer direct dental business increased $10.5 million and $4.1 million, respectively, in the first six months of 2000 as compared to the same period 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 by business segment for the periods shown:
OPERATING INCOME (LOSS) AND INCOME (LOSS) BEFORE INCOME TAX
SIX MONTHS ENDED JUNE 30
(IN THOUSANDS)
2000 1999
---- -----
Operating Income (Loss)(1)
Life Insurance
Individual Life $19,688 $ 16,762
West Coast 16,885 12,368
Acquisitions 26,579 36,445
Specialty Insurance Products
Dental and Consumer Benefits 8,466 7,369
Financial Institutions 16,418 10,592
Retirement Savings and Investment Products
Stable Value Products 15,947 14,078
Investment Products 6,887 6,240
Corporate and Other (14,983) (3,196)
------- ---------
Total operating income 95,887 100,658
------- --------
Realized Investment Gains (Losses)
Stable Value Products (89) 222
Investment Products 420 892
Unallocated Realized Investment Gains (Losses) (1,741) 2,550
Related Amortization of Deferred Policy Acquisition Costs
Investment Products (420) (892)
-------- ----------
Total net (1,830) 2,772
------- ---------
Income (Loss) Before Income Tax
Life Insurance
Individual Life 19,688 16,762
West Coast 16,885 12,368
Acquisitions 26,579 36,445
Specialty Insurance Products
Dental and Consumer Benefits 8,466 7,369
Financial Institutions 16,418 10,592
Retirement Savings and Investment Products
Stable Value Products 15,858 14,300
Investment Products 6,887 6,240
Corporate and Other (14,983) (3,196)
Unallocated Realized Investment Gains (Losses) (1,741) 2,550
-------- ----------
Total income before income tax $94,057 $103,430
======= ========
(1) Income before income tax excluding realized investment gains and losses and related
amortization of deferred acquisition costs.
The Individual Life Division’s pretax operating income was $19.7 million in the first six months of 2000 compared to $16.8 million in the same period of 1999. The Division has grown through sales. The Division’s mortality experience was $2.0 million better than expected in both years.
West Coast had pretax operating income of $16.9 million for the first six months of 2000 compared to $12.4 million for the same period last year. The increase reflects the Division’s growth through sales.
Pretax operating income from the Acquisitions Division was $26.6 million in the first six months of 2000 as compared to $36.4 million in the same period of 1999. The Division’s mortality experience was approximately $1.7 million better than expected in the first six months of 2000 as compared to being approximately $3.1 million better than expected in the first six 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 six months of 2000 approximately $7.0 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 Division has not made an acquisition in 1999 or the first six months of 2000.
The Dental Division’s pretax operating income was $8.5 million in the first six months of 2000 compared to $7.4 million in the same period last year. Claims returned to more normal levels in the 2000 second quarter after having been higher than normal in the first quarter.
Pretax operating income of the Financial Institutions Division was $16.4 million in the first six months of 2000 as compared to $10.6 million in the same period of 1999. Included in the Division’s results were $8.4 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 $15.9 million in the first six months of 2000 and $14.1 million in the corresponding period of 1999. This increase was primarily due to higher interest rate spreads and higher account balances. Operating spreads in the 2000 second quarter were compressed due to higher interest rates and an inverted yield curve. The Division expects spreads will continue to narrow. Realized investment losses associated with this Division in the first six months of 2000 were $0.1 million as compared to gains of $0.2 million in the same period last year. As a result, total pretax earnings were $15.9 million in the first six months of 2000 compared to $14.3 million for the same period last year.
The Investment Products Division pretax operating income was $6.9 million in the first six months of 2000 compared to $6.2 million in the same period of 1999. The increase reflects the Division’s growth through sales. The Division had no realized investment gains (net of related amortization of deferred policy acquisition costs) in the first six months of 2000 or the full year of 1999.
The Corporate and Other segment consists primarily of net investment income on unallocated capital and other operating expenses not identified with the preceding operating divisions (including management fees paid to PLC and interest on substantially all debt), several lines of business which Protective Life is not actively marketing (mostly health insurance), and the operations of a small noninsurance subsidiary. The pretax loss for this segment was $15.0 million in the first six months of 2000 compared to a loss of $3.2 million in the first six months of 1999. Earnings from health insurance lines decreased $3.9 million in the first six months of 2000 as compared to the same period last year. The segment also had approximately $10.4 million higher expenses in the first quarter of 2000 as compared to the same period in 1999.
The following table sets forth the effective tax rates for the periods shown:
SIX MONTHS
ENDED ESTIMATED EFFECTIVE
JUNE 30 INCOME TAX RATES
------------- -------------------
1999 36.6 %
2000 35.3
The effective income tax rate for the full year of 1999 was 36.6%. Management’s estimate of the effective income tax rate for 2000 is approximately 36.0%.
NET INCOME
--------------------------------
SIX MONTHS PERCENTAGE
ENDED TOTAL INCREASE/
JUNE 30 (IN THOUSANDS) (DECREASE)
----------- -------------- ------------
1999 $65,540 15.9%
2000 60,827 (7.2)
Compared to the same period in 1999, net income in the first six months of 2000 decreased $4.7 million, reflecting improved operating earnings in the Individual Life, West Coast, Dental, Financial Institutions, Stable Value and Investment Products Divisions and higher realized investment gains (net of related amortization of deferred policy acquisition costs) which were offset by lower operating earnings in the Acquisitions and the Corporate and Other segment.
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 Protective Life to report derivative financial instruments on the balance sheet and to carry such derivatives at fair value. The fair values of derivatives increase or decrease as interest rates change. Under SFAS No. 133,
changes in fair value are reported as a component of net income or as a change to share-owner’s equity, depending upon the nature of the derivative. Although the adoption of SFAS No. 133 will not affect Protective Life’s operations, adoption will introduce volatility into Protective Life’s reported net income and share-owner’s equity as interest rates change. The effects of adoption will depend upon the nature, purpose and volume of derivatives held by Protective Life at the date of adoption.
There has been no material change from the disclosure in Protective Life’s Annual Report on Form 10-K for the year ended December 31, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial data schedule
Exhibit 99 - Safe Harbor for Forward-Looking Statements
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 Insurance Company | ||
|---|---|---|
| Date: | August 14, 2000 | /s/ Jerry W. Defoor |
| Jerry W. DeFoor | ||
| Vice President and Controller | ||
| and Chief Accounting Officer | ||
| (Duly authrorized officer) |