PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
MARCH 31 DECEMBER 31
2001 2000
-------------- ---------------
(Unaudited)
ASSETS
Investments:
Fixed maturities, at market .............................. $ 8,021,991 $ 7,390,110
Equity securities, at market ............................. 37,869 41,792
Mortgage loans on real estate ............................ 2,487,148 2,268,224
Investment in real estate, net of accumulated depreciation 12,489 12,566
Policy loans ............................................. 330,005 230,527
Other long-term investments .............................. 184,934 66,646
Short-term investments ................................... 290,899 172,699
------------ ------------
Total investments ....................................... 11,365,335 10,182,564
Cash ....................................................... 46,789 33,517
Accrued investment income .................................. 133,924 121,996
Accounts and premiums receivable, net of allowance for
uncollectible amounts .................................... 71,655 72,189
Reinsurance receivables .................................... 1,161,179 1,099,574
Deferred policy acquisition costs .......................... 1,283,218 1,189,380
Goodwill, net .............................................. 239,726 241,831
Property and equipment, net ................................ 50,356 51,166
Other assets ............................................... 110,322 120,874
Receivable from related parties ............................ 1,301 4,768
Assets related to separate accounts
Variable Annuity ......................................... 1,649,501 1,841,439
Variable Universal Life .................................. 61,941 63,504
Other .................................................... 3,804 3,746
------------ ------------
$ 16,179,051 $ 15,026,548
============ ============
LIABILITIES
Policy liabilities and accruals ............................ $ 6,779,270 $ 5,969,002
Stable value investment contract deposits .................. 3,207,745 3,177,863
Annuity deposits ........................................... 2,067,980 1,916,894
Other policyholders' funds ................................. 148,113 125,336
Other liabilities .......................................... 381,047 324,901
Accrued income taxes ....................................... 10,072 (10,932)
Deferred income taxes ...................................... 113,336 72,065
Notes payable .............................................. 2,309 2,315
Indebtedness to related parties ............................ 10,000 10,000
Liabilities related to separate accounts
Variable Annuity ......................................... 1,649,501 1,841,439
Variable Universal Life .................................. 61,941 63,504
Other .................................................... 3,804 3,746
----------- -----------
14,435,118 13,496,133
----------- -----------
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 ................................. 723,805 632,805
Note receivable from PLC Employee Stock Ownership Plan ..... (4,499) (4,841)
Retained earnings .......................................... 983,987 948,819
Accumulated other comprehensive income (loss):
Net unrealized gain (losses) on investments (net of income
tax: 2001 - $19,190; 2000 - $(27,661)) .................. 35,638 (51,370)
------------ ------------
1,743,933 1,530,415
------------ ------------
$ 16,179,051 $ 15,026,548
============ ============
See notes to consolidated condensed financial statements
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
THREE MONTHS ENDED
MARCH 31
-----------------------------
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ...................................................................... $ 35,168 $ 25,876
Adjustments to reconcile net income to net cash provided by operating activities:
Realized investment gains .................................................... (6,683) (2,446)
Amortization of deferred policy acquisition costs ............................ 29,383 37,517
Capitalization of deferred policy acquisition costs .......................... (63,717) (94,812)
Depreciation expense ......................................................... 2,809 1,934
Deferred income tax .......................................................... (10,670) 7,534
Accrued income tax ........................................................... 21,004 2,835
Amortization of goodwill ..................................................... 2,075 375
Interest credited to universal life and investment products .................. 182,989 200,909
Policy fees assessed on universal life and investment products ............... (50,768) (48,498)
Change in accrued investment income and other receivables .................... (48,895) (11,185)
Change in policy liabilities and other policyholders'
funds of traditional life and health products ............................. 25,441 122,034
Change in other liabilities .................................................. 52,461 12,048
Other (net) .................................................................. 14,602 26,661
--------- ---------
Net cash provided by operating activities ....................................... 185,199 280,782
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reductions of investments
Investments available for sale ............................................... 4,142,786 2,358,438
Other ........................................................................ 60,310 14,873
Sale of investments
Investments available for sale ............................................... 249,286 260,445
Other ........................................................................ 17,096
Cost of investments acquired
Investments available for sale ............................................... (4,793,751) (2,881,760)
Other ........................................................................ (121,463) (59,275)
Cost of acquisitions ............................................................ 137,754 (150,903)
Purchase of property and equipment .............................................. (1,882) (1,928)
--------- ---------
Net cash used in investing activities ........................................... (326,960) (443,014)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings under line of credit arrangements and debt ............. 959,200
Principal payments on line of credit arrangements and debt ...................... (959,200)
Capital contribution from PLC ................................................... 91,000 59,000
Investment product deposits and change in universal life deposits ............... 323,534 558,898
Investment product withdrawals .................................................. (259,501) (430,581)
--------- ---------
Net cash provided by financing activities ....................................... 155,033 187,317
--------- ---------
INCREASE IN CASH .................................................................... 13,272 25,085
CASH AT BEGINNING OF PERIOD ......................................................... 33,517 0
--------- ---------
CASH AT END OF PERIOD ............................................................... $ 46,789 $ 25,085
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period:
Interest on debt ............................................................. $ 213 $ 1,526
Income taxes ................................................................. $ 48 $ 1,986
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Reduction of principal on note from ESOP ........................................ $ 342 $ 307
Acquisitions and bulk reinsurance assumptions
Assets acquired, net of cash ................................................. $ 658,200 $ 496,221
Liabilities assumed .......................................................... (795,954) (345,318)
--------- --------
Net ............................................................................. $ (137,754) $ 150,903
========= ========
See notes to consolidated condensed financial statements
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - BASIS OF PRESENTATION
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 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 three month period ended March 31, 2001, are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. 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 Protective Life’s annual report on Form 10-K for the year ended December 31, 2000.
Protective Life is a wholly-owned subsidiary of Protective Life Corporation ("PLC").
NOTE B - COMMITMENTS AND CONTINGENT LIABILITIES
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. 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.
NOTE C - OPERATING SEGMENTS
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 and the cumulative effect of change in accounting principle. There are no asset adjustments.
OPERATING SEGMENT INCOME FOR THE
THREE MONTHS ENDED MARCH 31, 2001
--------------------------------------------------------------
(IN THOUSANDS)
SPECIALTY INSURANCE
LIFE INSURANCE PRODUCTS
INDIVIDUAL DENTAL FINANCIAL
LIFE WEST COAST ACQUISITIONS BENEFITS INSTITUTIONS
---------- ---------- ------------ -------- ------------
Premiums and policy fees ......... $ 92,789 $ 25,110 $ 50,945 $ 91,443 $ 123,460
Reinsurance ceded ................ (56,067) (11,124) (8,046) (14,782) (65,846)
------ ------- ------ ------- -------
Net of reinsurance ceded ....... 36,722 13,986 42,899 76,661 57,614
Net investment income ............ 16,449 24,324 40,872 2,289 11,906
Realized investment gains (losses)
Other income ..................... 254 4,513 8,136
------ ------ ------ ------ ------
Total revenues .............. 53,425 38,310 83,771 83,463 77,656
------ ------ ------ ------ ------
Benefits and settlement expenses . 35,969 26,226 58,032 51,676 38,758
Amortization of deferred policy
acquisition costs .............. 3,734 3,760 4,565 1,722 8,957
Amortization of goodwill ......... 1,368 707
Other operating expenses ......... 5,201 (1,739) 6,000 20,352 19,305
------- ------ ------ ------ ------
Total benefits and expenses . 44,904 28,247 68,597 75,118 67,727
------- ------ ------ ------ ------
Income before income tax ......... 8,521 10,063 15,174 8,345 9,929
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
STABLE CORPORATE
VALUE INVESTMENT AND TOTAL
PRODUCTS PRODUCTS OTHER ADJUSTMENTS CONSOLIDATED
-------- ---------- --------- ----------- ------------
Premiums and policy fees ......... $ 7,345 $ 25,317 $ 416,409
Reinsurance ceded ................ (12,016) (167,881)
-------- --------- ---------
Net of reinsurance ceded ....... 7,345 13,301 248,528
---------
Net investment income ............ $ 65,255 37,479 (2,426) 196,148
Realized investment gains (losses) 2,444 169 $ 4,070 6,683
Other income ..................... 819 756 14,478
-------- -------- --------- ------- ---------
Total revenues .............. 67,699 45,812 11,631 4,070 465,837
-------- -------- --------- ------- ---------
Benefits and settlement expenses . 55,464 31,044 11,520 308,689
Amortization of deferred policy
acquisition costs .............. 245 5,888 512 29,383
Amortization of goodwill ......... 2,075
Other operating expenses ......... 996 5,815 4,304 60,234
-------- -------- --------- --------
Total benefits and expenses . 56,705 42,747 16,336 400,381
-------- -------- --------- --------
Income before income tax ......... 10,994 3,065 (4,705) 65,456
Income tax expense ............... 21,947 21,947
Cumulative effect of change in
accounting principle ........... (8,341) (8,341)
-------
Net income .................. $ 35,168
=======
OPERATING SEGMENT INCOME FOR THE
THREE MONTHS ENDED MARCH 31, 2000
-------------------------------------------------------------
(IN THOUSANDS)
SPECIALTY INSURANCE
LIFE INSURANCE PRODUCTS
INDIVIDUAL DENTAL FINANCIAL
LIFE WEST COAST ACQUISITIONS BENEFITS INSTITUTIONS
---------- ---------- ------------ --------- ------------
Premiums and policy fees ......... $ 81,854 $ 23,270 $ 34,790 $ 62,113 $ 111,745
Reinsurance ceded ................ (56,081) (16,005) (7,942) (17,271) (62,709)
-------- -------- -------- -------- ---------
Net of reinsurance ceded ....... 25,773 7,265 26,848 44,842 49,036
Net investment income ............ 14,328 21,795 28,915 2,485 11,121
Realized investment gains (losses)
Other income ..................... (672) 2,947 6,766
-------- -------- -------- -------- ---------
Total revenues .............. 39,429 29,060 55,763 50,274 66,923
-------- -------- -------- -------- ---------
Benefits and settlement expenses . 23,233 20,143 33,363 33,892 31,270
Amortization of deferred policy
acquisition costs .............. 7,216 3,102 3,930 2,712 13,290
Amortization of goodwill ......... 375
Other operating expenses ......... (922) (2,805) 6,706 10,520 15,132
-------- -------- -------- -------- ---------
Total benefits and expenses . 29,527 20,440 43,999 47,124 60,067
-------- -------- ------- -------- ---------
Income before income tax ......... 9,902 8,620 11,764 3,150 6,856
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
STABLE CORPORATE
VALUE INVESTMENT AND TOTAL
PRODUCTS PRODUCTS OTHER ADJUSTMENTS CONSOLIDATED
-------- ---------- --------- ----------- ------------
Premiums and policy fees ......... $ 7,291 $ 27,698 $ 348,761
Reinsurance ceded ................ (10,595) (170,603)
-------- --------- ---------
Net of reinsurance ceded ....... 7,291 17,103 178,158
Net investment income ............ $ 58,996 29,094 (2,913) 163,821
Realized investment gains (losses) (58) 429 $ 2,075 2,446
Other income ..................... 526 1,418 10,985
-------- -------- --------- --------- ---------
Total revenues .............. 58,938 37,340 15,608 2,075 355,410
-------- -------- --------- --------- ---------
Benefits and settlement expenses . 49,058 23,624 19,836 234,419
Amortization of deferred
acquisition costs .............. 207 6,539 522 37,518
Amortization of goodwill ......... 375
Other operating expenses ......... 1,076 4,162 10,220 44,089
-------- -------- --------- ---------
Total benefits and expenses . 50,341 34,325 30,578 316,401
-------- -------- --------- ---------
Income before income tax ......... 8,597 3,015 (14,970) 39,009
Income tax expense ............... 13,133 13,133
---------
Net income .................. $ 25,876
=========
OPERATING SEGMENT ASSETS
MARCH 31, 2001
--------------------------------------------------------------
(IN THOUSANDS)
SPECIALTY INSURANCE
LIFE INSURANCE PRODUCTS
INDIVIDUAL DENTAL FINANCIAL
LIFE WEST COAST ACQUISITIONS BENEFITS INSTITUTIONS
---------- ---------- ------------ -------- ------------
Investments and other assets .... $1,285,634 $1,617,230 $2,399,887 $189,791 $1,274,944
Deferred policy acquisition costs
and goodwill .................. 369,841 288,238 294,379 215,246 153,891
---------- ---------- ---------- -------- ----------
Total assets ............... $1,655,475 $1,905,468 $2,694,266 $405,037 $1,428,835
========== ========== ========== ======== ==========
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
STABLE CORPORATE
VALUE INVESTMENT AND TOTAL
PRODUCTS PRODUCTS OTHER CONSOLIDATED
---------- ---------- --------- -----------
Investments and other assets .... $3,365,889 $3,757,489 $765,243 $14,656,107
Deferred policy acquisition costs
and goodwill .................. 1,954 130,855 68,540 1,522,944
---------- ---------- -------- -----------
Total assets ............... $3,367,843 $3,888,344 $833,783 $16,179,051
========== ========== ======== ===========
OPERATING SEGMENT ASSETS
DECEMBER 31, 2000
----------------------------------------------------------------
(IN THOUSANDS)
SPECIALTY INSURANCE
LIFE INSURANCE PRODUCTS
INDIVIDUAL DENTAL FINANCIAL
LIFE WEST COAST ACQUISITIONS BENEFITS INSTITUTIONS
---------- ---------- ------------ -------- ------------
Investments and other assets .... $1,237,867 $1,576,577 $1,604,854 $192,906 $1,369,915
Deferred policy acquisition costs
and goodwill .................. 354,320 276,518 223,430 214,770 150,984
---------- ---------- ---------- -------- ----------
Total assets ............... $1,592,187 $1,853,095 $1,828,284 $407,676 $1,520,899
========== ========== ========== ======== ==========
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
STABLE CORPORATE
VALUE INVESTMENT AND TOTAL
PRODUCTS PRODUCTS OTHER CONSOLIDATED
---------- ---------- -------- ------------
Investments and other assets .... $3,340,099 $3,844,168 $428,951 $13,595,337
Deferred policy acquisition costs
and goodwill .................. 2,144 127,334 81,711 1,431,211
---------- ---------- -------- -----------
Total assets ............... $3,342,243 $3,971,502 $510,662 $15,026,548
========== ========== ======== ===========
NOTE D - STATUTORY REPORTING PRACTICES
Financial statements prepared in conformity with accounting principles generally accepted in the United States of America (i.e., GAAP) differ in some respects from the statutory accounting practices prescribed or permitted by insurance regulatory authorities. At March 31, 2001, and for the three months then ended, Protective Life and its life insurance subsidiaries had consolidated share-owner’s equity and net loss prepared in conformity with statutory reporting practices of $613.1 million and $72.0 million, respectively.
The National Association of Insurance Commissioners (“NAIC”) has adopted the Codification of Statutory Accounting Principles (“Codification”). Codification changes current statutory accounting rules in several areas and was effective January 1, 2001. The adoption of Codification resulted in an increase in Protective Life’s statutory capital of approximately $39 million on January 1, 2001.
NOTE E - INVESTMENTS
As 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 March 31,2001 and December 31, 2000, prepared on the basis of reporting investments at amortized cost rather than at market values, are as follows:
March 31 December 31
----------- ------------
(In Thousands)
Total investments ............... $11,287,558 $10,258,809
Deferred policy acquisition costs 1,306,167 1,192,696
All other assets ................ 3,530,498 3,654,604
----------- -----------
$16,124,223 $15,106,109
=========== ===========
Deferred income taxes ........... $ 94,146 $ 100,256
All other liabilities ........... 14,321,782 13,424,068
----------- -----------
14,415,928 13,524,324
Share-owner's equity ............ 1,708,295 1,581,785
----------- -----------
$16,124,223 $15,106,109
=========== ===========
NOTE F - RECENTLY ISSUED ACCOUNTING STANDARDS
On January 1, 2001, Protective Life adopted Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities”. SFAS No. 133, as amended by SFAS No. 138, requires Protective Life 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-owner’s 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. The adoption of SFAS No. 133 resulted in a cumulative charge to net income of approximately $8.3 million (net of an income tax benefit of $4.5 million) and is reflected in the accompanying statement of income as the cumulative effect of a change in accounting principle. The adoption of SFAS No. 133 also resulted in a cumulative increase to other comprehensive income of approximately $4.0 million (net of $2.1 million of income tax) in the three months ended March 31, 2001. Prospectively, the adoption of SFAS No. 133 may introduce volatility into Protective Life’s reported net income and other comprehensive income depending on future market conditions and Protective Life’s hedging activities.
Protective Life utilizes a risk management strategy that incorporates the use of derivative instruments. As of March 31, 2001 Protective Life only has entered into fair value hedges.
Changes in the fair value of a derivative that is highly effective as a fair value hedge, along with the loss or gain on the hedged asset or liability that is attributable to the hedged risk, are recorded in current period earnings. Changes in the fair value of derivatives that are highly effective, and that are designated and qualify as, foreign currency hedges are also considered fair value hedges and are recorded in current period earnings.
Protective Life formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values of hedged items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, Protective Life discontinues hedge accounting prospectively.
Protective Life occasionally may purchase a financial instrument that contains a derivative instrument that is “embedded” in the financial instrument. If the economic characteristics of the embedded financial instrument are not clearly and closely related to the host contract, it would meet the definition of a derivative instrument. Any embedded derivative is then separated from the host contract and is carried at fair value on Protective Life’s consolidated balance sheet.
During the three months ended March 31, 2001, Protective Life recorded a gain of $1.8 million for the change in fair value of other derivatives that did not meet the definition of hedges under SFAS No. 133 and a gain of $0.3 million for the ineffective portion of the change in fair value hedges. Such amounts are reported as a component of realized investment gains in the accompanying statement of income. All components of each derivative’s gain or loss are included in the assessment of hedge effectiveness.
In September 2000 the Financial Accounting Standards Board issued SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinquishments of Liabilities, a replacement of SFAS No. 125". SFAS No. 140 revises the standards for accounting for securitizations and other transfers of financial assets. This Statement is effective for transfers and servicing of financial assets and extinquishments of liabilities occurring after March 31, 2001.
NOTE G - COMPREHENSIVE INCOME
The following table sets forth Protective Life’s comprehensive income for the periods shown:
THREE MONTHS ENDED
MARCH 31
----------------------
2001 2000
---- ----
Net income ..................................... $ 35,168 $ 25,876
Increase (decrease) in net unrealized gains
on investments (net of income tax:
2001 - $46,052; 2000 - $(46)) ................ 85,526 (85)
Reclassification adjustment for amounts
included in net income (net of
income tax: 2001 - $(1,329); 2000 - $(856)) .. (2,469) (1,590)
Transition adjustment on derivative financial
instruments (net of income tax: 2001 - $2,127) 3,951
--------- --------
Comprehensive income ........................... $ 122,176 $ 24,201
========= ========
NOTE H - RECLASSIFICATIONS
Certain reclassifications have been made in the previously reported financial statements and accompanying notes to make the prior year amounts comparable to those of the current year. Such reclassifications had no effect on previously reported net income, total assets, or share-owner’s equity.
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF THE
RESULTS OF OPERATIONS
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. Protective Life’s Divisions are: Individual Life, West Coast, Acquisitions, Dental Benefits, 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.
Revenues
The following table sets forth revenues by source for the period shown, and the percentage change from the prior period:
THREE MONTHS PERCENTAGE
ENDED INCREASE/
MARCH 31 (DECREASE)
------------------- ------------
(IN THOUSANDS)
2001 2000
---- ----
Premiums and policy fees $248,528 $178,158 39.5%
Net investment income ... 196,148 163,821 19.7
Realized investment gains 6,683 2,446 173.2
Other income ............ 14,478 10,985 31.8
-------- --------
$465,837 $355,410
======== ========
Premiums and policy fees, net of reinsurance ceded, increased $70.4 million or 39.5% in the first three months of 2001 over the first three months of 2000. Premiums and policy fees in the Individual Life Division increased $10.9 million in the first three months of 2001 as compared to the same period in 2000. Premiums and policy fees in the West Coast Division increased $6.7 million in the first three months of 2001 as compared to the same period in 2000. Premiums and policy fees in the Acquisitions Division are expected to decline with time unless new acquisitions are made. In the first quarter of 2001 Protective Life coinsured a block of individual life policies from Standard Insurance Company. This coinsurance arrangement resulted in a $18.6 million increase in premium and policy fees. Premiums and policy fees from older acquired blocks declined $2.5 million in the first three months of 2001 as compared to the same period last year. In October 2000, PLC transferred ownership of twenty companies (that provide prepaid dental products) to Protective Life. The operations of these companies are included in Protective Life’s Dental Benefits Division and resulted in a $29.4 million increase in premium and policy fees in the Division in the first three months of 2001. Premiums and policy fees related to the Dental Benefits Division’s other businesses increased $2.4 million in the first three months of 2001 as compared to the same period in 2000. Premiums and policy fees from the Financial Institutions Division increased $8.6 million in the first three months of 2001 as compared to the first three months of 2000. Premiums and policy fees relating to various health insurance lines in the Corporate and Other segment decreased $3.8 million in the first three months of 2001 as compared to the same period in 2000.
Net investment income in the first three months of 2001 increased by $32.3 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 January 2001 acquisition of a block of individual life policies resulted in an increase in investment income of $12.3 million.
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 gains for the first three months of 2001 were $6.7 million as compared to $2.4 million in the corresponding period of 2000.
Other income consists primarily of revenues from Protective Life’s direct response business, service contract business, non-insurance subsidiaries and rental of space in its administrative building to PLC. In the first three months of 2001 as compared to the same period of 2000, revenues from Protective Life’s direct response business and service contract business increased $1.3 million and $0.8 million, respectively. Income from other sources increased $1.4 million.
Income Before Income Tax
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
Three Months Ended March 31
(In Thousands)
2001 2000
---- ----
Operating Income (Loss)(1)
Life Insurance
Individual Life ................................... $ 8,521 $ 9,902
West Coast ........................................ 10,063 8,620
Acquisitions ...................................... 15,174 11,764
Specialty Insurance Products
Dental Benefits ................................... 8,345 3,150
Financial Institutions ............................ 9,929 6,856
Retirement Savings and Investment Products
Stable Value Products ............................. 8,550 8,655
Investment Products ............................... 3,065 3,015
Corporate and Other ..................................... (4,705) (14,970)
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Total operating income .................... 58,942 36,992
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Realized Investment Gains (Losses)
Stable Value Products ............................. 2,444 (58)
Investment Products ............................... 169 429
Unallocated Realized Investment Gains (Losses) .... 4,070 2,075
Related Amortization of Deferred Policy Acquisition Costs
Investment Products ............................... (169) (429)
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Total net ................................. 6,514 2,017
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Income (Loss) Before Income Tax
Life Insurance
Individual Life ................................... 8,521 9,902
West Coast ........................................ 10,063 8,620
Acquisitions ...................................... 15,174 11,764
Specialty Insurance Products
Dental Benefits ................................... 8,345 3,150
Financial Institutions ............................ 9,929 6,856
Retirement Savings and Investment Products
Stable Value Products ............................. 10,994 8,597
Investment Products ............................... 3,065 3,015
Corporate and Other ..................................... (4,705) (14,970)
Unallocated Realized Investment Gains (Losses) .......... 4,070 2,075
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Total income before income tax ............ $ 65,456 $ 39,009
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(1) Income before income tax excluding realized investment gains and losses and related amortization of deferred policy acquisition
costs.
The Individual Life Division’s pretax operating income was $8.5 million in the first three months of 2001 compared to $9.9 million in the same period of 2000. The Division experienced higher marketing expenses as the Company increased its direct marketing and advertising in the first three months of 2001. The Division’s mortality experience was $0.8 million better than expected in the first three months of 2001 as compared to being $1.2 million better than expected in the first three months of 2000.
West Coast had pretax operating income of $10.1 million for the first three months of 2001 compared to $8.6 million for the same period last year. The increase reflects the Division’s growth through sales.
Pretax operating income from the Acquisitions Division was $15.2 million in the first three months of 2001 as compared to $11.8 million in the same period of 2000. The Division’s mortality experience improved $0.5 million in the first three months of 2001 as compared to the first three months of 2000. 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 coinsurance of a block of life insurance policies from Standard Life Insurance Company resulted in $2.4 million of the increase in earnings.
The Dental Benefits Division’s pretax operating income was $8.3 million in the first three months of 2001 compared to $3.2 million in the same period last year. The aforementioned transfer of companies from PLC resulted in a $1.7 million increase in pretax operating income. The remainder of the increase reflects a reduction of operating expense and improved claims experience.
Pretax operating income of the Financial Institutions Division was $9.9 million in the first three months of 2001 as compared to $6.9 million in the same period of 2000. In the first quarter of 2000 claims were higher than expected. Claims in the first quarter of 2001 were to more normal levels.
The Stable Value Products Division had pretax operating income of $8.6 million in the first three months of 2001 and $8.7 million in the corresponding period of 2000. Realized investment gains associated with this Division in the first three months of 2001 were $2.4 million as compared to losses of $0.1 million in the same period last year. As a result, total pretax earnings were $11.0 million in the first three months of 2001 compared to $8.6 million for the same period last year.
The Investment Products Division pretax operating income was $3.1 million in the first three months of 2001 compared to $3.0 million in the same period of 2000. The Division had no realized investment gains (net of related amortization of deferred policy acquisition costs) in the first three months of 2001 or 2000.
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 $4.7 million in the first three months of 2001 compared to a loss of $15.0 million in the first three months of 2000. Earnings from health insurance lines increased $3.9 million in the first three months of 2001 as compared to the same period last year. The segment also had approximately $5.4 million lower corporate expenses and $2.1 million higher corporate investment income in the first quarter of 2001 as compared to the same period in 2000. Protective Life experienced $1.1 million of other decreases in earnings in the first three months of 2001 as compared to the same period in 2000.
Income Taxes
The following table sets forth the effective tax rates for the periods shown:
THREE MONTHS
ENDED ESTIMATED EFFECTIVE
MARCH 31 INCOME TAX RATES
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2000 34%
2001 34%
The effective income tax rate for the full year of 2000 was 35.4%. Management’s estimate of the effective income tax rate for 2001 is approximately 35%.
Net Income
The following table sets forth net income for the periods shown, and the percentage change from the prior period:
NET INCOME
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THREE MONTHS PERCENTAGE
ENDED TOTAL INCREASE/
MARCH 31 (IN THOUSANDS) (DECREASE)
------------ -------------- ----------
2000 $25,876 (13.4)%
2001 35,168 35.9
Compared to the same period in 2000, net income in the first three months of 2001 increased $9.3 million, reflecting improved operating earnings in the West Coast, Acquisitions, Dental Benefits, Financial Institutions, and Investment Products Divisions and the Corporate and Other segment and higher realized investment gains (net of related amortization of deferred policy acquisition costs) which were offset by lower operating earnings in the Individual Life and Stable Value Divisions and a charge to earnings resulting from the cumulative effect of a change in accounting principle.
Recently Issued Accounting Standards
In September 2000 the FASB issued SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinquishments of Liabilities, a replacement of SFAS No. 125". SFAS No. 140 revises the standards for accounting for securitizations and other transfers of financial assets. This Statement is effective for transfers and servicing of financial assets and extinquishments of liabilities occurring after March 31, 2001.
ITEMS 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
There has been no material change from the disclosures in Protective Life's Annual Report on Form 10-K for the year ended December 31, 2000.
PART II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 99 - Safe Harbor for Forward-Looking Statements
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| Date: | May 15, 2001 | /s/ Jerry W. Defoor |
| | Jerry W. DeFoor |
| | Vice President and Controller |
| | and Chief Accounting Officer |
| | (Duly authrorized officer) |
