FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----- -----
Commission File Numbers 33-31940; 33-39345; 33-57052; 333-02249
PROTECTIVE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
TENNESSEE 63-0169720
(State of incorporation) (IRS Employer Identification Number)
2801 HIGHWAY 280 SOUTH
BIRMINGHAM, ALABAMA 35223
(Address of principal executive offices)
(205) 879-9230
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO
Number of shares of Common Stock, $1.00 par value, outstanding as of
May 3, 1996: 5,000,000 shares.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(A)
AND (B) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION H(2).
PROTECTIVE LIFE INSURANCE COMPANY
INDEX
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Report of Independent Accountants
Consolidated Condensed Statements of Income for the Three
Months ended March 31, 1996 and 1995 (unaudited)
Consolidated Condensed Balance Sheets as of March 31, 1996
(unaudited) and December 31, 1995
Consolidated Condensed Statements of Cash Flows
for the Three Months ended March 31, 1996 and 1995 (unaudited)
Notes to Consolidated Condensed Financial Statements (unaudited)
Item 2. Management's Narrative Analysis of the Results of Operations
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K
Signature
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Stockholder
Protective Life Insurance Company
Birmingham, Alabama
We have reviewed the accompanying consolidated condensed balance sheet of
Protective Life Insurance Company and subsidiaries as of March 31, 1996, and the
related consolidated condensed statements of income for the three-month periods
ended March 31, 1996 and 1995 and consolidated condensed statements of cash
flows for the three-month periods ended March 31, 1996 and 1995. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated condensed financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1995, and the
related consolidated statements of income, stockholder's equity, and cash flows
for the year then ended (not presented herein); and in our report dated February
12, 1996, we expressed an unqualified opinion which contains an explanatory
paragraph regarding the changes in accounting for certain investments in debt
and equity securities in 1993 on those consolidated financial statements. In
our opinion, the information set forth in the accompanying consolidated
condensed balance sheet as of December 31, 1995, is fairly stated in all
material respects in relation to the consolidated balance sheet from which it
has been derived.
COOPERS & LYBRAND L.L.P.
Birmingham, Alabama
April 24, 1996
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in thousands)
(Unaudited)
THREE MONTHS ENDED
MARCH 31
1996 1995
REVENUES
Premiums and policy fees (net of reinsurance ceded:
1996 - $78,303; 1995 - $62,131) $108,667 $102,014
Net investment income 118,343 110,291
Realized investment gains (losses) 4,421 2,661
Other income 1,947 968
-------- --------
233,378 215,934
-------- --------
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance ceded:
1996 - $56,751; 1995 - $44,203) 149,228 135,393
Amortization of deferred policy acquisition costs 21,819 20,325
Other operating expenses (net of reinsurance ceded:
1996 - $17,802; 1995 - $11,269) 32,757 31,309
-------- --------
203,804 187,027
-------- --------
INCOME BEFORE INCOME TAX 29,574 28,907
Income tax expense 10,614 9,539
-------- --------
NET INCOME $ 18,960 $ 19,368
======== ========
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
MARCH 31 DECEMBER 31
1996 1995
(Unaudited)
ASSETS
Investments:
Fixed maturities $4,408,744 $3,891,932
Equity securities 41,748 38,711
Mortgage loans on real estate 1,378,745 1,835,057
Investment in real estate, net 21,321 20,788
Policy loans 164,741 143,372
Other long-term investments 40,573 43,875
Short-term investments 190,173 46,891
---------- ----------
Total investments 6,246,045 6,020,626
Cash 4,526 6,198
Accrued investment income 64,791 61,004
Accounts and premiums receivable, net 32,687 35,492
Reinsurance receivables 293,890 271,018
Deferred policy acquisition costs 450,938 410,183
Property and equipment, net 34,263 34,211
Receivables from related parties 120 1,961
Other assets 12,736 13,096
Assets held in separate accounts 388,321 324,904
---------- ----------
TOTAL ASSETS $7,528,317 $7,178,693
========== ==========
LIABILITIES
Policy liabilities and accruals $2,393,920 $2,121,921
Guaranteed investment contract deposits 2,544,596 2,451,693
Annuity deposits 1,260,454 1,280,069
Other policyholders' funds 142,243 134,380
Other liabilities 105,551 109,538
Accrued income taxes 1,744 838
Deferred income taxes 40,277 67,420
Indebtedness to related parties 31,578 34,693
Liabilities related to separate accounts 388,321 324,904
---------- ----------
TOTAL LIABILITIES 6,908,684 6,525,456
========== ==========
COMMITMENTS AND CONTINGENT LIABILITIES - NOTE C
REDEEMABLE PREFERRED STOCK, $1 par value,
at redemption value; Shares authorized and issued: 2,000 2,000 2,000
---------- ----------
STOCKHOLDER'S EQUITY
Common Stock, $1 par value
Shares authorized and issued: 5,000,000 5,000 5,000
Additional paid-in capital 144,494 144,494
Net unrealized gains (losses) on investments
(Net of income tax: 1996 - $2,753; 1995 - $31,157) 5,113 57,863
Retained earnings 468,605 449,645
Note receivable from PLC
Employee Stock Ownership Plan (5,579) (5,765)
---------- ----------
TOTAL STOCKHOLDER'S EQUITY 617,633 651,237
---------- ----------
$7,528,317 $7,178,693
========== ==========
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
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 18,960 $ 19,368
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred policy acquisition 21,819 20,325
Capitalization of deferred policy acquisition costs (20,333) (21,786)
Depreciation expense 1,310 1,020
Deferred income tax 1,262 (2,234)
Accrued income tax 906 10,573
Interest credited to universal life and investment products 69,895 67,685
Policy fees assessed on universal life and investment products 26,535 (22,716)
Change in accrued investment income and other receivables (22,014) (4,463)
Change in policy liabilities and other policyholders'
funds of traditional life and health products 86,495 20,252
Change in other liabilities (4,602) 12,165
Other (net) (2,278) 597
-------- --------
Net cash provided by operating activities 177,955 100,786
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reductions of investments
Investments available for sale 186,107 42,451
Other 20,728 22,808
Sale of investments
Investments available for sale 351,445 197,797
Other 554,969 1,759
Cost of investments acquired
Investments available for sale (1,286,996) (374,660)
Other (119,178) (61,928)
Acquisitions and bulk reinsurance assumptions 116,220
Purchase of property and equipment (1,392) (2,638)
Sale of property and equipment 31 41
Net cash used in investing activities (178,066) (174,370)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings under line of credit arrangements and debt 419,500 283,500
Principal payments on line of credit arrangements and debt (419,500) (283,500)
Capital contribution from PLC 18,000
Principal payment on surplus note to PLC (3,115)
Investment product deposits and change in universal life deposits 256,047 55,219
Investment product withdrawals (254,493) 365
--------- --------
Net cash provided by (used in) financing activities (1,561) 73,584
--------- --------
INCREASE (DECREASE) IN CASH (1,672) 0
CASH AT BEGINNING OF PERIOD 6,198 0
--------- --------
CASH AT END OF PERIOD $ 4,526 $ 0
========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period:
Interest on notes and mortgages payable $ (1,625) $ (1,846)
Income taxes $ (8,446) $ (1,200)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Reduction of principal on note from ESOP $ 186 $ 171
Acquisitions and bulk reinsurance assumptions
Assets acquired $ 138,564
Liabilities assumed $ (169,287)
----------
Net $ (30,723)
==========
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 ("Protective Life") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the disclosures required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation have been included. Operating
results for the three month period ended March 31, 1996 are not necessarily
indicative of the results that may be expected for the year ending
December31,1996. 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, 1995.
Protective Life is a wholly-owned subsidiary of Protective Life Corporation
("PLC").
NOTE B - SALE OF MORTGAGE LOANS
On March 22, 1996, Protective Life sold $554 million of its commercial mortgage
loans in a securitization transaction. Proceeds from the sale consisted of cash
of $400 million, net of expenses, and subordinated mortgaged-backed securities
of $161 million. The transaction resulted in a realized investment gain of
approximately $6.1 million. The cash proceeds were reinvested in fixed maturity
and short-term investments.
NOTE C - 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 any
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.
Protective Life and its subsidiaries, like other life and health insurers, from
time to time are involved in lawsuits, in which the plaintiff may seek punitive
damage awards as well as compensatory damage awards. To date, no such lawsuit
has resulted in the award of any material amount of damages against Protective
Life. Although the outcome of any litigation cannot be predicted with
certainty, Protective Life believes that no pending or threatened litigation is
reasonably likely to have a material adverse effect on the financial position of
Protective Life.
NOTE D - STATUTORY REPORTING PRACTICES
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 March
31, 1996 and for the three months then ended, Protective Life and its life
insurance subsidiaries had consolidated stockholder's equity and net income
prepared in conformity with statutory reporting practices of $300.6 million and
$6.7 million, respectively.
NOTE E - RECENTLY ADOPTED ACCOUNTING STANDARDS
At December 31, 1993, Protective Life adopted Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." For purposes of adopting SFAS No. 115 Protective Life has
classified all of its investments in fixed maturities, equity securities, and
short-term investments as "available for sale." As prescribed in SFAS No. 115,
these investments are recorded at their market values with the resulting net
unrealized gain or loss, net of income tax and a related adjustment to deferred
policy acquisition costs, recorded as a component of stockholder's equity.
Protective Life's balance sheets at March 31, 1996 and December 31, 1995,
prepared on the basis of reporting investments at amortized cost rather than at
market values, are as follows:
MARCH 31, 1996 DECEMBER 31, 1995
(IN THOUSANDS)
Total investments $6,233,447 $5,915,357
Deferred policy acquisition costs 455,670 426,432
All other assets 831,334 747,884
---------- ----------
$7,520,451 $7,089,673
========== ==========
Deferred income taxes $ 37,524 $ 36,263
All other liabilities 6,868,407 6,458,036
---------- ----------
6,905,931 6,494,299
Redeemable preferred stock 2,000 2,000
Stockholder's equity 612,520 593,374
---------- ----------
$7,520,451 $7,089,673
========== ==========
At January 1, 1996, Protective Life adopted SFAS No. 120, "Accounting and
Reporting by Mutual Life Insurance Enterprises and by Insurance Enterprises
for Certain Long-Duration Contracts;" SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of;"
and SFAS No. 122, "Accounting for Mortgage Servicing Rights." The adoption of
these accounting standards did not have a material effect on Protective Life's
financial statements.
NOTE F - 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 stockholder's equity.
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF THE
RESULTS OF OPERATIONS
Protective Life Insurance Company ("Protective Life") is a wholly-owned and the
principal operating subsidiary of Protective Life Corporation ("PLC"), an
insurance holding company whose common stock is traded on the New York Stock
Exchange. Founded in 1907, Protective Life provides financial services through
the production, distribution, and administration of insurance and investment
products.
In accordance with General Instruction H(2)(a), Protective Life includes the
following analysis with the reduced disclosure format.
REVENUES
The following table sets forth revenues by source for the period shown:
THREE MONTHS PERCENTAGE
ENDED INCREASE/
MARCH 31 (DECREASE)
(IN THOUSANDS)
1996 1995
Premiums and policy fees $108,667 $102,014 6.5%
Net investment income 118,343 110,291 7.3
Realized investment gains 4,421 2,661 66.1
Other income 1,947 968 101.1
-------- --------
$233,378 $215,934
======== ========
Premiums and policy fees increased $6.7 million or 6.5% in the first three
months of 1996 over the first three months of 1995. Premiums and policy fees
from the Financial Institutions Division decreased $7.2 million in the first
three months of 1996 as compared to the first three months of 1995. This
resulted from a reinsurance arrangement begun in 1995. Increases in premiums
and policy fees from the Group and Individual Life Divisions were $4.3 million
and $6.0 million, respectively. The coinsurance of a block of policies in the
second quarter of 1995 resulted in a $1.8 million increase in premiums and
policy fees in the first three months of 1996. The coinsurance of a block of
policies in the first quarter of 1996 resulted in a $4.7 million increase in
premiums and policy fees. Decreases in older acquired blocks resulted in a
$4.0 million decrease in premiums and policy fees.
Net investment income in the first three months of 1996 increased by $8.1
million over the corresponding period of the preceding year, primarily due to
increases in the average amount of invested assets. Invested assets have
increased primarily due to receiving annuity and guaranteed investment contract
("GIC") deposits and to acquisitions. The assumption of a block of policies
in 1995 and a block of policies in the first quarter of 1996 resulted in an
increase in net investment income of $3.1 million in the first three months of
1996.
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 approximate
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 1996 were $1.8 million
higher than the corresponding period of 1995. In the 1996 first quarter,
Protective Life sold $554 million of its commercial mortgage loans in a
securitization transaction, resulting in a $6.1 million realized investment
gain.
Other income consists primarily of fees from administrative-services-only types
of group accident and health insurance contracts, and from rental of space in
its administrative building to PLC.
INCOME BEFORE INCOME TAX
The following table sets forth income or loss before income tax by business
segment for the periods shown:
INCOME BEFORE INCOME TAX
THREE MONTHS ENDED MARCH 31
(IN THOUSANDS)
BUSINESS SEGMENT 1996 1995
Acquisitions $13,963 $11,073
Financial Institutions 1,482 1,340
Group 3,092 1,435
Guaranteed Investment Contracts 6,576 7,544
Individual Life 3,957 4,093
Investment Products 2,732 1,746
Corporate and Other (2,918) (887)
Unallocated Realized Investment Gains (Losse) 690 2,563
------- -------
$29,574 $28,907
======= =======
Pretax earnings from the Acquisitions Division increased $2.9 million in the
first three months of 1996 as compared to the same period of 1995. Earnings
from the Acquisitions Division are 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. As previously discussed, Protective
Life assumed one block of policies during the second quarter of 1995 and another
block of policies in the first quarter of 1996. These acquisitions represent
$1.5 million of the increase.
Pretax earnings of the Financial Institutions Division were $0.1 million higher
in the first three months of 1996 as compared to the same period in 1995. The
reinsurance arrangement begun in 1995 to reinsure all of the Division's new
credit insurance sales and thereby improve the Division's return on investment,
reduced the Division's reported earnings for the first three months of 1996 by
approximately $1.0 million, as contemplated at the date of the arrangement.
In addition, life insurance claims were approximately $0.4 million higher in
the 1996 first quarter as compared to the same period last year. These
decreases were offset by an increase in the Division's sales.
Group pretax earnings were $1.7 million higher in the first three months of 1996
as compared to the first three months of 1995. Improved dental earnings
represented $1.2 million of the increase.
The Guaranteed Investment Contract ("GIC") Division had pretax operating
earnings of $9.0 million in the first three months of 1996 and $7.4 million in
the corresponding period of 1995. At March 31, 1996, GIC deposits totaled $2.5
billion compared to $2.3 billion one year earlier. Realized investment losses
associated with this Division in the first three months of 1996 were $2.4
million, as compared to realized investment gains of $0.1 million in the same
period last year. As a result, total pretax earnings were $6.6 million in the
first three months of 1996 compared to $7.5 million for the same period in 1995.
The Individual Life Division had pretax operating earnings of $2.9 million in
the 1996 first quarter as compared to $4.1 million in the same period of 1995.
The decrease was primarily due to approximately $1.0 million higher life
insurance claims in the 1996 first quarter as compared to the same period last
year. Realized investment gains, net of related amortization of deferred policy
acquisition costs, associated with this Division were $1.1 million in 1996. As
a result, total pretax earnings were $4.0 million in the first three months of
1996 compared to $4.1 million as in the first three months of 1995 in which
there were no realized investment gains.
Investment Products Division pretax operating earnings were $2.0 million which
was $0.4 million higher in the first three months of 1996 compared to the same
period of 1995. Realized investment gains associated with the Division, net of
related amortization of deferred policy acquisition costs, were $0.7 million as
compared to less than $0.1 million last year, resulting in total pretax earnings
of $2.7 million in the first quarter of 1996 as compared to $1.7 million in the
same period of 1995.
The Corporate and Other segment consists of several small insurance lines of
business, net investment income and other operating expenses not identified with
the preceding operating divisions (including interest on substantially all
debt), and the operations of a small noninsurance subsidiary. Pretax losses for
this segment were $2.0 million higher in the first three months of 1996 as
compared to the first three months of 1995 primarily due to lower investment
income allocated to this segment.
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
1996 35.9%
1995 33.0
The effective income tax rate for the full year of 1995 was 34%. Management's
estimate of the effective income tax rate for 1996 is also 34%.
NET INCOME
The following table sets forth net income for the periods shown:
NET INCOME
THREE MONTHS PERCENTAGE
ENDED TOTAL INCREASE/
MARCH 31 (IN THOUSANDS) (DECREASE)
1996 $18,960 (2.1)%
1995 19,368 (2.3)
Compared to the same period in 1995, net income in the first three months of
1996 decreased $0.4 million, reflecting improved operating earnings in the
Acquisitions, Financial Institutions, Group, Guaranteed Investment Contracts,
and Investment Products Divisions, which were offset by lower earnings in the
Individual Life Division and Corporate and Other segment and lower realized
investment gains net of related amortization of deferred policy acquisition
costs.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial data schedule
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
PROTECTIVE LIFE INSURANCE COMPANY
Date: May 13, 1996 /S/ JERRY W. DEFOOR
Jerry W. DeFoor
Vice President and Controller,
and Chief Accounting Officer
(Duly authorized officer)