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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, 1998
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 or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
2801 HIGHWAY 280 SOUTH
BIRMINGHAM, ALABAMA 35223
(Address of principal executive offices and zip code)
(205) 879-9230
(Registrant's telephone number, including area code)
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 8,
1998: 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, 1998 and 1997 (unaudited).......................
Consolidated Condensed Balance Sheets as of March 31, 1998
(unaudited) and December 31, 1997...............................
Consolidated Condensed Statements of Cash Flows for the
Three Months ended March 31, 1998 and 1997 (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, 1998, and the
related consolidated condensed statements of income and consolidated condensed
statements of cash flows for the three-month periods ended March 31, 1998 and
1997. 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, 1997, 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
11, 1998, 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, 1997, 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 23, 1998
2
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in thousands)
(Unaudited)
THREE MONTHS ENDED
MARCH 31
1998 1997
---- -----
REVENUES
Premiums and policy fees (net of reinsurance ceded:
1998 - $99,628; 1997 - $54,509) $136,867 $120,377
Net investment income 149,241 123,596
Realized investment gains (losses) 11 (418)
Other income 3,840 807
--------- ----------
289,959 244,362
--------- ----------
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance ceded:
1998 - $57,363; 1997 - $33,536) 180,390 157,702
Amortization of deferred policy acquisition costs 24,827 20,827
Other operating expenses (net of reinsurance ceded:
1998 - $31,709; 1997 - $14,254) 42,755 32,081
-------- ---------
247,972 210,610
-------- --------
INCOME BEFORE INCOME TAX 41,987 33,752
Income tax expense 15,244 11,571
-------- ---------
NET INCOME $ 26,743 $ 22,181
======== ========
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
3
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
MARCH 31 DECEMBER 31
1998 1997
--------------------- -------------
(Unaudited)
ASSETS
Investments:
Fixed maturities $ 6,271,780 $ 6,348,252
Equity securities 13,130 15,006
Mortgage loans on real estate 1,368,566 1,313,478
Investment in real estate, net 13,185 13,469
Policy loans 192,961 194,109
Other long-term investments 55,146 54,704
Short-term investments 139,713 54,337
----------- --------------
Total investments 8,054,481 7,993,355
Cash 39,197
Accrued investment income 92,870 94,095
Accounts and premiums receivable, net 43,378 42,255
Reinsurance receivables 584,220 591,457
Deferred policy acquisition costs 652,709 632,605
Property and equipment, net 36,106 36,407
Other assets 26,040 14,445
Assets held in separate accounts 1,123,756 931,465
------------ -------------
$10,613,560 $10,375,281
============ =============
LIABILITIES
Policy liabilities and accruals $ 3,817,247 $ 3,720,990
Guaranteed investment contract deposits 2,677,543 2,684,676
Annuity deposits 1,502,662 1,511,553
Other policyholders' funds 166,121 183,324
Other liabilities 199,290 246,081
Accrued income taxes 12,809 941
Deferred income taxes 46,560 49,417
Indebtedness to related parties 21,772 28,055
Liabilities related to separate accounts 1,123,756 931,465
----------- ------------
9,567,760 9,356,502
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES - NOTE B
STOCKHOLDER'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 327,992 327,992
Note receivable from PLC Employee Stock Ownership Plan (5,199) (5,378)
Retained earnings 656,178 629,436
Accumulated other comprehensive income
Net unrealized gains on investments (net of income
tax: 1998 -$33,317; 1997 - $33,238) 61,827 61,727
------------- -------------
1,045,800 1,018,779
------------- -------------
$10,613,560 $10,375,281
============= =============
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
4
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
THREE MONTHS ENDED
MARCH 31
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 26,743 $ 22,181
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred policy acquisition costs 24,827 20,827
Capitalization of deferred policy acquisition costs (43,930) (25,231)
Depreciation expense 1,917 1,402
Deferred income tax (4,247) (488)
Accrued income tax 11,868 10,293
Interest credited to universal life and investment products 84,729 41,239
Policy fees assessed on universal life and investment products (34,045) 31,163
Change in accrued investment income and other receivables 7,339 3,597
Change in policy liabilities and other policyholders'
funds of traditional life and health products 114,125 93,341
Change in other liabilities (46,790) (13,065)
Other (net) (20,811) 660
------------- --------------
Net cash provided by operating activities 121,725 185,919
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reductions of investments
Investments available for sale 1,742,067 774,451
Other 76,911 28,655
Sale of investments
Investments available for sale 145,772 550,101
Other 234,634 2,766
Cost of investments acquired
Investments available for sale (1,974,390) (1,454,639)
Other (281,863) (89,573)
Purchase of property and equipment (2,684) (1,764)
Sale of property and equipment 4 9
---------------------------------
Net cash used in investing activities (59,549) (189,994)
-------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings under line of credit arrangements and debt 304,500 504,100
Principal payments on line of credit arrangements and debt (304,500) (504,100)
Principal payment on surplus note to PLC 0 (4,943)
Investment product deposits and change in universal life deposits 330,148 174,968
Investment product withdrawals (431,521) (244,533)
------------- -------------
Net cash used in financing activities (101,373) (74,508)
------------- --------------
INCREASE (DECREASE) IN CASH (39,197) (78,583)
CASH AT BEGINNING OF PERIOD 39,197 114,384
-------------- -------------
CASH AT END OF PERIOD $ 0 $ 35,801
================ =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period:
Interest on notes and mortgages payable $ 856 $ 1,151
Income taxes $ 9,995 $ 1,858
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Reduction of principal on note from ESOP $ 179 $ 202
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
5
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, 1998, are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998. The year-end consolidated condensed balance sheet data was derived from
audited financial statements, but does not include all disclosures required by
generally accepted accounting principles. 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, 1997.
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), juries have substantial discretion in awarding punitive damages which
creates the potential for unpredictable material adverse judgments in any given
punitive damages suit. Protective Life and its subsidiaries, like other
insurers, in the ordinary course of business, are involved in such litigation.
Although the outcome of any such litigation 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.
6
NOTE C - OPERATING SEGMENTS
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.
OPERATING SEGMENT INCOME FOR THE
THREE MONTHS ENDING MARCH 31, 1998
SPECIALTY INSURANCE
LIFE INSURANCE PRODUCTS
DENTAL AND
INDIVIDUAL CONSUMER FINANCIAL
ACQUISITIONS LIFE WEST COAST BENEFITS INSTITUTIONS
Premiums and policy fees $24,244 $34,025 $ 7,220 $39,112 $28,112
Net investment income 26,732 14,020 15,012 3,857 6,244
Realized investment gains (losses)
Other income (3) 599 2,790
----------- --------- ---------- --------- --------
Total revenues 50,976 48,042 22,232 43,568 37,146
-------- ------- ------- ------- -------
Benefits and settlement expenses 29,105 27,197 15,395 28,318 15,167
Amortization of deferred policy
acquisition costs 4,541 7,172 (12) 2,970 5,649
Other operating expenses 5,458 7,566 2,391 10,205 12,271
--------- ------- ------- ------- -------
Total benefits and expenses 39,104 41,935 17,774 41,493 33,087
-------- ------- ------- ------- -------
Income before tax 11,872 6,107 4,458 2,075 4,059
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
GUARANTEED CORPORATE
INVESTMENT INVESTMENT AND TOTAL
CONTRACTS PRODUCTS OTHER ADJUSTMENTS CONSOLIDATED
Premiums and policy fees $ 4,062 $ 92 $136,867
Net investment income $53,435 26,218 3,723 149,241
Realized investment gains (losses) (433) (87) $ 531 11
Other income (63) 517 3,840
----------- --------- ------- ---------- ---------
Total revenues 53,002 30,130 4,332 531 289,959
------- ------- ------ -------- --------
Benefits and settlement expenses 44,656 20,269 283 180,390
Amortization of deferred policy
acquisition costs 174 4,330 3 24,827
Other operating expenses 185 3,641 1,038 42,755
-------- ------- ------ ---------- --------
Total benefits and expenses 45,015 28,240 1,324 247,972
------- ------- ------ ---------- --------
Income before tax 7,987 1,890 3,008 41,987
Income tax expense 15,244 15,244
--------
Net income $ 26,743
========
7
OPERATING SEGMENT INCOME FOR THE
THREE MONTHS ENDING MARCH 31, 1997
SPECIALTY INSURANCE
LIFE INSURANCE PRODUCTS
DENTAL AND
INDIVIDUAL CONSUMER FINANCIAL
ACQUISITIONS LIFE WEST COAST BENEFITS INSTITUTIONS
Premiums and policy fees $26,579 $32,333 N/A $47,128 $11,861
Net investment income 27,531 12,904 4,020 2,962
Realized investment gains (losses)
Other income 2 407 13
---------- --------- -------- ---------
Total revenues 54,110 45,239 51,555 14,836
------- ------- ------- -------
Benefits and settlement expenses 28,451 25,759 35,061 5,060
Amortization of deferred policy
acquisition costs 4,573 7,442 1,560 3,707
Other operating expense 5,931 5,764 12,455 3,237
------- ------- ------- -------
Total benefits and expenses 38,955 38,965 49,076 12,004
------- ------- ------- -------
Income before income tax 15,155 6,274 2,479 2,832
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
GUARANTEED CORPORATE
INVESTMENT INVESTMENT AND TOTAL
CONTRACTS PRODUCTS OTHER ADJUSTMENTS CONSOLIDATED
Premiums and policy fees $ 2,424 $ 52 $120,377
Net investment income $51,609 25,838 (1,268) 123,596
Realized investment gains (losses) (724) 145 $ 161 (418)
Other (88) 473 807
----------- --------- -------- ---------- ----------
Total revenues 50,885 28,319 (743) 161 244,362
-------- ------- ------- -------- --------
Benefits and settlement expenses 43,497 19,787 87 157,702
Amortization of deferred policy
acquisition costs 131 3,409 5 20,827
Other operating expenses 1,068 2,427 1,199 32,081
-------- -------- ------- ---------- --------
Total benefits and expenses 44,696 25,623 1,291 210,610
------- ------- ------- ---------- --------
Income before tax 6,189 2,696 (2,034) 33,752
Income tax expense 11,571 11,571
--------
Net income $ 22,181
========
8
OPERATING SEGMENT ASSETS
MARCH 31, 1998
SPECIALTY INSURANCE
LIFE INSURANCE PRODUCTS
DENTAL AND
INDIVIDUAL CONSUMER FINANCIAL
ACQUISITIONS LIFE WEST COAST BENEFITS INSTITUTIONS
Investments and other assets $1,363,992 $ 983,167 $ 919,246 $209,125 $529,817
Deferred policy acquisition costs 134,169 263,291 116,947 23,971 53,934
----------- ----------- ----------- --------- ---------
Total assets $1,498,161 $1,246,458 $1,036,193 $233,096 $583,751
========== ========== ========== ======== ========
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
GUARANTEED CORPORATE
INVESTMENT INVESTMENT AND TOTAL
CONTRACTS PRODUCTS OTHER CONSOLIDATED
Investments and other assets $2,867,976 $2,508,166 $579,362 $ 9,960,851
Deferred policy acquisition costs 1,708 58,683 6 652,709
------------- ------------ ------------ -------------
Total assets $2,869,684 $2,566,849 $579,368 $10,613,560
========== ========== ======== ===========
OPERATING SEGMENT ASSETS
DECEMBER 31, 1997
SPECIALTY INSURANCE
LIFE INSURANCE PRODUCTS
DENTAL AND
INDIVIDUAL CONSUMER FINANCIAL
ACQUISITIONS LIFE WEST COAST BENEFITS INSTITUTIONS
Investments and other assets $1,401,294 $ 960,316 $ 910,030 $208,071 $536,058
Deferred policy acquisition costs 138,052 252,321 108,126 22,459 52,836
----------- ----------- ----------- --------- ---------
Total assets $1,539,346 $1,212,637 $1,018,156 $230,530 $588,894
========== ========== ========== ======== ========
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
GUARANTEED CORPORATE
INVESTMENT INVESTMENT AND TOTAL
CONTRACTS PRODUCTS OTHER CONSOLIDATED
Investments and other assets $2,887,732 $2,313,279 $525,896 $ 9,742,676
Deferred policy acquisition costs 1,785 56,074 952 632,605
------------- ------------ ---------- -------------
Total assets $2,889,517 $2,369,353 $526,848 $10,375,281
========== ========== ======== ===========
9
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, 1998, 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
$590.5 million and $24.9 million, respectively.
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
stockholder's equity. The market values of fixed maturities increase or decrease
as interest rates fall or rise. Therefore, although the adoption of SFAS No. 115
does not affect Protective Life's operations, its reported stockholder's equity
will fluctuate significantly as interest rates change.
Protective Life's balance sheets at March 31, 1998 and December 31,
1997, prepared on the basis of reporting investments at amortized cost rather
than at market values, are as follows:
MARCH 31, 1998 DECEMBER 31, 1997
-------------- ----------------
(IN THOUSANDS)
Total investments $ 7,938,832 $ 7,876,952
Deferred policy acquisition costs 673,214 654,043
All other assets 1,906,370 1,749,321
------------ ------------
$10,518,416 $10,280,316
=========== ===========
Deferred income taxes $ 13,243 $ 16,179
All other liabilities 9,521,200 9,307,085
------------ ------------
9,534,443 9,323,264
Stockholder's equity 983,973 957,052
------------- -------------
$10,518,416 $10,280,316
=========== ===========
NOTE F - ACCOUNTING POLICIES FOR DERIVATIVE FINANCIAL INSTRUMENTS
Protective Life does not use derivative financial instruments for
trading purposes. Combinations of futures contracts and options on treasury
notes are currently being used as hedges for asset/liability management of
certain investments, primarily mortgage loans on real estate, mortgage-backed
securities, and liabilities arising from interest-sensitive products such as
guaranteed investment contracts and individual annuities. Realized investment
gains and losses on such contracts are deferred and amortized over the life of
the hedged asset. At March 31, 1998, open option and open futures contracts with
a notional amount of $1.2 billion were in a $0.6 million unrealized gain
position. Additionally, Protective Life uses interest rate swap contracts
10
to convert certain investments from a variable to a fixed rate of interest. At
March 31, 1998, related open interest rate swap contracts with a notional amount
of $75.3 million were in a $0.1 million unrealized gain position.
NOTE G - COMPREHENSIVE INCOME
The following table sets forth Protective Life's comprehensive income
for the three months ended March 31, 1998 and 1997:
THREE MONTHS ENDED
1998 1997
---- ----
Net income $26,743 $ 22,181
Increase (decrease) in net unrealized gains
on investments (net of income tax:
1998 - $83; 1997 - $(21,168)) 107 (39,312)
Reclassification adjustment for amounts included
in net income (net of income tax:
1998 - $(4); 1997 - $146) (7) 272
---------- ----------
Comprehensive income (loss) $26,843 $(16,859)
======= ========
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 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.
Protective Life has seven operating divisions: Acquisitions, Individual
Life, West Coast, Dental and Consumer Benefits ("Dental"), Financial
Institutions, Guaranteed Investment Contracts ("GIC"), and Investment Products.
Protective Life also has an additional business segment which is described
herein as Corporate and Other.
11
This report includes "forward-looking statements" which express
expectations of future events and/or results. All statements based on future
expectations rather than on historical facts are forward-looking statements that
involve 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 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
(IN THOUSANDS)
1998 1997
---- ----
Premiums and policy fees $136,867 $120,377 13.7 %
Net investment income 149,241 123,596 20.7
Realized investment gains (losses) 11 (418) --
Other income 3,840 807 375.8
---------- -----------
$289,959 $244,362
========== ===========
Premiums and policy fees increased $16.5 million or 13.7% in the first
three months of 1998 over the first three months of 1997. Premiums and policy
fees from the Acquisitions Division decreased $2.3 million. The Individual Life
Division's premiums and policy fees increased $1.7 million. The acquisition of
West Coast Life Insurance Company ("West Coast") in the second quarter of 1997
increased premiums and policy fees $7.2 million. The Dental Division's exit from
the group major medical business resulted in a $11.7 million decrease in
premiums and policy fees. Premiums and policy fees related to the Dental
Division's other businesses increased $3.7 million in the first three months of
1998 as compared to the same period in 1997. Premiums and policy fees from the
Financial Institutions Division increased $16.3 million in the first three
months of 1998 as compared to the first three months of 1997. The acquisition of
the Western Diversified Group ("Western Diversified") and the coinsurance of an
unrelated closed block of credit insurance policies in late 1997 increased
premiums and policy fees $19.0 million. Decreases of $2.7 million relate to the
normal decrease in premiums on a closed block of credit insurance policies
reinsured in 1996. The increase in premiums and policy fees from the Investment
Products Division was $1.6 million.
Net investment income in the first three months of 1998 increased by
$25.6 million over the corresponding period of the preceding year, primarily due
to increases in the average amount of invested assets and an increase in
participating mortgage loan income. Invested assets have increased primarily due
to acquisitions and due to receiving annuity deposits. The acquisition of West
Coast, Western Diversified, and a block of credit policies in 1997 resulted in
an increase in net investment income of $18.7 million in the first three months
of 1998 as compared to the same period in 1997.
12
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 1998 were less
than $0.1 million as compared to realized investment losses of $0.4 million in
the corresponding period of 1997.
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 and
affiliates.
13
INCOME BEFORE INCOME TAX
The following table sets forth 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)
1997 1998
---- ----
Operating Income (Loss)1
Life Insurance
Acquisitions $15,155 $11,872
Individual Life 6,274 6,107
West Coast 4,458
Specialty Insurance Products
Dental and Consumer Benefits 2,832 2,075
Financial Institutions 2,479 4,059
Retirement Savings and Investment Products
Guaranteed Investment Contracts 6,913 8,420
Investment Products 2,644 1,934
Corporate and Other (2,034) 3,008
--------- ---------
Total operating income 34,263 41,933
-------- --------
Realized Investment Gains (Losses)
Guaranteed Investment Contracts (724) (433)
Investment Products 145 (87)
Unallocated Realized Investment Gains (Losses) 161 531
Related Amortization of Deferred Policy Acquisition Costs
Investment Products (93) 43
---------- ----------
Total net (511) 54
--------- ----------
Income (Loss) Before Income Tax
Life Insurance
Acquisitions 15,155 11,872
Individual Life 6,274 6,107
West Coast 4,458
Specialty Insurance Products
Dental and Consumer Benefits 2,832 2,075
Financial Institutions 2,479 4,059
Retirement Savings and Investment Products
Guaranteed Investment Contracts 6,189 7,987
Investment Products 2,696 1,890
Corporate and Other (2,034) 3,008
Unallocated Realized Investment Gains (Losses) 161 531
--------- ---------
Total income before tax $33,752 $41,987
======= =======
1 Income before tax excluding realized investment gains and losses and related
amortization of deferred acquisition costs.
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Pretax earnings from the Acquisitions Division decreased $3.4 million
in the first three months of 1998 as compared to the same period of 1997.
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. In addition, the Division's
mortality experience was approximately $2.6 million worse than expected in the
first three months of 1998 as compared to being approximately $2.0 million
better than expected in the 1997 first quarter.
The Individual Life Division's pretax earnings of $6.1 million in the
first three months of 1998 were $0.2 million below the same period of 1997. The
Division's mortality experience was approximately $1.8 million worse than
expected. Individual life sales measured by new premiums were $15.8 million, 68%
above the first quarter of 1997.
Headquartered in San Francisco, West Coast was acquired by the Company
on June 3, 1997. West Coast had pretax earnings of $4.5 million for the first
three months of 1998. Sales measured by new premiums were $11.6 million, 91%
above the first quarter of 1997.
Dental Division pretax earnings were $0.8 million lower in the first
three months of 1998 as compared to the first three months of 1997 primarily due
to higher dental claims in the first quarter of 1998 as compared to the first
quarter of 1997.
Pretax earnings of the Financial Institutions Division were $1.6
million higher in the first three months of 1998 as compared to the same period
in 1997. At the end of the third quarter of 1997, the Division acquired the
Western Diversified Group and coinsured an unrelated block of policies. These
acquisitions increased earnings $1.3 million.
The GIC Division had pretax operating earnings of $8.4 million in the
first three months of 1998 and $6.9 million in the corresponding period of 1997.
The increase largely reflects an improvement in operating spreads and an
increase in the amount of GIC and related annuity deposits. Realized investment
losses associated with this Division in the first three months of 1998 were $0.4
million as compared to $0.7 million in the same period last year. As a result,
total pretax earnings were $8.0 million in the first three months of 1998
compared to $6.2 million for the same period last year.
Investment Products Division pretax operating earnings in the first
three months of 1998 of $1.9 million were $0.7 million below the same period of
1997. Realized investment gains associated with the Division, net of related
amortization of deferred policy acquisition costs, were less than $0.1 million
in the first three months of 1998 and 1997, resulting in total pretax earnings
of $1.9 million in the first three months of 1998 as compared to $2.7 million in
the same period of 1997.
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 income for this segment was $3.0 million in the first three months of
1998 compared to a loss of $2.0 million in the first three months of 1997. The
increase in earnings relates primarily to increased net investment income on
capital and income from a securitization transaction.
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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
1997 34.3 %
1998 36.3
The effective income tax rate for the full year of 1997 was 34.9%.
Management's estimate of the effective income tax rate for 1998 is between 35%
and 36%.
NET INCOME
The following table sets forth net income for the periods shown, and
the percentage change from the prior period:
NET INCOME
THREE MONTHS
ENDED TOTAL PERCENTAGE
MARCH 31 (IN THOUSANDS) INCREASE
1997 $22,181 17.0 %
1998 26,743 20.6
Compared to the same period in 1997, net income in the first three
months of 1998 increased $4.6 million, reflecting improved operating earnings in
the Financial Institutions, West Coast, and Guaranteed Investment Contracts
Divisions and the Corporate and Other segment, and higher realized investment
gains (net of related amortization of deferred policy acquisition costs) which
were partially offset by lower operating earnings in the Acquisitions,
Individual Life, Dental and Investment Products Divisions.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 132, "Employers' Disclosures About Pension and Other
Postretirement Benefits." This statement revises the footnote disclosures about
pension and other postretirement benefit plans and its adoption will have no
effect on Protective Life's financial condition.
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Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)Exhibit 27 - Financial data schedule
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.
PROTECTIVE LIFE INSURANCE COMPANY
Date: May 15, 1998 /S/ JERRY W. DEFOOR
-------------------
Jerry W. DeFoor
Vice President and Controller,
and Chief Accounting Officer
(Duly authorized officer)
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