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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 JUNE 30, 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 August 7,
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 and Six Months
Months ended June 30, 1998 and 1997 (unaudited)....................
Consolidated Condensed Balance Sheets as of June 30, 1998
(unaudited) and December 31, 1997..................................
Consolidated Condensed Statements of Cash Flows for the
Six Months ended June 30, 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 June 30, 1998, and the
related consolidated condensed statements of income for the three-month and
six-month periods ended June 30, 1998 and 1997, and consolidated condensed
statements of cash flows for the six-month periods ended June 30, 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.
PricewaterhouseCoopers LLP
Birmingham, Alabama
July 28, 1998, except for Note H
as to which the date is August 7, 1998
2
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in thousands)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------------------------------------------
1998 1997 1998 1997
---- ----- ---- ----
REVENUES
Premiums and policy fees (net of reinsurance ceded:
three months: 1998 - $109,703; 1997 - $71,873
six months: 1998 - $209,331; 1997 - $125,916) $142,388 $108,493 $279,255 $228,870
Net investment income 144,929 132,197 294,170 255,793
Realized investment gains (losses) 1,038 2,138 1,049 1,720
Other income 5,697 681 9,537 1,488
--------- ---------- --------- ---------
294,052 243,509 584,011 487,871
-------- -------- -------- --------
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance ceded:
three months: 1998 - $82,964; 1997 - $24,394
six months: 1998 - $126,727; 1997 - $40,833) 179,199 164,451 359,589 322,153
Amortization of deferred policy acquisition costs 33,431 18,202 58,258 39,029
Other operating expenses (net of reinsurance ceded:
three months: 1998 - $34,239; 1997 - $22,042
six months: 1998 - $65,948; 1997 - $36,616) 34,840 24,386 77,595 56,467
--------- --------- --------- ---------
247,470 207,039 495,442 417,649
--------- -------- -------- --------
INCOME BEFORE INCOME TAX 46,582 36,470 88,569 70,222
Income tax expense 16,781 12,884 32,025 24,455
--------- -------- -------- ---------
NET INCOME $ 29,801 $ 23,586 $ 56,544 $ 45,767
======== ======== ======== ========
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
3
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
JUNE 30 DECEMBER 31
1998 1997
--------------------- -------------
(Unaudited)
ASSETS
Investments:
Fixed maturities $ 6,373,075 $ 6,348,252
Equity securities 13,131 15,006
Mortgage loans on real estate 1,484,775 1,313,478
Investment in real estate, net 11,063 13,469
Policy loans 190,491 194,109
Other long-term investments 58,820 54,704
Short-term investments 59,652 54,337
------------- --------------
Total investments 8,191,007 7,993,355
Cash 39,197
Accrued investment income 96,250 94,095
Accounts and premiums receivable, net 32,030 42,255
Reinsurance receivables 614,608 591,457
Deferred policy acquisition costs 675,495 632,605
Property and equipment, net 35,852 36,407
Other assets 34,026 14,445
Assets held in separate accounts 1,201,399 931,465
------------ -------------
$10,880,667 $10,375,281
LIABILITIES
Policy liabilities and accruals $ 3,917,824 $ 3,720,990
Guaranteed investment contract deposits 2,653,241 2,684,676
Annuity deposits 1,550,783 1,511,553
Other policyholders' funds 189,506 183,324
Other liabilities 203,199 246,081
Accrued income taxes (2,122) 941
Deferred income taxes 32,864 49,417
Indebtedness to related parties 57,417 28,055
Liabilities related to separate accounts 1,201,399 931,465
------------ ------------
9,804,111 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 685,930 629,436
Accumulated other comprehensive income
Net unrealized gains on investments (net of income
tax: 1998 -$33,832; 1997 - $33,238) 62,831 61,727
-------------- -------------
1,076,556 1,018,779
-------------- -------------
$10,880,667 $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)
SIX MONTHS ENDED
JUNE 30
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 56,544 $ 45,767
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred policy acquisition costs 58,258 39,029
Capitalization of deferred policy acquisition costs (103,964) (49,674)
Depreciation expense 3,838 2,303
Deferred income tax (18,487) (8,838)
Accrued income tax (3,063) 6,680
Interest credited to universal life and investment products 166,829 220,542
Policy fees assessed on universal life and investment products (67,322) (63,778)
Change in accrued investment income and other receivables (15,080) 4,071
Change in policy liabilities and other policyholders'
funds of traditional life and health products 332,756 (134,897)
Change in other liabilities (42,882) (11,206)
Other (net) (24,298) (1,565)
-------------- --------------
Net cash provided by operating activities 343,129 48,434
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reductions of investments
Investments available for sale 4,900,696 2,188,595
Other 94,343 58,635
Sale of investments
Investments available for sale 306,944 1,012,132
Other 124,129 3,247
Cost of investments acquired
Investments available for sale (5,352,186) (3,226,556)
Other (264,455) (202,403)
Acquisition and bulk reinsurance assumptions 0 (146,868)
Purchase of property and equipment (4,294) (2,564)
Sale of property and equipment 15 597
---------------- --------------
Net cash used in investing activities (194,808) (315,185)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings under line of credit arrangements and debt 339,500 1,041,738
Principal payments on line of credit arrangements and debt (304,500) (1,037,738)
Dividend to PLC (50) 0
Principal payment on surplus note to PLC 0 (5,193)
Investment product deposits and change in universal life deposits 459,471 465,132
Investment product withdrawals (681,939) (311,251)
------------- -------------
Net cash provided by (used in) financing activities (187,518) 152,688
------------- -------------
INCREASE (DECREASE) IN CASH (39,197) (114,063)
CASH AT BEGINNING OF PERIOD 39,197 114,384
-------------- -------------
CASH AT END OF PERIOD $ 0 $ 321
================ ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period:
Interest on notes and mortgages payable $ 1,527 $ 3,112
Income taxes $ 42,298 $ 26,437
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Reduction of principal on note from ESOP $ 202
Acquisitions and bulk reinsurance assumptions
Assets acquired $ 941,123
Liabilities assumed (784,709)
------------
Net $ 156,414
============
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 six month period ended June 30, 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
SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS)
SPECIALTY INSURANCE
LIFE INSURANCE PRODUCTS
DENTAL AND
INDIVIDUAL CONSUMER FINANCIAL
ACQUISITIONS LIFE WEST COAST BENEFITS INSTITUTIONS
Premiums and policy fees $ 48,249 $66,945 $13,052 $83,659 $58,323
Net investment income 52,176 27,005 31,142 7,355 11,520
Realized investment gains (losses)
Other income 1,600 103 1,440 4,982
---------- --------- ---------- -------- --------
Total revenues 102,025 94,053 44,194 92,454 74,825
-------- -------- ------- ------- -------
Benefits and settlement expenses 56,892 54,273 29,238 59,858 27,385
Amortization of deferred policy
acquisition costs 9,638 15,194 2,188 5,486 16,181
Other operating expenses 10,754 8,801 2,815 22,778 22,550
--------- --------- -------- ------- -------
Total benefits and expenses 77,284 78,268 34,241 88,122 66,116
--------- -------- ------- ------- -------
Income before tax 24,741 15,785 9,953 4,332 8,709
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
GUARANTEED CORPORATE
INVESTMENT INVESTMENT AND TOTAL
CONTRACTS PRODUCTS OTHER ADJUSTMENTS CONSOLIDATED
Premiums and policy fees $ 8,899 $ 128 $279,255
Net investment income $107,142 52,490 5,340 294,170
Realized investment gains (losses) (59) 678 $ 430 1,049
Other income 424 988 9,537
------------ --------- ------- ---------- ---------
Total revenues 107,083 62,491 6,456 430 584,011
-------- ------- ------ -------- --------
Benefits and settlement expenses 89,959 41,772 212 359,589
Amortization of deferred
acquisition costs 363 9,208 58,258
Other operating expenses 987 6,946 1,964 77,595
---------- -------- ------ ---------
Total benefits and expenses 91,309 57,926 2,176 495,442
--------- ------- ------ --------
Income before tax 15,774 4,565 4,280 88,569
Income tax expense 32,025 32,025
---------
Net income $ 56,544
========
7
OPERATING SEGMENT INCOME FOR THE
SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS)
SPECIALTY INSURANCE
LIFE INSURANCE PRODUCTS
DENTAL AND
INDIVIDUAL CONSUMER FINANCIAL
ACQUISITIONS LIFE WEST COAST BENEFITS INSTITUTIONS
Premiums and policy fees $ 52,914 $64,965 $2,238 $85,481 $18,057
Net investment income 55,750 23,577 4,534 8,180 6,260
Realized investment gains (losses)
Other income 10 (1) 643 18
----------- ---------- --------- --------- ---------
Total revenues 108,674 88,541 6,772 94,304 24,335
-------- ------- ------ -------- -------
Benefits and settlement expenses 60,022 60,055 3,355 63,832 7,667
Amortization of deferred policy
acquisition costs 8,532 12,558 1,200 3,145 6,536
Other operating expense 11,344 9,342 1,127 19,785 4,532
-------- -------- ------ ------- --------
Total benefits and expenses 79,898 81,955 5,682 86,762 18,735
-------- ------- ------ ------- --------
Income before income tax 28,776 6,586 1,090 7,542 5,600
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
GUARANTEED CORPORATE
INVESTMENT INVESTMENT AND TOTAL
CONTRACTS PRODUCTS OTHER ADJUSTMENTS CONSOLIDATED
Premiums and policy fees $ 5,087 $ 128 $228,870
Net investment income $104,425 51,557 1,510 255,793
Realized investment gains (losses) 107 589 $1,024 1,720
Other (116) 934 1,488
------------ -------- ------- --------- ---------
Total revenues 104,532 57,117 2,572 1,024 487,871
-------- ------- ------ ------ --------
Benefits and settlement expenses 86,678 40,275 269 322,153
Amortization of deferred policy
acquisition costs 273 6,785 39,029
Other operating expenses 1,781 5,326 3,230 56,467
--------- -------- ------ ---------
Total benefits and expenses 88,732 52,386 3,499 417,649
-------- ------- ------ --------
Income before tax 15,800 4,731 (927) 70,222
Income tax expense 24,455 24,455
---------
Net income $ 45,767
========
8
OPERATING SEGMENT ASSETS
JUNE 30, 1998
(IN THOUSANDS)
SPECIALTY INSURANCE
LIFE INSURANCE PRODUCTS
DENTAL AND
INDIVIDUAL CONSUMER FINANCIAL
ACQUISITIONS LIFE WEST COAST BENEFITS INSTITUTIONS
Investments and other assets $1,260,337 $1,015,099 $ 972,470 $198,643 $640,983
Deferred policy acquisition costs 128,529 273,252 129,000 24,973 55,675
----------- ----------- ---------- --------- ---------
Total assets $1,388,866 $1,288,351 $1,101,470 $223,616 $696,658
========== ========== ========== ======== ========
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
GUARANTEED CORPORATE
INVESTMENT INVESTMENT AND TOTAL
CONTRACTS PRODUCTS OTHER CONSOLIDATED
Investments and other assets $2,851,616 $2,663,869 $602,155 $10,205,172
Deferred policy acquisition costs 1,624 62,432 10 675,495
------------- ------------ ----------- -------------
Total assets $2,853,240 $2,726,301 $602,165 $10,880,667
========== ========== ======== ===========
OPERATING SEGMENT ASSETS
DECEMBER 31, 1997
(IN THOUSANDS)
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 June 30, 1998, and for the six 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
$618.3 million and $46.2 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 June 30, 1998 and December 31,
1997, prepared on the basis of reporting investments at amortized cost rather
than at market values, are as follows:
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
(IN THOUSANDS)
Total investments $ 8,070,023 $ 7,876,952
Deferred policy acquisition costs 699,816 654,043
All other assets 2,014,165 1,749,321
------------ ------------
$10,784,004 $10,280,316
=========== ===========
Deferred income taxes $ (968) $ 16,179
All other liabilities 9,771,247 9,307,085
------------ ------------
9,770,279 9,323,264
Stockholder's equity 1,013,725 957,052
------------ -------------
$10,784,004 $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 June 30, 1998, open option and open futures contracts with
a notional amount of $975.0 million were in a $0.5 million net unrealized loss
position. Additionally, Protective Life uses interest rate swap contracts
10
to convert certain investments from a variable to a fixed rate of interest. At
June 30, 1998, related open interest rate swap contracts with a notional amount
of $75.3 million were in a $0.3 million net unrealized gain position.
NOTE G - COMPREHENSIVE INCOME
The following table sets forth Protective Life's comprehensive income
for the six months ended June 30, 1998 and 1997:
SIX MONTHS ENDED JUNE 30
(IN THOUSANDS)
1998 1997
---- ----
Net income $56,544 $45,767
Increase (decrease) in net unrealized gains
on investments (net of income tax:
1998 - $961; 1997 - $3,603) 1,786 6,691
Reclassification adjustment for amounts included
in net income (net of income tax:
1998 - $(367); 1997 - $(602)) (682) (1,118)
--------- --------
Comprehensive income $57,648 $51,340
======= =======
NOTE H - ACQUISITION
On August 7, 1998, PLC announced an agreement in which one of
Protective Life's insurance subsidiaries will acquire, through a coinsurance
transaction, a block of approximately 260,000 individual life insurance policies
from Lincoln National Corporation. The transaction represents approximately $330
million of life insurance reserves and approximately $65 million of annual
premium.
NOTE I - 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.
11
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.
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:
SIX MONTHS PERCENTAGE
ENDED INCREASE/
JUNE 30 (DECREASE)
(IN THOUSANDS)
1998 1997
---- ----
Premiums and policy fees $279,255 $228,870 22.0 %
Net investment income 294,170 255,793 15.0
Realized investment gains 1,049 1,720 (39.0)
Other income 9,537 1,488 540.9
---------- ----------
$584,011 $487,871
Premiums and policy fees increased $50.4 million or 22.0% in the first
six months of 1998 over the first six months of 1997. Premiums and policy fees
from the Acquisitions Division decreased $4.7 million. The Individual Life
Division's premiums and policy fees increased $2.0 million. The acquisition of
West Coast Life Insurance Company ("West Coast") in the second quarter of 1997
increased premiums and policy fees $10.8 million. The Dental Division's exit
from the group major medical business resulted in a $6.0 million decrease in
premiums and policy
12
fees. Premiums and policy fees related to the Dental Division's other businesses
increased $4.2 million in the first six months of 1998 as compared to the same
period in 1997. Premiums and policy fees from the Financial Institutions
Division increased $40.3 million in the first six months of 1998 as compared to
the first six 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 $38.7
million. Decreases of $4.8 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 $3.8 million.
Net investment income in the first six months of 1998 increased by
$38.4 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 $32.5 million in the first six months of
1998 as compared to the same period in 1997.
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 six months of 1998 were $1.0
million as compared to $1.7 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 operating income or loss and income or loss
before income tax by business segment for the periods shown:
OPERATING INCOME (LOSS) AND INCOME (LOSS) BEFORE
INCOME TAX SIX MONTHS ENDED JUNE 30
(IN THOUSANDS)
1998 1997
---- ----
Operating Income (Loss) (1)
Life Insurance
Acquisitions $24,741 $28,776
Individual Life 15,785 6,586
West Coast 9,953 1,090
Specialty Insurance Products
Dental and Consumer Benefits 4,332 7,542
Financial Institutions 8,709 5,600
Retirement Savings and Investment Products
Guaranteed Investment Contracts 15,833 15,693
Investment Products 4,254 4,515
Corporate and Other 4,280 (927)
-------- ---------
Total operating income 87,887 68,875
------- -------
Realized Investment Gains (Losses)
Guaranteed Investment Contracts (59) 107
Investment Products 678 589
Unallocated Realized Investment Gains (Losses) 430 1,024
Related Amortization of Deferred Policy Acquisition Costs
Investment Products (367) (373)
-------- ---------
Total net 682 1,347
-------- --------
Income (Loss) Before Income Tax
Life Insurance
Acquisitions 24,741 28,776
Individual Life 15,785 6,586
West Coast 9,953 1,090
Specialty Insurance Products
Dental and Consumer Benefits 4,332 7,542
Financial Institutions 8,709 5,600
Retirement Savings and Investment Products
Guaranteed Investment Contracts 15,774 15,800
Investment Products 4,565 4,731
Corporate and Other 4,280 (927)
Unallocated Realized Investment Gains (Losses) 430 1,024
--------- --------
Total income before tax $88,569 $70,222
======= =======
(1) Income before tax excluding realized investment gains and losses and related
amortization of deferred acquisition costs.
14
Pretax earnings from the Acquisitions Division decreased $4.0 million
in the first six 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 $2.1 million worse than expected in the
first six months of 1998 as compared to being approximately $1.7 million better
than expected in the first six months of 1997.
The Individual Life Division's pretax earnings of $15.8 million in the
first six months of 1998 were 9.2 million above the same period of 1997. In the
second quarter of 1997, the Division experienced record high mortality.
Mortality experience was at expected levels in the second quarter of 1998 after
having been above expected levels in the first quarter of 1998.
Headquartered in San Francisco, West Coast was acquired by the Company
on June 3, 1997. West Coast had pretax earnings of $10.0 million for the first
six months of 1998 compared to $1.1 million in the first six months of 1997. The
Division was acquired by the Company in June 1997, therefore last year's results
represent only one month of operations.
Dental Division pretax earnings were $3.2 million lower in the first
six months of 1998 as compared to the first six months of 1997. Last years
results include $3.1 million of earnings from the group major medical business
which the Division exited last year.
Pretax earnings of the Financial Institutions Division were $3.1
million higher in the first six 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 $3.7 million in the first six months of 1998 as
compared to the same period last year.
The GIC Division had pretax operating earnings of $15.8 million in the
first six months of 1998 and $15.7 million in the corresponding period of 1997.
Realized investment losses associated with this Division in the first six months
of 1998 were less than $0.1 million as compared to realized investment gains of
$0.1 million in the same period last year. As a result, total pretax earnings
were $15.7 million in the first six months of 1998 compared to $15.8 million for
the same period last year.
Investment Products Division pretax operating earnings in the first six
months of 1998 of $4.3 million were $0.2 million below the same period of 1997.
Realized investment gains associated with the Division, net of related
amortization of deferred policy acquisition costs, were $0.3 million in the
first six months of 1998 compared to $0.2 million in the first six months of
1997, resulting in total pretax earnings of $4.6 million in the first six months
of 1998 as compared to $4.7 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 $4.3 million in the first six months of 1998
compared to a loss of $0.9 million in the first six months of 1997. The increase
in earnings relates
15
primarily to increased net investment income on capital and income from a
securitization transaction.
INCOME TAXES
The following table sets forth the effective tax rates for the periods
shown:
SIX MONTHS
ENDED ESTIMATED EFFECTIVE
JUNE 30 INCOME TAX RATES
1997 34.8 %
1998 36.2
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 approximately
36%.
NET INCOME
The following table sets forth net income for the periods shown, and
the percentage change from the prior period:
SIX MONTHS NET INCOME
ENDED TOTAL PERCENTAGE
JUNE 30 (IN THOUSANDS) INCREASE
1997 $45,767 12.1 %
1998 56,544 23.5
Compared to the same period in 1997, net income in the first six months
of 1998 increased $10.8 million, reflecting improved operating earnings in the
Individual Life, West Coast, Financial Institutions, and Guaranteed Investment
Contracts Divisions and the Corporate and Other segment, which were partially
offset by lower operating earnings in the Acquisitions, Dental, and Investment
Products Divisions and lower realized investment gains (net of related
amortization of deferred policy acquisition costs).
RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards No. ("SFAS") 132, "Employers' Disclosures About
Pension and Other Postretirement Benefits" which revises the footnote
disclosures about pension and other postretirement benefit plans. The FASB has
also issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The adoption of these accounting standards are not expected to have
a material effect on Protective Life's financial condition.
16
YEAR 2000 DISCLOSURE.
Computer hardware and software often denote the year using two digits
rather than four; for example, the year 1998 often is denoted by such hardware
and software as "98." It is probable that such hardware and software will
malfunction when calculations involving the year 2000 are attempted because the
hardware and/or software will interpret "00" as representing the year 1900
rather that the year 2000. This "Year 2000" issue potentially affects all
individuals and companies (including Protective Life, its customers, business
partners, suppliers, banks, custodians and administrators). The problem is most
prevalent in older mainframe systems, but personal computers and equipment
containing computer chips could also be affected.
Protective Life shares computer hardware and software with its parent,
Protective Life Corporation ("PLC"), and other affiliates of PLC. PLC began work
on the Year 2000 problem in 1995 and has developed and implemented a Year 2000
transition plan intended to identify and modify or replace important hardware
and/or software systems on which it relies that have Year 2000 issues or to
develop appropriate contingency measures. Substantial resources are being
devoted to this effort; however, the total costs to develop and implement these
plans are not expected to be material. PLC is also confirming that its service
providers are implementing plans to identify and modify or replace their systems
that have a Year 2000 issue.
The majority of the modifications necessary for PLC's mainframe systems to
be able to process transactions dated beyond 1999 have been completed. PLC
currently anticipates that its remaining systems with Year 2000 issues will be
addressed and appropriate action taken before December 31, 1999. Due to the fact
that PLC does not control all of the factors that could impact its Year 2000
readiness, there can be no assurances that PLC's efforts will be successful,
that interactions with other service providers with Year 2000 issues will not
impair PLC's operations, or that the Year 2000 issue will not otherwise
adversely affect PLC.
PLC is developing detailed contingency plans for a large percentage of its
remaining Year 2000 issues. PLC is also using research, direct inquiry, and/or
testing to determine the Year 2000 readiness of critical vendors and business
partners.
Should some of PLC's systems not be available due to Year 2000 problems,
in a reasonably likely worst case scenario, PLC may experience significant
delays in its ability to perform certain functions, but does not expect an
inability to perform critical functions or to otherwise conduct business.
17
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: August 14, 1998 /S/ JERRY W. DEFOOR
-------------------
Jerry W. DeFoor
Vice President and Controller,
and Chief Accounting Officer
(Duly authorized officer)
18