- ------------------------------------------------------------------------------
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, 1999
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 6,
1999: 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
ended June 30, 1999 and 1998 (unaudited)
Consolidated Condensed Balance Sheets as of June 30, 1999
(unaudited) and December 31, 1998
Consolidated Condensed Statements of Cash Flows for the Six Months ended
June 30, 1999 and 1998 (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 Share Owner
Protective Life Insurance Company
Birmingham, Alabama
We have reviewed the accompanying consolidated condensed balance sheet of
Protective Life Insurance Company and subsidiaries as of June 30, 1999, and the
related consolidated condensed statements of income for the three-month and
six-month periods ended June 30, 1999 and 1998, and consolidated condensed
statements of cash flows for the six-month periods ended June 30, 1999 and 1998.
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 interim financial statements referred to
above for them to be in conformity with generally accepted accounting
principles.
We previously audited in accordance with generally accepted auditing standards,
the consolidated balance sheet as of December 31, 1998, and the related
consolidated statements of income, share-owner's equity, and cash flows for the
year then ended (not presented herein), and in our report dated February 11,
1999, 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, 1998, is fairly stated
in all material respects in relation to the consolidated balance sheet from
which it has been derived.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Birmingham, Alabama
July 27, 1999
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in thousands)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
----------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
REVENUES
Premiums and policy fees $ 282,718 $246,079 $552,456 $476,593
Reinsurance ceded (130,345) (103,691) (248,297) (197,338)
--------- -------- -------- --------
Premiums and policy fees, net of reinsurance ceded 152,373 142,388 304,159 279,255
Net investment income 157,141 144,929 306,595 294,170
Realized investment gains 2,215 1,038 3,664 1,049
Other income 7,843 5,697 11,215 9,537
---------- --------- -------- ---------
319,572 294,052 625,633 584,011
--------- -------- -------- --------
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance ceded:
three months: 1999 - $77,085; 1998 - $82,964
six months: 1999 - $157,523; 1998 - $126,727) 191,284 179,199 376,720 359,589
Amortization of deferred policy acquisition costs 28,272 33,431 59,225 58,258
Other operating expenses (net of reinsurance ceded:
three months: 1999 - $36,941; 1998 - $34,239
six months: 1999 - $69,371; 1998 - $65,948) 42,970 34,840 86,258 77,595
--------- --------- --------- ---------
262,526 247,470 522,203 495,442
-------- -------- -------- --------
INCOME BEFORE INCOME TAX 57,046 46,582 103,430 88,569
Income tax expense 21,391 16,781 37,890 32,025
-------- -------- --------- --------
NET INCOME $ 35,655 $ 29,801 $ 65,540 $ 56,544
======== ======== ======== ========
See notes to consolidated condensed financial statements
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
JUNE 30 DECEMBER 31
1999 1998
---------------- ----------------
(Unaudited)
ASSETS
Investments:
Fixed maturities $ 6,214,788 $ 6,400,262
Equity securities 14,815 12,258
Mortgage loans on real estate 1,950,362 1,623,603
Investment in real estate, net of accumulated depreciation 16,339 14,868
Policy loans 232,316 232,670
Other long-term investments 74,073 70,078
Short-term investments 83,078 159,655
------------ ------------
Total investments 8,585,771 8,513,394
Accrued investment income 105,204 100,395
Accounts and premiums receivable, net of allowance for
uncollectible amounts 51,979 31,265
Reinsurance receivables 846,738 756,370
Deferred policy acquisition costs 914,151 841,425
Property and equipment, net 48,331 42,374
Other assets 28,327 34,632
Assets related to separate accounts
Variable Annuity 1,528,316 1,285,952
Variable Universal Life 24,533 13,606
Other 3,437 3,482
-------------- --------------
$12,136,787 $11,622,895
============== ==============
LIABILITIES
Policy liabilities and accruals $ 4,795,001 $ 4,529,297
Guaranteed investment contract deposits 2,792,768 2,691,697
Annuity deposits 1,532,954 1,519,820
Other policyholders' funds 122,318 219,356
Other liabilities 323,186 226,310
Accrued income taxes (2,915) (10,992)
Deferred income taxes (25,934) 51,735
Notes payable 39,347 2,363
Indebtedness to related parties 16,000 20,898
Liabilities related to separate accounts
Variable Annuity 1,528,316 1,285,952
Variable Universal Life 24,533 13,606
Other 3,437 3,482
-------------- -------------
11,149,011 10,553,524
-------------- -------------
COMMITMENTS AND CONTINGENT LIABILITIES - NOTE B
SHARE-OWNER'S EQUITY
Preferred Stock, $1.00 par value, shares authorized and
issued: 2,000, liquidation preference $2,000 2 2
Common Stock, $1 par value
Shares authorized and issued: 5,000,000 5,000 5,000
Additional paid-in capital 327,992 327,992
Note receivable from PLC Employee Stock Ownership Plan (5,148) (5,199)
Retained earnings 752,058 686,519
Accumulated other comprehensive income
Net unrealized gains (losses) on investments
(net of income tax (benefit): 1999 - $(49,607); 1998 - $29,646) (92,128) 55,057
-------------- -------------
987,776 1,069,371
-------------- -------------
$12,136,787 $11,622,895
============== =============
See notes to consolidated condensed financial statements
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
SIX MONTHS ENDED
JUNE 30
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 65,540 $ 56,544
Adjustments to reconcile net income to net cash provided by operating activities:
Realized investment gains 3,664 1,049
Amortization of deferred policy acquisition costs 59,225 58,258
Capitalization of deferred policy acquisition costs (110,849) (103,964)
Depreciation expense 4,040 3,838
Deferred income tax 1,581 (18,487)
Accrued income tax 8,077 (3,063)
Interest credited to universal life and investment products 162,794 166,829
Policy fees assessed on universal life and investment products (73,423) (67,322)
Change in accrued investment income and other receivables (120,874) (15,080)
Change in policy liabilities and other policyholders'
funds of traditional life and health products 81,131 332,756
Change in other liabilities 96,877 (42,882)
Other (net) 10,497 (24,298)
------------ ------------
Net cash provided by operating activities 188,280 344,178
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reductions of investments
Investments available for sale 1,928,571 4,900,696
Other 144,736 94,343
Sale of investments
Investments available for sale 181,712 306,944
Other 3,368 124,129
Cost of investments acquired
Investments available for sale (2,104,730) (5,353,235)
Other (478,758) (264,455)
Purchase of property and equipment (10,594) (4,294)
Sale of property and equipment 49 15
-------------- --------------
Net cash used in investing activities (335,646) (195,857)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings under line of credit arrangements and debt 2,002,804 339,500
Principal payments on line of credit arrangements and debt (1,965,804) (304,500)
Dividends to PLC 0 (50)
Principal payment on surplus note to PLC (2,000) 0
Investment product deposits and change in universal life deposits 659,108 459,471
Investment product withdrawals (546,742) (681,939)
----------- -----------
Net cash provided by financing activities 147,366 (187,518)
----------- -----------
INCREASE (DECREASE) IN CASH 0 (39,197)
CASH AT BEGINNING OF PERIOD 0 39,197
-------------- ------------
CASH AT END OF PERIOD $ 0 $ 0
============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period:
Interest on debt $ 2,509 $ 1,527
Income taxes $ 26,043 $ 42,298
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Reduction of principal on note from ESOP $ 51
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 six month period ended June 30, 1999, are not necessarily
indicative of the results that may be expected for the year ending December 31,
1999. 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, 1998.
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 or
alternatively in arbitration. Although the outcome of any such litigation or
arbitration cannot be predicted with certainty, Protective Life believes that at
the present time there are no pending or threatened lawsuits that are reasonably
likely to have a material adverse effect on the financial position, results of
operations, or liquidity of Protective Life.
NOTE C - OPERATING SEGMENTS
Protective Life operates seven divisions whose principal strategic
focuses can be grouped into three general categories: life insurance, specialty
insurance products, and retirement savings and investment products. The
following table sets forth operating segment income and assets for the periods
shown. Adjustments represent the inclusion of unallocated realized investment
gains (losses) and the recognition of income tax expense. There are no asset
adjustments.
Operating Segment Income for the
Six Months Ended June 30, 1999
-----------------------------------------------------------------------
(In Thousands)
SPECIALTY INSURANCE
LIFE INSURANCE PRODUCTS
Dental and
Individual Consumer Financial
Life West Coast Acquisitions Benefits Institutions
----------------------------------------------------------------------
Premiums and policy fees $130,663 $ 37,649 $ 80,032 $ 152,825 $139,864
Reinsurance ceded (79,143) (26,269) (16,995) (36,027) (89,863)
-------- -------- -------- --------- --------
Net of reinsurance ceded 51,520 11,380 63,037 116,798 50,001
Net investment income 30,247 37,158 66,197 7,735 11,410
Realized investment gains (losses)
Other income (1,329) 484 (9) 1,563 6,319
--------- --------- ----------- --------- ---------
Total revenues 80,438 49,022 129,225 126,096 67,730
--------- -------- -------- -------- --------
Benefits and settlement expenses 37,137 31,466 65,969 85,606 24,938
Amortization of deferred policy
acquisition costs 17,569 2,512 12,497 5,034 11,249
Other operating expenses 8,970 2,676 14,314 28,087 20,951
--------- -------- -------- -------- --------
Total benefits and expenses 63,676 36,654 92,780 118,727 57,138
-------- ------- -------- -------- --------
Income before income tax 16,762 12,368 36,445 7,369 10,592
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
Stable Corporate
Value Investment and Total
Products Products Other Adjustments Consolidated
--------------------------------------------------------------------------
Premiums and policy fees $11,331 $ 92 $552,456
Reinsurance ceded (248,297)
---------- --------- --------
Net of reinsurance ceded 11,331 92 304,159
--------
Net investment income $102,951 51,922 (1,025) 306,595
Realized investment gains (losses) 222 892 $ 2,550 3,664
Other income 1,408 2,779 11,215
------------ -------- ------- ---------- --------
Total revenues 103,173 65,553 1,846 2,550 625,633
-------- ------- ------- ------- --------
Benefits and settlement expenses 86,835 42,432 2,337 376,720
Amortization of deferred
acquisition costs 382 9,982 59,225
Other operating expenses 1,656 6,899 2,705 86,258
--------- -------- ------- --------
Total benefits and expenses 88,873 59,313 5,042 522,203
-------- ------- ------- --------
Income before income tax 14,300 6,240 (3,196) 103,430
Income tax expense 37,890 37,890
-------
Net income $ 65,540
========
Operating Segment Income for the
Six Months Ended June 30, 1998
----------------------------------------------------------------------------
(In Thousands)
SPECIALTY INSURANCE
LIFE INSURANCE PRODUCTS
Dental and
Individual Consumer Financial
Life West Coast Acquisitions Benefits Institutions
----------------------------------------------------------------------------
Premiums and policy fees $108,782 $36,057 $56,009 $130,631 $136,087
Reinsurance ceded (41,837) (23,005) (7,760) (46,972) (77,764)
--------- ------- -------- --------- ---------
Net of reinsurance ceded 66,945 13,052 48,249 83,659 58,323
Net investment income 27,005 31,142 52,176 7,355 11,520
Realized investment gains (losses)
Other income 103 1,600 1,440 4,982
---------- ------------ --------- -------- --------
Total revenues 94,053 44,194 102,025 92,454 74,825
--------- --------- -------- ------- -------
Benefits and settlement expenses 54,273 29,238 56,892 59,858 27,385
Amortization of deferred policy
acquisition costs 15,194 2,188 9,638 5,486 16,181
Other operating expense 8,801 2,815 10,754 22,778 22,550
-------- --------- --------- ------- -------
Total benefits and expenses 78,268 34,241 77,284 88,122 66,116
------- -------- --------- ------- -------
Income before income tax 15,785 9,953 24,741 4,332 8,709
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
Stable Corporate
Value Investment and Total
Products Products Other Adjustments Consolidated
----------------------------------------------------------------------------
Premiums and policy fees $ 8,899 $ 128 $476,593
Reinsurance ceded (197,338)
---------- -------- --------
Net of reinsurance ceded 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 policy
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 income tax 15,774 4,565 4,280 88,569
Income tax expense 32,025 32,025
--------
Net income $ 56,544
========
Operating Segment Assets
June 30, 1999
----------------------------------------------------------------------------
(In Thousands)
SPECIALTY INSURANCE
LIFE INSURANCE PRODUCTS
Dental and
Individual Consumer Financial
Life West Coast Acquisitions Benefits Institutions
----------------------------------------------------------------------------
Investments and other assets $1,128,159 $1,243,749 $1,554,460 $202,764 $732,736
Deferred policy acquisition costs 337,210 170,328 242,850 25,028 39,100
----------- ----------- ----------- --------- ---------
Total assets $1,465,369 $1,414,077 $1,797,310 $227,792 $771,836
========== ========== ========== ======== ========
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
Stable Corporate
Value Investment and Total
Products Products Other Consolidated
----------------------------------------------------------------------------
Investments and other assets $2,909,075 $2,788,992 $662,701 $11,222,636
Deferred policy acquisition costs 1,382 98,244 9 914,151
------------ ------------ ----------- -------------
Total assets $2,910,457 $2,887,236 $662,710 $12,136,787
========== ========== ======== ===========
Operating Segment Assets
December 31, 1998
----------------------------------------------------------------------------
(In Thousands)
SPECIALTY INSURANCE
LIFE INSURANCE PRODUCTS
Dental and
Individual Consumer Financial
Life West Coast Acquisitions Benefits Institutions
----------------------------------------------------------------------------
Investments and other assets $1,076,202 $1,149,642 $1,600,123 $197,337 $645,909
Deferred policy acquisition costs 301,941 144,455 255,347 23,836 39,212
----------- ----------- ----------- --------- ---------
Total assets $1,378,143 $1,294,097 $1,855,470 $221,173 $685,121
========== ========== ========== ======== ========
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
Stable Corporate
Value Investment and Total
Products Products Other Consolidated
----------------------------------------------------------------------------
Investments and other assets $2,869,304 $2,542,536 $700,417 $10,781,470
Deferred policy acquisition costs 1,448 75,177 9 841,425
------------ ------------ ------------ -------------
Total assets $2,870,752 $2,617,713 $700,426 $11,622,895
========== ========== ======== ===========
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, 1999, and for the six months then ended, Protective
Life and its life insurance subsidiaries had consolidated share-owner's equity
and net income prepared in conformity with statutory reporting practices of
$561.3 million and $44.4 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
share-owner'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 share-owner's equity
will fluctuate significantly as interest rates change.
Protective Life's balance sheets at June 30, 1999 and December 31,
1998, prepared on the basis of reporting investments at amortized cost rather
than at market values, are as follows:
JUNE 30, 1999 DECEMBER 31, 1998
------------- -----------------
(IN THOUSANDS)
Total investments $ 8,732,084 $ 8,412,167
Deferred policy acquisition costs 909,572 857,949
All other assets 2,636,865 2,268,076
------------ ------------
$12,278,521 $11,538,192
=========== ===========
Deferred income taxes $ 23,672 $ 22,089
All other liabilities 11,174,945 10,501,789
----------- -----------
11,198,617 10,523,878
Share-owner's equity 1,079,904 1,014,314
------------ ------------
$12,278,521 $11,538,192
=========== ===========
NOTE F - ACCOUNTING POLICIES FOR DERIVATIVE FINANCIAL INSTRUMENTS
Protective Life does not currently use derivative financial instruments
for trading purposes. Combinations of options and futures contracts are
sometimes used as hedges against changes in interest rates for certain
investments, primarily outstanding mortgage loan commitments, mortgage loans,
and mortgage-backed securities, and liabilities arising from interest-sensitive
products. Realized investment gains and losses on such contracts are deferred
and amortized over the life of the hedged asset. No realized investment gains or
losses were deferred in 1999 or 1998. At June 30, 1999, open option and open
futures contracts with a notional amount of $375.0 million were in a $0.6
million net unrealized loss position. Additionally, Protective Life uses
interest rate
swap contracts, swaptions (options to enter into interest rate swap contracts),
caps, and floors to convert certain investments from a variable to a fixed rate
of interest and from a fixed rate of interest to a variable rate of interest. At
June 30, 1999, related open interest rate swap contracts with a notional amount
of $679.0 million were in a $3.0 million net unrealized gain position.
NOTE G - COMPREHENSIVE INCOME (LOSS)
The following table sets forth Protective Life's comprehensive income
(loss) for the six months ended June 30, 1999 and 1998:
Six Months Ended
June 30
(In Thousands)
1999 1998
---- ----
Net income $ 65,540 $56,544
Increase (decrease) in net unrealized gains
on investments (net of income tax:
1999 - $(77,971); 1998 - $961) (144,803) 1,786
Reclassification adjustment for amounts included
in net income (net of income tax:
1999 - $(1,282); 1998 - $(367)) (2,382) (682)
--------- ---------
Comprehensive income (loss) $(81,645) $57,648
======== =======
NOTE H - RECLASSIFICATIONS
Certain reclassifications have been made in the previously reported
financial statements and accompanying notes to make the prior year amounts
comparable to those of the current year. Such reclassifications had no effect on
previously reported net income, total assets, or share-owner's equity.
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF THE
RESULTS OF OPERATIONS
Protective Life Insurance Company ("Protective Life") is a wholly-owned
subsidiary of Protective Life Corporation ("PLC"), an insurance holding company
whose common stock is traded on the New York Stock Exchange (symbol: PL).
Founded in 1907, Protective Life provides financial services through the
production, distribution, and administration of insurance and investment
products. Unless the context otherwise requires "Protective Life" refers to the
consolidated group of Protective Life Insurance Company and its subsidiaries.
In accordance with General Instruction H(2)(a), Protective Life
includes the following analysis with the reduced disclosure format.
Protective Life operates seven divisions whose principal strategic
focuses can be grouped into three general categories: life insurance, specialty
insurance products, and retirement savings and investment products. The life
insurance category includes the Individual Life, West Coast, and Acquisitions
Divisions. The specialty insurance products category includes the Dental and
Consumer Benefits ("Dental") and Financial Institutions Divisions. The
retirement savings and investment products category includes the Stable Value
Products and Investment Products Divisions. Protective Life also has an
additional business segment which is described herein as Corporate and Other.
The Stable Value Products Division (formerly known as the Guaranteed
Investment Products ("GIC") Division) was renamed during the second quarter of
1999 to reflect its broader product offerings and customer base.
This report includes "forward-looking statements" which express the
expectations of future events and/or results. The words "believe", "expect",
"anticipate" and similar expressions identify forward-looking statements which
are based on future expectations rather than on historical facts and are
therefore subject to a number of risks and uncertainties, and Protective Life
cannot give assurance that such statements will prove to be correct. Please
refer to Exhibit 99 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)
1999 1998
---- ----
Premiums and policy fees $304,159 $279,255 8.9 %
Net investment income 306,595 294,170 4.2
Realized investment gains 3,664 1,049 249.3
Other income 11,215 9,537 17.6
--------- ----------
$625,633 $584,011
========= ==========
Premiums and policy fees increased $24.9 million or 8.9% in the first
six months of 1999 over the first six months of 1998. Premiums and policy fees
in the Individual Life and West Coast Divisions decreased $15.4 million and $1.7
million, respectively in the first six months of 1999 as compared to the same
period in 1998 primarily due to an increase in the use of reinsurance by these
Divisions. In the Acquisitions Division, decreases in older acquired blocks
resulted in a $3.0 million decrease in premiums and policy fees. The coinsurance
of a block of policies from Lincoln National Corporation ("Lincoln National") in
October 1998 resulted in a $17.8 million increase in premiums and policy fees.
In the Dental Division premiums and policy fees related to dental indemnity
insurance increased $17.9 million in the first six months of 1999 as compared to
the same period in 1998. Premiums and policy fees related to the Dental
Division's other businesses increased $15.2 million in the first six months of
1999 as compared to the same period in 1998. Premiums and policy fees from the
Financial Institutions Division decreased $8.3 million in the first six months
of 1999 as compared to the first six months of 1998 of which $5.5 million
related to the normal decrease in premiums on closed blocks of policies acquired
in prior years. Premiums and policy fees related to the Financial Institutions
Division's other businesses decreased $2.8 million in the first six months of
1999 as compared to the same period in 1998 due to an increase in the use of
reinsurance. The increase in premiums and policy fees from the Investment
Products Division was $2.4 million.
Net investment income in the first six months of 1999 increased by
$12.4 million over the corresponding period of the preceding year primarily due
to an increase in the average amount of invested assets. Invested assets have
increased primarily due to acquisitions and receiving stable value contract
(guaranteed investment contract and funding agreements) and annuity deposits.
Protective Life generally purchases its investments with the intent to
hold to maturity by purchasing investments that match future cash-flow needs.
However, Protective Life may sell any of its investments to maintain proper
matching of assets and liabilities. Accordingly, Protective Life has classified
its fixed maturities and certain other securities as "available for sale." The
sales of investments that have occurred have resulted principally from portfolio
management decisions to maintain approximate matching of assets and liabilities.
Realized investment gains for the first six months of 1999 were $3.7
million as compared to $1.0 million in the corresponding period of 1998.
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. Other income from all sources increased $1.7 million in the first
six months of 1999 as compared with the first six months of 1998.
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)
1999 1998
---- ----
Operating Income (Loss) (1)
Life Insurance
Individual Life $ 16,762 $15,785
West Coast 12,368 9,953
Acquisitions 36,445 24,741
Specialty Insurance Products
Dental and Consumer Benefits 7,369 4,332
Financial Institutions 10,592 8,709
Retirement Savings and Investment Products
Stable Value Products 14,078 15,833
Investment Products 6,240 4,254
Corporate and Other (3,196) 4,280
--------- --------
Total operating income 100,658 87,887
-------- -------
Realized Investment Gains (Losses)
Stable Value Products 222 (59)
Investment Products 892 678
Unallocated Realized Investment Gains (Losses) 2,550 430
Related Amortization of Deferred Policy Acquisition Costs
Investment Products (892) (367)
--------- ---------
Total net 2,772 682
-------- ---------
Income (Loss) Before Income Tax
Life Insurance
Individual Life 16,762 15,785
West Coast 12,368 9,953
Acquisitions 36,445 24,741
Specialty Insurance Products
Dental and Consumer Benefits 7,369 4,332
Financial Institutions 10,592 8,709
Retirement Savings and Investment Products
Stable Value Products 14,300 15,774
Investment Products 6,240 4,565
Corporate and Other (3,196) 4,280
Unallocated Realized Investment Gains (Losses) 2,550 430
---------- ---------
Total income before income tax $103,430 $88,569
======== =======
(1) Income before income tax excluding realized investment gains and losses and
related amortization of deferred acquisition costs.
The Individual Life Division's pretax operating income was $16.8
million in the first six months of 1999 compared to $15.8 million in the same
period of 1998. The Division's 1999 results include a $2.0 million loss relating
to a venture to sell term and term-like products through direct response. The
Division has reinsured most of its mortality risk such that mortality
fluctuations have been significantly reduced.
West Coast had pretax operating income of $12.4 million for the first
six months of 1999 compared to $10.0 million for the same period last year. This
increase reflects the Division's growth through sales.
Pretax operating income from the Acquisitions Division was $36.4
million in the first six months of 1999 as compared to $24.7 million in the same
period of 1998. The Division's mortality experience was approximately $3.1
million better than expected in the first six months of 1999 as compared to
being approximately $2.1 million worse than expected in the first six months of
1998. Earnings from the Acquisitions Division are normally expected to decline
over time (due to the lapsing of policies resulting from deaths of insureds or
terminations of coverage) unless new acquisitions are made. In October 1998, the
Company coinsured a block of policies from Lincoln National. Earnings relating
to this acquisition were $4.2 million in the first six months of 1999.
The Dental Division's pretax operating income was $7.4 million in the
first six months of 1999 compared to $4.3 million in the same period last year.
The increase was primarily due to more favorable claims experience in the first
six months of 1999 as compared to the same period in 1998.
Pretax operating income of the Financial Institutions Division was
$10.6 million in the first six months of 1999 as compared to $8.7 million last
year. Several of the Division's lines of business improved in the first six
months of 1999 as compared to the same period of 1998.
The Stable Value Products Division had pretax operating income of $14.1
million in the first six months of 1999 and $15.8 million in the corresponding
period of 1998. This decrease was primarily due to lower interest rate spreads
which resulted from the Division shortening the duration of its invested assets
in order to better match assets to liabilities. Realized investment gains
associated with this Division in the first six months of 1999 were $0.2 million
as compared to losses of less than $0.1 million in the same period last year. As
a result, total pretax earnings were $14.3 million in the first six months of
1999 compared to $15.8 million for the same period last year.
Investment Products Division pretax operating income was $6.2 million
in the first six months of 1999 compared to $4.3 million in the same period of
1998. The Division had no realized investment gains (net of related amortization
of deferred policy acquisition costs) in the first six months of 1999 as
compared to gains of $0.3 million in the same period of 1998. Total pretax
earnings were $6.2 million in the first six months of 1999 as compared to $4.6
million in the same period of 1998.
The Corporate and Other segment consists of several small insurance
lines of business, net investment income on unallocated capital 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. The pretax loss for this segment was $3.2 million in
the first six months of 1999 compared to income of $4.3 million in the first six
months of 1998. The decrease in earnings relates primarily to the allocation of
capital to the block of policies coinsured from Lincoln National and to a
decrease in unallocated capital resulting from a $60 million dividend paid to
PLC in the third quarter of 1998.
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
-------------- -----------------------
1998 36.2 %
1999 36.6
The effective income tax rate for the full year of 1998 was 35.0%.
Management's estimate of the effective income tax rate for 1999 is approximately
36.0%.
Net Income
The following table sets forth net income for the periods shown, and
the percentage change from the prior period:
NET INCOME
SIX MONTHS -----------------------------------------------
ENDED TOTAL PERCENTAGE
JUNE 30 (IN THOUSANDS) INCREASE
-------------- ----------------- --------------
1998 $56,544 23.5 %
1999 65,540 15.9
Compared to the same period in 1998, net income in the first six months
of 1999 increased $9.0 million, reflecting improved operating earnings in the
Individual Life, West Coast, Acquisitions, Dental, Financial Institutions, and
Investment Products Divisions and higher realized investment gains (net of
related amortization of deferred policy acquisition costs), which were partially
offset by lower operating earnings in the Stable Value Products Division and the
Corporate and Other segment.
Recently Issued Accounting Standards
The Financial Accounting Standards Board (FASB) has issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 will require Protective Life
to report derivative financial instruments
on the balance sheet and to carry such derivatives at fair value. The fair
values of derivatives increase or decrease as interest rates change. Under SFAS
No. 133, changes in fair value are reported as a component of net income or as a
change to share-owner's equity, depending upon the nature of the derivative.
Although the adoption of SFAS No. 133 will not affect Protective Life's
operations, adoption will introduce volatility into Protective Life's reported
net income and share-owner's equity as interest rates change. SFAS No. 133 is
effective January 1, 2001.
The FASB has also issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise," and the American Institute of Certified Public
Accountants has issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." The adoption of these
accounting standards in 1999 is not expected to have a material effect on
Protective Life's financial condition.
Year 2000 Disclosure
Computer hardware and software often denote the year using two digits
rather than four; for example, the year 1999 often is denoted by such hardware
and software as "99." 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 than 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,
PLC, and other affiliates of PLC. PLC began work on the Year 2000 problem in
1995. At that time, PLC identified and assessed its critical mainframe systems,
and prioritized the remediation efforts that were to follow. During 1998 all
other hardware and software, including non-information technology (non-IT)
related hardware and software, were included in the process. PLC's Year 2000
plan includes all subsidiaries.
PLC estimates that Year 2000 remediation is complete for most of its
insurance administration systems and general administration systems. Of the
general administration systems that are not yet remediated, the majority are new
systems that were implemented during 1998 and are scheduled for year 2000
testing in August 1999 with the compliant, tested version to be placed in
production by September 1999. All remediated systems are currently in
production.
Mainframe application remediation was completed December 31, 1998.
Personal computer network hardware, software, and operating systems have been
reviewed, with upgrades implemented where necessary. Remaining Year 2000
personal computer preparations are expected to be completed by September 30,
1999. In March 1999 a personal computer test lab was established to facilitate
client server system testing. That testing is now materially complete and the
lab facility is being used for desktop application testing. With respect to
non-IT equipment and processes, the assessment and remediation is progressing on
schedule and all known issues are expected to be remediated before December 31,
1999.
Future date tests are complete for the majority of PLC's mission
critical systems and are expected to be completed by August 31, 1999. Integrated
tests involve multiple system testing and are used to verify the Year 2000
readiness of interfaces and connectivity across multiple systems. PLC is using
its mainframe computer to simulate a Year 2000 production environment and to
facilitate integrated testing. Current expectations are that integrated testing
will be completed on or before September 30, 1999.
Significant business partners and suppliers that provide products or
services critical to PLC operations are being reviewed for year 2000 readiness.
To date, no partners or suppliers have reported that they expect to be unable to
continue supplying products and services after January 1, 2000.
PLC cannot specifically identify all of the costs to develop and
implement its Year 2000 plan. The costs of new systems to replace non-compliant
systems have been capitalized in the ordinary course of business. Other costs
have been expensed as incurred. Through June 30, 1999, costs that have been
specifically identified as relating to the Year 2000 problem total $4.7 million,
with an additional $0.5 million estimated to be required to support continued
Year 2000 preparations. PLC's Year 2000 efforts have not adversely affected its
normal procurement and development of information technology.
Although PLC believes that a process is in place to successfully
address Year 2000 issues, there can be no assurance that PLC's efforts will be
successful, that interactions with other service providers with Year 2000 issues
will not impair PLC's or Protective Life's operations, or that the Year 2000
issue will not otherwise adversely affect PLC or Protective Life.
A formal contingency plan is being prepared for senior management
approval in September 1999. The plan will also be reviewed with the Finance and
Investments Committee of PLC's Board of Directors at their October meeting.
Those systems and functions identified as mission critical are included in the
contingency plan.
Should some of PLC's systems not be available due to Year 2000
problems, in a reasonably likely worst case scenario, Protective Life may
experience significant delays in its ability to perform certain functions, but
does not expect to be unable to perform critical functions or to otherwise
conduct business.
PART II
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 13, 1999 /s/ Jerry W. DeFoor
----------------------------
Jerry W. DeFoor
Vice President and Controller,
and Chief Accounting Officer
(Duly authorized officer)