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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, 1995
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
PROTECTIVE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
TENNESSEE 63-0169720
(State of incorporation) (IRS Employer Identification Number)
2801 HIGHWAY 280 SOUTH
BIRMINGHAM, ALABAMA 35223
(Address of principal executive offices)
(205) 879-9230
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No
Number of shares of Common Stock, $1.00 par value, outstanding as of May 9,
1995: 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
PAGE NUMBER
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PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Report of Independent Accountants............................ 2
Consolidated Condensed Statements of Income for the Three
Months ended March 31, 1995 and 1994 (unaudited)........... 3
Consolidated Condensed Balance Sheets as of March 31, 1995
(unaudited) and December 31, 1994.......................... 4
Consolidated Condensed Statements of Cash Flows
for the Three Months ended March 31, 1995 and 1994
(unaudited)................................................ 5
Notes to Consolidated Condensed Financial Statements
(unaudited)................................................ 6
Item 2. Management's Narrative Analysis of the Results of
Operations................................................... 8
PART II. OTHER INFORMATIONH:
Item 6. Exhibits and Reports on Form 8-K........................ 13
Signature.......................................................... 13
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, 1995, and
the related consolidated condensed statements of income and cash flows for
the three-month periods ended March 31, 1995 and 1994. 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, 1994, 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 13, 1995, we expressed an unqualified opinion which contains an
explanatory paragraph regarding the changes in accounting for certain
investments in debt and equity securities in 1993 and postretirement benefits
other than pensions in 1992 on those consolidated financial statements. In
our opinion, the information set forth in the accompanying consolidated
condensed balance sheet as of December 31, 1994, 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 26, 1995
2
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in thousands)
(Unaudited)
THREE MONTHS ENDED
MARCH 31
--------------------
1995 1994
-------- --------
REVENUES
Premiums and policy fees (net of reinsurance ceded:
1995 - $62,131; 1994 - $34,126) $ 90,562 $ 89,437
Net investment income 110,291 98,825
Realized investment gains 2,661 2,297
Other income 1,354 752
-------- --------
204,868 191,311
-------- --------
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance ceded:
1995 - $44,203; 1994 - $24,111) 123,941 115,876
Amortization of deferred policy acquisition costs 20,325 20,039
Other operating expenses (net of reinsurance ceded:
three months: 1995 - $11,269; 1994 - $2,729) 31,695 26,272
-------- --------
175,961 162,187
-------- --------
INCOME BEFORE INCOME TAX 28,907 29,124
Income tax expense 9,539 9,320
-------- --------
NET INCOME $ 19,368 $ 19,804
-------- --------
-------- --------
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
3
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
MARCH 31 DECEMBER 31
1995 1994
----------- -----------
(UNAUDITED)
ASSETS
Investments:
Fixed maturities $3,583,409 $3,493,646
Equity securities 44,149 45,005
Mortgage loans on real estate 1,555,340 1,488,495
Investment in real estate, net 20,202 20,170
Policy loans 147,258 147,608
Other long-term investments 59,238 50,751
Short-term investments 159,277 54,683
----------- -----------
Total investments 5,568,873 5,300,358
Accrued investment income 57,724 55,630
Accounts and premiums receivable, net 19,679 28,928
Reinsurance receivables 131,725 122,175
Deferred policy acquisition costs 411,573 434,200
Property and equipment, net 34,762 33,185
Receivables from related parties 2,349 281
Other assets 11,769 11,802
Assets held in separate accounts 159,951 124,145
----------- -----------
TOTAL ASSETS $6,398,405 $6,110,704
----------- -----------
----------- -----------
LIABILITIES
Policy liabilities and accruals $1,840,956 $1,797,774
Guaranteed investment contract deposits 2,330,249 2,281,673
Annuity deposits 1,282,139 1,251,318
Other policyholders' funds 142,688 144,461
Other liabilities 106,345 94,181
Accrued income taxes 5,874 (4,699)
Deferred income taxes 8,665 (14,667)
Indebtedness to related parties 39,443 39,443
Liabilities related to separate accounts 159,951 124,145
----------- -----------
TOTAL LIABILITIES 5,916,310 5,713,629
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES - NOTE B
REDEEMABLE PREFERRED STOCK, $1 par value,
at redemption value; Shares authorized and
issued: 2,000 2,000 2,000
----------- -----------
STOCKHOLDER'S EQUITY
Common Stock, $1 par value
Shares authorized and issued: 5,000,000 5,000 5,000
Additional paid-in capital 144,494 126,494
Net unrealized losses on investments
(Net of income tax: 1995 - $(32,335);
1994 - $(57,902)) (60,051) (107,532)
Retained earnings 396,417 377,049
Note receivable from PLC
Employee Stock Ownership Plan (5,765) (5,936)
----------- -----------
TOTAL STOCKHOLDER'S EQUITY 480,095 395,075
----------- -----------
$6,398,405 $6,110,704
----------- -----------
----------- -----------
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
--------------------
1995 1994
-------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 19,368 $ 19,804
Adjustments to reconcile net income to net cash
provided by operating activities:
Net change in deferred policy acquisition costs (1,461) 117
Depreciation expense 1,020 770
Deferred income taxes (2,234) 610
Accrued income taxes 10,573 3,034
Interest credited to universal life and investment
products 67,685 58,460
Policy fees assessed on universal life and investment
products (22,716) (19,089)
Change in accrued investment income and other
receivables (4,463) 1,049
Change in policy liabilities and other policyholders'
funds of traditional life and health products 20,252 6,575
Change in other liabilities 12,165 (5,624)
Other (net) 597 (1,838)
-------- ---------
Net cash provided by operating activities 100,786 63,868
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reductions of investments
Investments available for sale 42,451 166,705
Other 22,808 85,840
Sale of investments
Investments available for sale 197,797 60,609
Other 1,759 2,249
Cost of investments acquired
Investments available for sale (374,660) (348,025)
Other (61,928) (100,621)
Purchase of property and equipment (2,638) (1,059)
Sale of property and equipment 41 1,201
-------- ---------
Net cash used in investing activities (174,370) (133,101)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contribution from PLC 18,000
Proceeds from borrowings under line of credit
arrangements and debt 283,500 287,186
Principal payments on line of credit arrangements
and debt (283,500) (287,205)
Change in universal life and investment product
deposits 55,584 60,613
-------- ---------
Net cash provided by financing activities 73,584 60,594
-------- ---------
INCREASE (DECREASE) IN CASH 0 (8,639)
CASH AT BEGINNING OF PERIOD 0 23,951
-------- ---------
CASH AT END OF PERIOD $ 0 $ 15,312
-------- ---------
-------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period:
Interest on notes and mortgages payable $ (992) $ (1,526)
Income taxes $ (1,200) $ (6,922)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Reduction of principal on note from ESOP $ 171 $ 28
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, 1995 are not necessarily indicative of the results that may be expected
for the year ending December 31, 1995. 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, 1994.
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.
Protective Life and its subsidiaries, like other life and health insurers,
from time to time are involved in litigation. To date, no such lawsuit has
resulted in the award of any significant amount of damages against Protective
Life. Among the litigation currently pending are two class actions concerning
the sale of credit insurance; with respect to one action a proposed settlement
agreement has been filed with the supervising court for approval. Although
the outcome of any litigation cannot be predicted with certainty, Protective
Life believes that such litigation will not have a material adverse effect on
its financial position.
NOTE C - 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, 1995, Protective Life and its life insurance
subsidiaries had consolidated stockholder's equity and net income prepared in
conformity with statutory reporting practices of $314.2 million and $17.5
million, respectively.
6
NOTE D - RECENTLY ADOPTED ACCOUNTING STANDARDS
At December 31, 1993, Protective Life adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." For purposes of adopting SFAS No. 115 Protective
Life has classified all of its investments in fixed maturities, equity
securities, and short-term investments as "available for sale." As prescribed
in SFAS No. 115, these investments are recorded at their market values with
the resulting net unrealized gain or loss, net of income tax and a related
adjustment to deferred policy acquisition costs, recorded as a component of
stockholder's equity.
Protective Life's balance sheets at March 31, 1995 and December 31, 1994,
prepared on the basis of reporting investments at amortized cost rather than
at market values, are as follows:
MARCH 31, 1995 DECEMBER 31, 1994
-------------- -----------------
(IN THOUSANDS)
Total investments $5,674,970 $5,499,511
Deferred policy acquisition costs 401,941 400,480
All other assets 413,880 376,146
-------------- -----------------
$6,490,791 $6,276,137
-------------- -----------------
-------------- -----------------
Deferred income taxes $ 41,000 $ 43,235
All other liabilities 5,907,645 5,728,296
-------------- -----------------
5,948,645 5,771,531
Redeemable preferred stock 2,000 2,000
Stockholder's equity 540,146 502,606
-------------- -----------------
$6,490,791 $6,276,137
-------------- -----------------
-------------- -----------------
On January 1, 1995 Protective Life adopted SFAS No. 114 "Accounting by
Creditors for Impairment of a Loan" and SFAS No. 118 "Accounting by Creditors
for Impairment of a Loan-Income Recognition and Disclosures". Under the new
standards, a loan is considered impaired, based on current information and
events, if it is probable that Protective Life will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. The measurement of impaired loans is
generally based on the present value of expected future cash flows discounted
at the historical effective interest rate, except that all
collateral-dependent loans are measured for impairment based on the fair
value of the collateral.
Since Protective Life's mortgage loans are collateralized by real estate
any assessment of impairment is based upon the estimated fair value of the
real estate. Based on Protective Life's evaluation of its mortgage loan
portfolio Protective Life does not expect any material losses on its mortgage
loans and therefore no allowance for losses is required under SFAS No. 114.
7
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF THE
RESULTS OF OPERATIONS
Protective Life Insurance Company ("Protective Life") is a wholly-owned
and the principal operating subsidiary of Protective Life Corporation
("PLC"), an insurance holding company whose common stock is traded on the New
York Stock Exchange. Founded in 1907, Protective Life provides financial
services through the production, distribution, and administration of
insurance and investment products.
In accordance with General Instruction H(2)(a), Protective Life includes
the following analysis with the reduced disclosure format.
REVENUES
The following table sets forth revenues by source for the period shown:
THREE MONTHS
ENDED PERCENTAGE
MARCH 31 INCREASE
---------------- ----------
(IN THOUSANDS)
1995 1994
-------- --------
Premiums and policy fees $ 90,562 $ 89,437 1.3%
Net investment income 110,291 98,825 11.6
Realized investment gains 2,661 2,297 15.8
Other income 1,354 752 80.1
-------- --------
$204,868 $191,311
-------- --------
-------- --------
Premiums and policy fees increased $1.1 million or 1.3% in the first three
months of 1995 over the first three months of 1994. Increases in premiums and
policy fees from the Group and Individual Life Divisions represent increases
of $3.7 million and $3.2 million, respectively. The reinsurance of a block of
payroll deduction policies in the second quarter of 1994 resulted in a $2.5
million increase in premiums and policy fees in 1995. The reinsurance of a
block of policies in the fourth quarter of 1994 resulted in a $6.2 million
increase in premiums and policy fees in 1995. Decreases in older acquired
blocks resulted in a $2.2 million decrease in premiums and policy fees.
Premiums and policy fees from the Financial Institutions Division decreased
$12.8 million in the first quarter of 1995 as compared to the first quarter
of 1994. This resulted from a reinsurance arrangement whereby a significant
portion of the Division's new sales in the first quarter of 1995 was ceded to
a reinsurer.
8
Net investment income in the first three months of 1995 increased by $11.5
million or 11.6% over the corresponding period of the preceding year,
primarily due to increases in the average amount of invested assets. Invested
assets have increased primarily due to receiving annuity and guaranteed
investment contract ("GIC") deposits and to acquisitions. Annuity and GIC
deposits are not considered revenues in accordance with generally accepted
accounting principles. These deposits are included in the liability section
of the balance sheet. The reinsurance of two blocks of policies in 1994
resulted in an increase in net investment income of $3.5 million in the first
three months of 1995.
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 largely resulted
from portfolio management decisions to maintain proper matching of assets
and liabilities.
Realized investment gains for the first three months of 1995 were $0.4
million higher than the corresponding period of 1994. Recently, rising
interest rates have caused market values to fall below amortized cost for
many of Protective Life's fixed maturity investments. Therefore, some
realized investment losses may be incurred upon future sales of investments
to maintain proper matching of assets and liabilities. Protective Life does
not anticipate such realized investment losses will be material.
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.
9
INCOME BEFORE INCOME TAX
The following table sets forth income or loss before income tax by
business segment for the periods shown:
INCOME (LOSS) BEFORE INCOME TAX
THREE MONTHS ENDED MARCH 31
(IN THOUSANDS)
----------------------------
BUSINESS SEGMENT 1995 1994
---------------- ------- -------
Acquisition $11,781 $ 8,967
Financial Institutions 1,560 2,137
Group 1,981 1,880
Guaranteed Investment Contracts 8,172 10,203
Individual Life 4,708 5,112
Investment Products 2,157 1,660
Corporate and Other (4,015) (978)
Unallocated Realized Investment Gains (Losses) 2,563 143
------- -------
$28,907 $29,124
------- -------
------- -------
Pretax earnings from the Acquisitions Division increased $2.8 million in
the first three months of 1995 as compared to the same period of 1994.
Earnings from the Acquisitions Division are expected to decline over time
(due to the lapsing of policies resulting from deaths of insureds or
terminations of coverage) unless new acquisitions are made. As previously
discussed, Protective Life reinsured two blocks of policies during 1994.
These two acquisitions represent $1.7 million of the increase. Improved
results related to Wisconsin National Life Insurance Company (a company
acquired in 1993) represent a $1.0 million increase.
Pretax earnings of the Financial Institutions Division were $0.6 million
lower in the first three months of 1995 as compared to the same period in
1994 due to an increase in life claims.
Group pretax earnings were $0.1 million higher in the first three months
of 1995 as compared to the first three months of 1994 due to improved
earnings from traditional group products which were partially offset by lower
earnings from cancer products.
10
The Guaranteed Investment Contract ("GIC") Division had pretax
operating earnings of $8.1 million in the first three months of 1995
and $7.6 million in the corresponding period of 1994. This increase
was due to the growth in GIC deposits placed with Protective Life.
At March 31, 1995, GIC deposits totaled $2.3 billion compared to
$2.1 billion one year earlier. Realized investment gains associated
with this Division in the first three months of 1995 were $0.1 million,
$2.4 million lower than the same period last year. Total pre-tax
earnings were $8.2 million in the 1995 first quarter compared to
$10.2 million for the same period in 1994.
Individual Life pretax earnings were $0.4 million lower in the
first three months of 1995 as compared to the first three months of
1994. At December 31, 1994 Protective Life reduced certain statutory
policy liabilities for certain term-like products to be more
consistent with current regulation and industry practice. This
reduced investment income allocated to the Division in the 1995
first quarter by approximately $0.7 million when compared to the
same period in 1994. Additionally, expenses to develop new
marketing ventures were $0.7 million higher in the first three
months of 1995 as compared to the first three months of 1994.
These decreases were partially offset by earnings from a growing
amount of business in force.
Investment Products Division pretax earnings were $0.5 million
higher in the first three months of 1995 compared to the same
period of 1994. During 1994 the Division completed the amortization
of the deferred policy acquisition costs related to its book value
annuities. Accordingly, 1995 first quarter earnings were $2.1 million
higher due to lower amortization. This increase was partially offset
by higher expenses related to the Company's variable annuity which
was introduced in early 1994, and to increases in other expenses.
The Corporate and Other segment consists of several small
insurance lines of business, net investment income and other
operating expenses not identified with the preceding operating
divisions (including interest on substantially all debt), and the
operations of a small noninsurance subsidiary. Pretax losses for
this segment were $3.0 million higher in the first three months
of 1995 as compared to the first three months of 1994 primarily
due to higher expenses, including management fees to PLC.
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
------------ ---------------------
1995 33.0%
1994 32.0
The effective income tax rate for the first three months of 1994 was 32.0%.
Management's estimate of the effective income tax rate for 1995 is 33.0%.
11
NET INCOME
The following table sets forth net income for the periods shown:
NET INCOME
THREE MONTHS -----------------------------------
ENDED TOTAL PERCENTAGE
MARCH 31 (IN THOUSANDS) INCREASE (DECREASE)
-------------- -----------------------------------
1995 $19,368 (2.2)%
1994 19,804 93.0
Compared to the same period in 1994, net income in the first three months
of 1995 decreased $0.4 million, reflecting improved earnings in the
Acquisitions, Group, and Investment Products Divisions, which were offset by
lower earnings in the Financial Institutions, Guaranteed Investment
Contracts, and Individual Life Divisions and the Corporate and Other segment.
RECENTLY ISSUED ACCOUNTING STANDARDS
In January 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 120, "Accounting and
Reporting by Mutual Life Insurance Enterprises and by Insurance Enterprises
for Certain Long-Duration Participating Contracts." In March 1995, the FASB
issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of." Protective Life anticipates that
the impact of adopting SFAS Nos. 120 and 121 will be immaterial.
12
ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial data schedule
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PROTECTIVE LIFE INSURANCE COMPANY
Date: May 12, 1995 /s/ Jerry W. DeFoor
----------------------------------------
Jerry W. DeFoor
Vice President and Controller,
and Chief Accounting Officer
(Duly authorized officer)
13