Item
2.02 Results
of Operations and Financial Condition.
On
October 19, 2006, Protective Life Corporation ("Protective" or the "Company")
conducted a teleconference to discuss the Company’s announcement that it
expected to take a charge of approximately $35 million pretax, or $0.32
per
diluted share, related to two discontinued lines of business. The $0.32
per
share is expected to be included in operating earnings as reported in the
Company’s third quarter results. Protective’s Chief Executive Officer, Johnny
Johns, reported an expected $26 million charge related to the discontinued
Lender’s Indemnity product and an expected $9 million charge related to the
discontinued Residual Value product line.
The
following discussion is a summary of the material information regarding
the
Company’s results of operations or financial condition discussed on this
call:
The
Lender’s Indemnity product line is within Protective’s Asset Protection Division
and was in existence when Protective acquired Lyndon Property Insurance
Company
in 2000. The product guarantees to the lender, primarily credit unions,
an
amount approximately equal to the difference between the value of a vehicle
and
the outstanding balance of a loan in the event the vehicle is repossessed
and
sold because the loan is in default. The aggregate of outstanding loans
was
approximately $700 - $800 million when Protective discontinued this business
in
2003.
CENTRIX
Financial LLC (“CENTRIX”), headquartered in Denver Colorado, was the originator
and servicer of these sub-prime auto loans through an auto dealer network.
The
lenders and beneficiaries of the product were approximately 300 credit
unions
throughout the country. In conjunction with the discontinuation of the
product
line in 2003, Protective reached agreement with CENTRIX and Founders Insurance
Company Limited (“Founders”), a reinsurer affiliated with CENTRIX, under which
Protective received cash collateral and guarantees which it believed at
the time
and until recently would be sufficient to cover the remaining risk on the
business.
In
2005,
CENTRIX started to incur some financial difficulty and Protective permitted
CENTRIX to use a portion of the cash collateral to pay some of the claims.
By
allowing CENTRIX to use the cash collateral, Protective was trying to maintain
the ongoing business status of CENTRIX, the servicer of this business,
and
believed that the cash collateral available was materially adequate to
cover the
runoff liabilities. Protective based its liability estimates with respect
to the runoff business on the pattern and frequency of claims that were
being
reported to Protective by CENTRIX. After a bankruptcy petition was filed
for
CENTRIX in September, 2006, an audit of CENTRIX revealed a significant
backlog
of claims that had been previously unreported to Protective, causing Protective
to change assumptions relating to the amount of potential liability outstanding.
Based
on
current information, Protective believes there are a total of approximately
10,600 loans with an aggregate loan balance of approximately $88 million.
Based
on current information, the Company believes that approximately half of
the
loans outstanding are in current status. In the short term, CENTRIX is
expected
to continue to operate as a debtor in possession and will continue to service
the outstanding loans. Protective has increased the reserves for this business
based on the expectation that the frequency of losses will be greater than
previously assumed. The Company is projecting a claims frequency of
approximately 50% on the remaining loans. Assumptions will be analyzed
and
updated as this business continues to run off. This reserve does not take
into
account any potential recoveries.
With
respect to the Residual Value charge, there has been a decline of approximately
5% in the estimated value of the portfolio of automobiles covered by the
Residual Value program during 2006. The $9 million charge to this line
relates
directly to the decline. Protective believes this change in reserve is
consistent with previously disclosed sensitivity analysis. Mr. Johns
reported that an immediate additional decrease in used car prices of 2.5%
or 5%
would be expected to result in an additional charge of approximately $2.5
million or $5.5 million, respectively. If used car prices were to increase
by
5%, the expected result would be an improvement of approximately $4
million.
Protective
is near the end of both the Lenders Indemnity and Residual Value books
of
business and expects the runoff of the business to be complete by 2008.
The vast
majority of the Lenders Indemnity business runs off in 2007. For Residual
Value, there are approximately 60,000 leases currently exposed as of
September 30, 2006, and these leases are expected to runoff rapidly in the
next 18 months. The estimated number of contracts outstanding is expected
to be
approximately 49,000 at the end of 2006 and approximately 12,000 at the
end of
2007.
Mr. Johns
reported that the Company’s planned release of earnings on November 7,
2006, was not related to these charges, but was intended to allow additional
time to account for the complexities of the Chase acquisition, which closed
during the third quarter. Mr. Johns indicated that although the Company
does not give quarterly earnings guidance, and does not yet know what the
outcome of the quarter is going to be, the earnings may be a little bit
soft in
light of the interest rate environment. He reported that he currently doesn’t
see any other large items evolving for the quarter. Mr. Johns also reported
that, notwithstanding the charges, the Company expected to be within the
guidelines set by the rating agencies at the end of the year.
The
foregoing was a summary of information discussed on a teleconference which
occurred on October 19, 2006. Protective does not undertake a duty to update
such information after such date.
Forward-looking
statements
This
summary 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 the Company cannot give assurance that such
statements will prove to be correct. The expected charges included in this
summary were based on management’s current estimate of the charges and there can
be no assurance that amounts may not change.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended,
the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
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Protective
Life Corporation
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By:
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/s/ STEVEN
G. WALKER
Steven
G. Walker
Senior
Vice President, Controller and
Chief
Accounting Officer
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Date:
October 25, 2006