Edgar Filing: PROTECTIVE LIFE CORP

plc_10q.htm



UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2007
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 Number 001-11339
Protective Life Corporation
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization)	95-2492236 (IRS Employer Identification No.)
2801 Highway 280 South Birmingham, Alabama 35223 (Address of principal executive offices and zip code)
(205) 268-1000 (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 [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ý Accelerated Filer o Non-accelerated filer o Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
Number of shares of Common Stock, $0.50 par value, outstanding as of August 8, 2007: 70,141,673

PROTECTIVE LIFE CORPORATION Quarterly Report on Form 10-Q For Quarter Ended June 30, 2007 INDEX

Part I.	Financial Information:
Item 1.		Financial Statements (unaudited):
Consolidated Condensed Statements of Income for the
Three and Six Months ended June 30, 2007 and 2006
Consolidated Condensed Balance Sheets as of June 30, 2007
and December 31, 2006
Consolidated Condensed Statements of Cash Flows for the
Six Months ended June 30, 2007 and 2006
Notes to Consolidated Condensed Financial Statements

Item 2.		Management’s Discussion and Analysis of Financial Condition
and Results of Operations

Item 3.		Quantitative and Qualitative Disclosures About Market Risk

Item 4.		Controls and Procedures

Part II.	Other Information:
Item 1A.		Risk Factors

Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds

Item 4.		Submission of Matters to a Vote of Security Holders

Item 6.		Exhibits


Signature

PROTECTIVE LIFE CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Dollars in thousands except per share amounts)

(Unaudited)

Three Months Ended		Six Months Ended
June 30		June 30
2007	2006	2007	2006

Revenues Premiums and policy fees	$	691,165		$	506,211		$	1,348,182		$	1,013,905
Reinsurance ceded		(422,766	)		(307,769	)		(793,763	)		(588,439	)
Net of reinsurance ceded		268,399			198,442			554,419			425,466
Net investment income		410,436			300,734			826,118			599,799
Realized investment gains (losses): Derivative financial instruments		76,281			(4,799	)		73,990			8,538
All other investments		(66,609	)		14,663			(53,315	)		19,816
Other income		57,452			53,599			131,244			102,135
Total revenues		745,959			562,639			1,532,456			1,155,754
Benefits and expenses Benefits and settlement expenses, net of reinsurance ceded: (three months: 2007 - $469,449; 2006 - $290,566 six months: 2007 - $762,347; 2006 - $547,125)		458,949			335,937			926,734			685,545
Amortization of deferred policy acquisition costs and value of businesses acquired		78,036			34,153			154,416			84,184
Other operating expenses, net of reinsurance ceded: (three months: 2007 - $72,368; 2006 - $48,703 six months: 2007 - $137,671; 2006 – $94,994)		107,533			89,863			216,537			172,682
Total benefits and expenses		644,518			459,953			1,297,687			942,411
Income before income tax		101,441			102,686			234,769			213,343
Income tax expense		36,336			35,745			79,081			74,265
Net income	$	65,105		$	66,941		$	155,688		$	139,078
Net income per share – basic	$	0.92		$	0.94		$	2.19		$	1.96
Net income per share – diluted	$	0.91		$	0.94		$	2.18		$	1.95
Cash dividends paid per share	$	0.225		$	0.215		$	0.44		$	0.41
Average shares outstanding – basic		71,074,976			70,805,802			71,046,489			70,779,151
Average shares outstanding – diluted		71,490,467			71,381,677			71,488,786			71,469,976

See Notes to Consolidated Condensed Financial Statements

PROTECTIVE LIFE CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS

(Dollars in thousands)

(Unaudited)

	June 30	December 31
	2007	2006

Assets Investments: Fixed maturities, at fair market value (amortized cost: 2007 - $21,684,591; 2006 - $21,194,871)	$	21,459,631		$	21,367,263
Equity securities, at fair market value (cost: 2007 - $65,712; 2006 - $121,823)		68,540			128,695
Mortgage loans		4,119,350			3,880,028
Investment real estate, net of accumulated depreciation (2007 - $253; 2006 - $5,483)		12,067			38,918
Policy loans		819,387			839,502
Other long-term investments		185,958			310,225
Short-term investments		809,957			1,381,073
Total investments		27,474,890			27,945,704
Cash		361,129			69,516
Accrued investment income		284,181			284,529
Accounts and premiums receivable, net of allowance for uncollectible amounts (2007 - $3,686; 2006 - $4,140)		206,857			194,447
Reinsurance receivables		4,881,638			4,618,122
Deferred policy acquisition costs and value of businesses acquired		3,391,650			3,198,735
Goodwill		114,717			100,479
Property and equipment, net of accumulated depreciation (2007 - $107,616; 2006 - $109,718)		43,328			43,796
Other assets		155,102			165,656
Income tax receivable		50,102			116,318
Assets related to separate accounts Variable annuity		2,929,160			2,750,129
Variable universal life		344,529			307,863
Total assets	$	40,237,283		$	39,795,294
Liabilities Policy liabilities and accruals	$	16,738,012		$	16,059,930
Stable value product account balances		4,806,721			5,513,464
Annuity account balances		8,786,272			8,958,089
Other policyholders' funds		372,299			328,664
Securities sold under repurchase agreements		312,000			16,949
Other liabilities		1,372,999			1,323,375
Deferred income taxes		312,154			374,486
Non-recourse funding obligations		600,000			425,000
Liabilities related to variable interest entities		400,000			420,395
Long-term debt		444,852			479,132
Subordinated debt securities		524,743			524,743
Liabilities related to separate accounts Variable annuity		2,929,160			2,750,129
Variable universal life		344,529			307,863
Total liabilities		37,943,741			37,482,219
Commitments and contingent liabilities – Note 3
Share-owners' equity Preferred Stock, $1 par value, shares authorized: 4,000,000; Issued: None Common Stock, $.50 par value, shares authorized: 2007 and 2006 -160,000,000 shares issued: 2007 and 2006 – 73,251,960		36,626			36,626
Additional paid-in capital		442,504			438,485
Treasury stock, at cost (2007 – 3,111,232 shares; 2006 – 3,287,312 shares)		(11,181	)		(11,796	)
Unallocated stock in Employee Stock Ownership Plan (2007 – 259,139 shares; 2006 – 366,243 shares)		(852	)		(1,231	)
Retained earnings		1,965,577			1,838,560
Accumulated other comprehensive income (loss): Net unrealized gains (losses) on investments, net of income tax: (2007 - $(60,140) ; 2006 – $22,109)		(108,269	)		41,405
Accumulated gain (loss) – hedging, net of income tax: (2007 – (4,348); 2006 - $(3,179)		(7,843	)		(5,954	)
Postretirement benefits liability adjustment, net of income tax: (2007 - $(12,292); 2006 - $(12,292))		(23,020	)		(23,020	)
Total share-owners’ equity		2,293,542			2,313,075
	$	40,237,283		$	39,795,294

See Notes to Consolidated Condensed Financial Statements

PROTECTIVE LIFE CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

	Six Months Ended
	June 30
	2007	2006

Cash flows from operating activities Net income	$	155,688		$	139,078
Adjustments to reconcile net income to net cash provided by operating activities: Realized investment (gains) losses		(20,675	)		(28,354	)
Amortization of deferred policy acquisition costs and value of businesses acquired		154,416			84,184
Capitalization of deferred policy acquisition costs		(247,015	)		(192,892	)
Depreciation expense		5,649			6,742
Deferred income tax		47,335			61,393
Accrued income tax		66,403			59,720
Interest credited to universal life and investment products		494,214			379,760
Policy fees assessed on universal life and investment products		(276,383	)		(232,124	)
Change in reinsurance receivables		(263,516	)		(191,522	)
Change in accrued investment income and other receivables		(12,062	)		(47,968	)
Change in policy liabilities and other policyholders' funds of traditional life and health products		166,875			307,262
Trading securities:
Maturities and principal reductions of investments		202,938			0
Sale of investments		1,043,473			0
Cost of investments acquired		(1,381,788	)		0
Other net change in trading securities		59,067			5,329
Change in other liabilities		185,561			44,375
Other, net		(34,610	)		11,012
Net cash provided by operating activities		345,570			405,995
Cash flows from investing activities Investments available for sale:
Maturities and principal reductions of investments
Fixed maturities		719,465			580,437
Equity securities		0			0
Sale of investments
Fixed maturities		1,373,939			2,496,444
Equity securities		61,141			3,520
Cost of investments acquired
Fixed maturities		(2,437,415	)		(3,096,211	)
Equity securities		(1,323	)		(3,343	)
Mortgage loans:
New borrowings		(470,517	)		(489,928	)
Repayments		230,988			238,972
Change in investment real estate, net		33,990			34,368
Change in policy loans, net		20,115			4,600
Change in other long-term investments, net		(686	)		19,124
Change in short-term investments, net		484,607			(21,081	)
Purchase of property and equipment		(11,238	)		(3,053	)
Sales of property and equipment		4,094			0
Net cash provided by (used in) investing activities		7,160			(236,151	)
Cash flows from financing activities
Borrowings under line of credit arrangements and long-term debt		69,000			89,000
Principal payments on line of credit arrangement and long-term debt		(103,280	)		(82,000	)
Net proceeds from securities sold under repurchase agreements		295,051			0
Payments on liabilities related to variable interest entities		(20,395	)		(12,113	)
Issuance of non-recourse funding obligations		175,000			75,000
Dividends to share owners		(30,817	)		(28,647	)
Investment product deposits and change in universal life deposits		1,310,001			991,537
Investment product withdrawals		(1,747,821	)		(1,229,829	)
Excess tax benefits on stock based compensation		1,653			2,668
Other financing activities, net		(9,509	)		(23,412	)
Net cash used in financing activities		(61,117	)		(217,796	)
Change in cash		291,613			(47,952	)
Cash at beginning of period		69,516			83,670
Cash at end of period	$	361,129		$	35,718

See Notes to Consolidated Condensed Financial Statements

PROTECTIVE LIFE CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts in tables are in thousands, except per share amounts)

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated condensed financial statements of Protective Life Corporation and subsidiaries (the "Company") have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) 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 U.S. GAAP for complete financial statements. In the opinion of management, the accompanying financial statements reflect all adjustments (consisting only of normal recurring items) necessary for a fair statement of the results for the interim periods presented. Operating results for the three and six month periods ended June 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. The year-end consolidated condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. For further information, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2006.

Accounting Pronouncements Recently Adopted

Statement of Position 05-1. Effective January 1, 2007, the Company adopted Statement of Position (“SOP”) 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts” (“SOP 05-1”). SOP 05-1 provides guidance on accounting by insurance enterprises for deferred acquisition costs on internal replacements of insurance and investment contracts other than those specifically described in Statement of Financial Accounting Standards (“SFAS”) No. 97 (“SFAS 97”), “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments.” SOP 05-1 defines an internal replacement as a modification in product benefits, features, rights, or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. Contract modifications that result in a substantially unchanged contract will be accounted for as a continuation of the replaced contract. Contract modifications that result in a substantially changed contract should be accounted for as an extinguishment of the replaced contract, and any unamortized DAC, unearned revenue and deferred sales charges must be written off. The Company recorded no cumulative effect adjustment related to this adoption and does not expect it to have a material impact on its ongoing financial position or results of operations.

SFAS No. 155 - Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140. Effective January 1, 2007, the Company adopted SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments – an amendment of Financial Accounting Standards Board (“FASB”) Statements No. 133 and 140” (“SFAS 155”). SFAS 155 (1) permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, (2) clarifies which interest only (IO) strips and principal only (PO) strips are not subject to the requirements of SFAS 133, (3) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, (4) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and (5) amends Statement 140 to eliminate the prohibition on a qualifying special purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. The adoption of SFAS 155 resulted in a positive cumulative effect adjustment to opening retained earnings of approximately $2.0 million ($1.3 million net of taxes), related to the Company’s equity indexed annuity product line.

FASB Interpretation No. 48. Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement 109” (“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition, measurement and disclosure of an income tax position taken or expected to be taken in an income tax return. Additionally, this interpretation requires, in order for the Company to recognize a benefit in its financial statements from a given tax return position, that there must be a greater than 50 percent chance of success with the relevant taxing authority with regard to that tax return position. In making this analysis, the Company must assume that the taxing authority is fully informed of all of the facts regarding this issue. Furthermore, new disclosures regarding the effect of the accounting for uncertain tax positions on the financial statements will be required.

As a result of the implementation of FIN 48, the Company recognized a $0.9 million decrease in the liability for unrecognized income tax benefits, which was accounted for as an increase to the January 1, 2007 retained earnings balance. The Company’s liability for all unrecognized income tax benefits as of January 1, 2007 was $23.9 million. If recognized, approximately $3.2 million would be recorded as a component of income tax expense. Using information available as of June 30, 2007, the Company believes it is reasonably possible that in the next 12 months, $1.7 million of unrecognized tax benefits will be recognized due to the expiration of the relevant statute of limitations.

Any accrued interest and penalties related to unrecognized tax benefits have been included in income tax expense. The Company had approximately $5.9 million of accrued interest associated with unrecognized tax benefits as of January 1, 2007.

There were no significant changes to any of the aforementioned amounts during the six months ended June 30, 2007. The Company’s 2003 through 2005 income tax returns remain open to examination by the Internal Revenue Service and major state income taxing jurisdictions.

Accounting Pronouncements Not Yet Adopted

SFAS No. 157 - Fair Value Measurements. In September 2006, FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). This statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 is effective prospectively with a limited form of retrospective application for fiscal years beginning after November 15, 2007 (January 1, 2008 for the Company). The Company is currently evaluating the impact, if any, that SFAS 157 will have on its consolidated results of operations and financial position.

SFAS No. 159 - The Fair Value Option for Financial Assets and Financial Liabilities. In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115” (“SFAS 159”). This standard permits entities to choose to measure eligible financial assets and financial liabilities at fair value. SFAS 159 is effective for the Company beginning January 1, 2008. The Company has not yet made a decision as to whether or not it will elect the fair value option for any financial assets or financial liabilities. As a result, the Company does not know what impact, if any, that SFAS 159 will have on its consolidated results of operations and financial position.

Statement of Position 07-1. In June 2007, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants (“AcSEC”) issued Statement of Position (“SOP”) 07-1, “Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies” (“SOP 07-1”). SOP 07-1 provides guidance for determining whether an entity is within the scope of the AICPA Audit and Accounting Guide ("AAG"), Audits of Investment Companies. In addition, for such entities, SOP 07-1 provides guidance concerning whether specialized industry accounting principles as set forth in the AAG should be applied by a parent company in consolidation or by an equity method investor in an investment company. SOP 07-1 is effective for the Company beginning January 1, 2008. The Company is currently evaluating the impact, if any, that SOP 07-1 will have on its consolidated results of operations and financial position.

Reclassifications

Certain reclassifications have been made in the previously reported financial statements and accompanying notes to make the prior period amounts comparable to those of the current period. Such reclassifications had no effect on previously reported net income or share-owners' equity. Included in these reclassifications is a change in the Consolidated Condensed Statement of Cash Flows to remove the effects of policy fees assessed on universal life and investment products from financing activities. While this had no effect on total cash flow, for the six months ended June 30, 2007, net cash provided by operating activities was decreased and net cash provided by financing activities was increased by $232.1 million.

2.	NON-RECOURSE FUNDING OBLIGATIONS

Non-Recourse Funding Obligations

The Company issued $175.0 million of non–recourse funding obligations during the first six months of 2007, bringing the total amount outstanding to $600.0 million at June 30, 2007. These non-recourse funding obligations bear a floating rate of interest and mature in 2037. The weighted average interest rate as of June 30, 2007, was 6.8%.

3.	COMMITMENTS AND CONTINGENT LIABILITIES

The Company is contingently liable to obtain a $20 million letter of credit under indemnity agreements with its directors. Such agreements provide insurance protection in excess of the directors’ liability insurance in force at the time up to $20 million. Should certain events occur constituting a change in control of the Company, the Company must obtain the letter of credit upon which directors may draw for defense or settlement of any claim relating to performance of their duties as directors. The Company has similar agreements with certain of its officers providing up to $10 million in indemnification that are not secured by the obligation to obtain a letter of credit.

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. The Company does not believe such assessments will be materially different from amounts already provided for in the financial statements. Most of these laws 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 and other providers of financial services involving sales practices, alleged agent misconduct, failure to properly supervise representatives, relationships with agents or persons with whom the insurer does business, and other matters. Increasingly these lawsuits have resulted in the award of substantial judgments that are disproportionate to the actual damages, including material amounts of punitive and non-economic compensatory damages. In some states, juries, judges, and arbitrators have substantial discretion in awarding punitive and non-economic compensatory damages which creates the potential for unpredictable material adverse judgments or awards in any given lawsuit or arbitration. Arbitration awards are subject to very limited appellate review. In addition, in some class action and other lawsuits, companies have made material settlement payments. The Company, like other financial services companies, in the ordinary course of business, is involved in such litigation and in arbitration. Although the outcome of any such litigation or arbitration cannot be predicted, the Company 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 the Company.

4.	STOCK-BASED COMPENSATION

Performance shares awarded during the first six months of 2007 and 2006, and their estimated fair value at grant date are as follows:

Year Awarded	Performance Shares	Estimated Fair Value	Year Awarded	Performance Shares	Estimated Fair Value

2007	64,700	$2,800	2006	125,430	$6,100

The criteria for payment of 2007 performance awards is based primarily upon a comparison of the Company’s average return on average equity over a four-year period (earlier upon the death, disability, or retirement of the executive, or in certain circumstances, upon a change in control of the Company) to that of a comparison group of publicly held life and multi-line insurance companies. If the Company’s results are below the median of the comparison group (40^th percentile for 2007 awards), no portion of the award is earned. If the Company’s results are at or above the 90^th percentile, the award maximum is earned. Awards are paid in shares of Company Common Stock.

During the first quarter of 2007, stock appreciation rights (“SARs”) were granted to certain officers of the Company to provide long-term incentive compensation based solely on the performance of the Company’s Common Stock. The SARs are exercisable in four equal annual installments beginning one year after the date of grant (earlier upon the death, disability, or retirement of the officer, or in certain circumstances, upon a change in control of the Company) and expire after ten years or upon termination of employment. The SARs activity as well as weighted average base price for the first six months of 2007 is as follows:

	Weighted Average Base Price		No. of SARs
Balance at December 31, 2006	$	29.33		1,155,946
SARs granted		43.46		218,900
SARs exercised		24.85		(113,142	)
Balance at June 30, 2007	$	32.18		1,261,704

The SARs issued in 2007 had estimated fair values at grant date of $2.4 million. The fair value of the 2007 SARs was estimated using a Black-Scholes option pricing model. The assumptions used in the pricing model varied depending on the vesting period of the awards. Assumptions used in the model for the 2007 SARs were as follows: expected volatility ranged from 16.2% to 31.0%, the risk-free interest rate ranged from 4.5% to 4.6%, a dividend rate of 1.9%, a zero forfeiture rate, and the expected exercise date ranged from 2012 to 2015. The Company will pay an amount in stock equal to the difference between the specified base price of the Company’s Common Stock and the market value at the exercise date for each SAR.

Additionally during 2007, the Company issued 30,250 restricted stock units at a fair value of $43.46 per unit. These awards, with a total fair value of $1.3 million, vest over a four year period.

5.	DEFINED BENEFIT PENSION PLAN AND UNFUNDED EXCESS BENEFITS PLAN

Components of the net periodic benefit cost of the Company’s defined benefit pension plan and unfunded excess benefits plan are as follows:

	Three Months Ended June 30						Six months Ended June 30
	2007			2006			2007			2006

Service cost – Benefits earned during the period	$	2,016		$	1,726		$	4,641		$	4,302
Interest cost on projected benefit obligations		2,454			2,162			4,994			4,658
Expected return on plan assets		(2,645	)		(2,676	)		(5,538	)		(5,772	)
Amortization of prior service cost		53			54			106			118
Amortization of actuarial losses		761			774			1,610			2,046
Net periodic benefit cost	$	2,639		$	2,040		$	5,813		$	5,352

The Company previously disclosed in its financial statements for the year ended December 31, 2006, that it expected that no funding would be required in 2007. The Company has not yet determined the amount, if any, that it will contribute to its defined benefit pension plan during 2007. As of June 30, 2007, no contributions have been made to the defined benefit pension plan.

In addition to pension benefits, the Company provides limited healthcare benefits and life insurance benefits to eligible retirees. The cost of these plans for the six months ended June 30, 2007 and 2006 was immaterial.

6.	EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period, including shares issuable under various deferred compensation plans. Diluted earnings per share is computed by dividing net income by the weighted-average number of common shares and dilutive potential common shares outstanding during the period, including shares issuable under various stock-based compensation plans and stock purchase contracts.

A reconciliation of the numerators and denominators of the basic and diluted earnings per share is presented below:

	Three Months Ended June 30				Six months Ended June 30
	2007		2006		2007		2006

Calculation of basic earnings per share:
Net income	$	65,105	$	66,941	$	155,688	$	139,078

Average shares issued and outstanding		70,030,154		69,804,417		70,013,392		69,798,924
Issuable under various deferred compensation plans		1,044,822		1,001,385		1,033,097		980,227
Weighted shares outstanding - Basic		71,074,976		70,805,802		71,046,489		70,779,151

Basic earnings per share	$	0.92	$	0.94	$	2.19	$	1.96

Calculation of diluted earnings per share:
Net income	$	65,105	$	66,941	$	155,688	$	139,078

Weighted shares outstanding - Basic		71,074,976		70,805,802		71,046,489		70,779,151
Stock appreciation rights (“SARs”)^(a)		251,586		290,235		258,050		303,172
Issuable under various other stock-back compensation plans		163,905		285,640		184,247		387,653
Weighted shares outstanding - Diluted		71,490,467		71,381,677		71,488,786		71,469,976

Diluted earnings per share	$	0.91	$	0.94	$	2.18	$	1.95
(a) Excludes 331,450 and 144,100 SARs as of June 30, 2007 and 2006, respectively that are antidilutive. In the event the average market price exceeds the issue price of the SARs, such rights would be dilutive to the Company’s earnings per share and will be included in the Company’s calculation of the diluted average shares outstanding.

7.	COMPREHENSIVE INCOME

The following table sets forth the Company's comprehensive income (loss) for the periods presented below:

	Three Months Ended June 30						Six Months Ended June 30
	2007			2006			2007			2006

Net income	$	65,105		$	66,941		$	155,688		$	139,078
Change in net unrealized gains on investments, net of income tax: (three months: 2007 - $(94,717); 2006 - $(57,216) six months: 2007 - $(80,332); 2006 - $(135,519))		(172,728	)		(106,632	)		(146,496	)		(253,903	)
Change in accumulated gain-hedging, net of income tax: (three months: 2007 - $(2,162); 2006 - $(725) six months: 2007 - $(947); 2006 - $1,575)		(3,899	)		(1,352	)		(1,708	)		2,951
Minimum pension liability adjustment, net of income tax: (three months: 2007 - $0; 2006 - $(1,144) six months: 2007- $0; 2006 - $(1,144))		0			(2,132	)		0			(2,132	)
Reclassification adjustment for hedging amounts included in net income, net of tax: (three months: 2007 - $(136); 2006 - $0 six months: 2007 - $(101); 2006 - $0)		(244	)		0			(181	)		0
Reclassification adjustment for amounts included in net income, net of income tax: (three months: 2007 - $(118); 2006 - $(2,128) six months: 2007 - $(1,743); 2006 - $(779))		(215	)		(3,966	)		(3,178	)		(1,460	)
Comprehensive income (loss)	$	(111,981	)	$	(47,141	)	$	4,125		$	(115,466	)

8.	OPERATING SEGMENTS

The Company operates several business segments each having a strategic focus. An operating segment is generally distinguished by products and/or channels of distribution. A brief description of each segment follows:

The Life Marketing segment markets level premium term insurance (“traditional”), universal life (“UL”), variable universal life, and bank owned life insurance (“BOLI”) products on a national basis primarily through networks of independent insurance agents and brokers, stockbrokers, direct marketing channels, and independent marketing organizations.

·	The Acquisitions segment focuses on acquiring, converting, and servicing policies acquired from other companies. The segment’s primary focus is on life insurance policies and annuity products that were sold to individuals.

·	The Annuities segment manufactures, sells, and supports fixed and variable annuity products. These products are primarily sold through broker-dealers, but are also sold through financial institutions and independent agents and brokers.

The Stable Value Products segment sells guaranteed funding agreements (“GFAs”) to special purpose entities that in turn issue notes or certificates in smaller, transferable denominations. The segment also markets fixed and floating rate funding agreements directly to the trustees of municipal bond proceeds, institutional investors, bank trust departments, and money market funds. Additionally, the segment markets guaranteed investment contracts (“GICs”) to 401(k) and other qualified retirement savings plans.

The Asset Protection segment primarily markets extended service contracts and credit life and disability insurance to protect consumers’ investments in automobiles, watercraft, and recreational vehicles (“RV”). In addition, the segment markets a guaranteed asset protection (“GAP”) product and an inventory protection product (“IPP”).

The Company has an additional segment referred to as Corporate and Other. The Corporate and Other segment primarily consists of net investment income and expenses not attributable to the segments above (including net investment income on unallocated capital and interest on debt). This segment also includes earnings from several non-strategic lines of business (mostly cancer insurance, residual value insurance, surety insurance, and group annuities), various investment-related transactions, and the operations of several small subsidiaries.

The Company uses the same accounting policies and procedures to measure segment operating income and assets as it uses to measure its consolidated net income and assets. Segment operating income is generally income before income tax excluding net realized investment gains and losses (net of the related amortization of DAC/VOBA and participating income from real estate ventures), and the cumulative effect of change in accounting principle. Periodic settlements of derivatives associated with corporate debt and certain investments and annuity products are included in realized gains and losses but are considered part of operating income because the derivatives are used to mitigate risk in items affecting consolidated and segment operating income. Segment operating income represents the basis on which the performance of the Company’s business is internally assessed by management. Premiums and policy fees, other income, benefits and settlement expenses, and amortization of DAC/VOBA are attributed directly to each operating segment. Net investment income is allocated based on directly related assets required for transacting the business of that segment. Realized investment gains (losses) and other operating expenses are allocated to the segments in a manner that most appropriately reflects the operations of that segment. Investments and other assets are allocated based on statutory policy liabilities, while DAC/VOBA and goodwill are shown in the segments to which they are attributable.

There are no significant intersegment transactions.

The following tables summarize financial information for the Company’s segments. Asset adjustments represent the inclusion of assets related to discontinued operations.

	Three Months Ended June 30						Six Months Ended June 30
	2007			2006			2007			2006

Revenues
Life Marketing	$	235,205		$	196,557		$	505,744		$	415,482
Acquisitions		227,448			100,505			459,152			201,956
Annuities		77,724			67,478			151,478			131,274
Stable Value Products		70,895			83,060			151,421			160,439
Asset Protection		82,218			70,303			162,241			135,452
Corporate and Other		52,469			44,736			102,420			111,151
Total revenues	$	745,959		$	562,639		$	1,532,456		$	1,155,754

Segment Operating Income (Loss)
Life Marketing	$	37,834		$	51,225		$	103,114		$	92,006
Acquisitions		30,814			18,958			63,063			38,864
Annuities		6,669			6,150			12,275			10,891
Stable Value Products		12,355			11,800			24,541			24,144
Asset Protection		11,522			8,904			21,606			17,642
Corporate and Other		(1,300	)		6,848			477			18,511
Total segment operating income (loss)		97,894			103,885			225,076			202,058

Realized investment gains (losses) – investments⁽¹⁾		(71,146	)		4,946			(62,198	)		4,773
Realized investment gains (losses) – derivatives⁽²⁾		74,693			(6,145	)		71,891			6,512
Income tax expense		(36,336	)		(35,745	)		(79,081	)		(74,265	)
Net income	$	65,105		$	66,941		$	155,688		$	139,078

(1)Realized investment gains (losses) – investments	$	(66,609	)	$	14,663		$	(53,315	)	$	19,816
Less participating income from real estate ventures		3,707			8,168			6,857			13,494
Less related amortization of DAC		830			1,549			2,026			1,549
	$	(71,146	)	$	4,946		$	(62,198	)	$	4,773

(2)Realized investment gains (losses) – derivatives	$	76,281		$	(4,799	)	$	73,990		$	8,538
Less settlements on certain interest rate swaps		237			674			494			2,005
Less derivative losses related to certain annuities		1,351			672			1,605			21
	$	74,693		$	(6,145	)	$	71,891		$	6,512

Life Marketing operating income for six months ended June 30, 2007 includes a $15.7 million gain on the sale of a subsidiary which is included in other income.

	Operating Segment Assets June 30, 2007
	Life Marketing		Acquisitions		Annuities		Stable Value Products

Investments and other assets	$	8,929,029	$	11,482,568	$	7,451,666	$	4,798,446
Deferred policy acquisition costs and value of businesses acquired		2,009,979		1,021,805		210,038		15,855
Goodwill		10,193		46,406		0		0
Total assets	$	10,949,201	$	12,550,779	$	7,661,704	$	4,814,301


	Asset Protection		Corporate and Other		Adjustments		Total Consolidated

Investments and other assets	$	1,449,382	$	2,591,425	$	28,400	$	36,730,916
Deferred policy acquisition costs and value of businesses acquired		125,715		8,258		0		3,391,650
Goodwill		58,035		83		0		114,717
Total assets	$	1,633,132	$	2,599,766	$	28,400	$	40,237,283



	Operating Segment Assets December 31, 2006
	Life Marketing		Acquisitions		Annuities		Stable Value Products

Investments and other assets	$	8,041,854	$	10,650,928	$	8,142,681	$	5,369,107
Deferred policy acquisition costs and value of businesses acquired		1,846,219		925,218		261,826		16,603
Goodwill		10,354		32,007		0		0
Total assets	$	9,898,427	$	11,608,153	$	8,404,507	$	5,385,710


	Asset Protection		Corporate and Other		Adjustments		Total Consolidated

Investments and other assets	$	992,932	$	3,261,874	$	36,704	$	36,496,080
Deferred policy acquisition costs and value of businesses acquired		125,745		23,124		0		3,198,735
Goodwill		58,035		83		0		100,479
Total assets	$	1,176,712	$	3,285,081	$	36,704	$	39,795,294

9.	SUBSEQUENT EVENT

On July 10, 2007, Golden Gate II Captive Insurance Company (“Golden Gate II”), a special purpose financial captive insurance company wholly-owned by Protective Life Insurance Company (“Protective Life”), itself a wholly-owned and consolidated subsidiary of the Company, issued $575 million in aggregate principal amount of floating rate surplus notes due July 15, 2052 (the “Notes”). Golden Gate II has received regulatory approval to issue additional series of its floating rate surplus notes up to an aggregate of $675 million principal amount of surplus notes (including the Notes). The Notes are direct financial obligations of Golden Gate II.

The Notes were issued by Golden Gate II to fund statutory reserves required by the Valuation of Life Insurance Policies Model Regulation (“Regulation XXX”), as clarified by Actuarial Guideline 38 (commonly known as “AXXX”). Golden Gate II has entered into an agreement to reinsure from Protective Life certain universal life insurance policies with secondary guarantees on a combination coinsurance and modified coinsurance basis. Protective Life Corporation ("PLC") has entered into certain support agreements with Golden Gate II obligating PLC to provide support payments to Golden Gate II under certain adverse interest rate conditions and to the extent of any reduction in the reinsurance premiums received by Golden Gate II due to an increase in the premium rates charged to Protective Life under its third-party yearly renewable term reinsurance agreements that reinsure a portion of the mortality risk of the policies that are ceded to Golden Gate II. In addition, PLC has entered into a support agreement with Golden Gate II obligating PLC to pay or make capital contributions to Golden Gate II in respect of certain of Golden Gate II’s expenses and in certain circumstances to collateralize certain of PLC's obligations to Golden Gate II.

The Notes were sold for deposit into certain Delaware trusts (the “Trusts”) that will issue money market securities, term securities resetting to money market securities after a specified period or term securities (the “Securities”). The holders of Notes cannot require repayment from PLC, Protective Life or any of their affiliates, other than Golden Gate II, the direct issuer of the Notes. PLC has agreed, under certain circumstances, to make certain liquidity advances to the Trusts not in excess of specified amounts of assets held in a reinsurance trust of which Protective Life is the beneficiary and Golden Gate II is the grantor in the event that the Trusts do not have sufficient funds available to fully redeem the Securities at the stated maturity date. PLC’s obligation to make any such liquidity advance is subject to it having a first priority security interest in the residual interest in such reinsurance trust and in the Notes.

Golden Gate II will pay interest on the principal amount of the Notes on a monthly basis, subject to regulatory approval. Any payment of principal of, including by redemption, or interest on the Notes may only be made with the prior approval of the Director of Insurance of the State of South Carolina in accordance with the terms of Golden Gate II’s licensing order and in accordance with applicable law. The holders of the Notes have no rights to accelerate payment of principal on the Notes under any circumstances, including without limitation, for nonpayment or breach of any covenant. Golden Gate II reserves the right to repay the Notes at any time, subject to the terms of the Notes and prior regulatory approval.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

(Dollar amounts in tables are in thousands)

This Management’s Discussion and Analysis should be read in its entirety, since it contains detailed information that is important to understanding the Company’s results and financial condition. The Overview below is qualified in its entirety by the full Management’s Discussion and Analysis.

FORWARD-LOOKING STATEMENTS – CAUTIONARY LANGUAGE

This report reviews the Company’s financial condition and results of operations including its liquidity and capital resources. Historical information is presented and discussed. Where appropriate, factors that may affect future financial performance are also identified and discussed. Certain statements made in this report include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include any statement that may predict, forecast, indicate or imply future results, performance or achievements instead of historical facts and may contain words like “believe,” “expect,” “estimate,” “project,” “budget,” “forecast,” “anticipate,” “plan,” “will,” “shall,” “may,” and other words, phrases, or expressions with similar meaning. Forward-looking statements involve risks and uncertainties, which may cause actual results to differ materially from the results contained in the forward-looking statements, and the Company cannot give assurances that such statements will prove to be correct. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

For a more complete understanding of the Company’s business and its current period results, please read the following Management’s Discussion and Analysis of Financial Condition and Results of Operations in conjunction with the Company’s latest Annual Report on Form 10-K and other filings with the SEC.

OVERVIEW

Protective Life Corporation (the “Company”) is a holding company whose subsidiaries provide financial services through the production, distribution, and administration of insurance and investment products. Founded in 1907, Protective Life Insurance Company is the Company's largest operating subsidiary. Unless the context otherwise requires, the "Company" refers to the consolidated group of Protective Life Corporation and its subsidiaries.

The Company operates several business segments each having a strategic focus. An operating segment is generally distinguished by products and/or channels of distribution. The Company's operating segments are Life Marketing, Acquisitions, Annuities, Stable Value Products, and Asset Protection. The Company has an additional segment referred to as Corporate and Other which consists of net investment income on unallocated capital, interest on debt, earnings from various investment-related transactions, and the operations of several non-strategic lines of business. The Company periodically evaluates its operating segments in light of the segment reporting requirements prescribed by SFAS 131, “Disclosures about Segments of an Enterprise and Related Information,” and makes adjustments to its segment reporting as needed.

KNOWN TRENDS AND UNCERTAINTIES

The factors which could affect the Company's future results include, but are not limited to, general economic conditions and the following known trends and uncertainties: we are exposed to the risks of natural disasters, pandemics, malicious and terrorist acts that could adversely affect our operations; we operate in a mature, highly competitive industry, which could limit our ability to gain or maintain our position in the industry and negatively affect profitability; a ratings downgrade could adversely affect our ability to compete; our policy claims fluctuate from period to period resulting in earnings volatility; our results may be negatively affected should actual experience differ from management's assumptions and estimates; the use of reinsurance introduces variability in our statements of income; we could be forced to sell investments at a loss to cover policyholder withdrawals; interest rate fluctuations could negatively affect our spread income or otherwise impact our business; equity market volatility could negatively impact our business; insurance companies are highly regulated and subject to numerous legal restrictions and regulations; changes to tax law or interpretations of existing tax law could adversely affect the Company and its ability to compete with non-insurance products or reduce the demand for certain insurance products; financial services companies are frequently the targets of litigation, including class action litigation, which could result in substantial judgments; publicly held companies in general and the financial services industry in particular are sometimes the target of law enforcement investigations and the focus of increased regulatory scrutiny; our ability to maintain competitive unit costs is dependent upon the level of new sales and persistency of existing business; our investments are subject to market and credit risks; we may not realize our anticipated financial results from our acquisitions strategy; we may not be able to achieve the expected results from our recent acquisition; we are dependent on the performance of others; our reinsurers could fail to meet assumed obligations, increase rates or be subject to adverse developments that could affect us; computer viruses or network security breaches could affect our data processing systems or those of our business partners and could damage our business and adversely affect our financial condition and results of operations; our ability to grow depends in large part upon the continued availability of capital; new accounting rules or changes to existing accounting rules could negatively impact us; and our risk management policies and procedures may leave us exposed to unidentified or unanticipated risk, which could negatively affect our business or result in losses. Please refer to Exhibit 99 about these factors that could affect future results.

The Company’s results may fluctuate from period to period due to fluctuations in mortality, persistency, claims, expenses, interest rates, and other factors. Therefore, it is management's opinion that quarterly operating results for an insurance company are not necessarily indicative of results to be achieved in future periods, and that a review of operating results over a longer period is necessary to assess an insurance company's performance.

RESULTS OF OPERATIONS

In the following discussion, segment operating income is defined as income before income tax, excluding net realized investment gains and losses (net of the related amortization of deferred policy acquisition costs (“DAC”) and value of business acquired (“VOBA”) and participating income from real estate ventures). Periodic settlements of derivatives associated with corporate debt and certain investments and annuity products are included in realized gains and losses but are considered part of segment operating income because the derivatives are used to mitigate risk in items affecting segment operating income. Management believes that segment operating income provides relevant and useful information to investors, as it represents the basis on which the performance of the Company’s business is internally assessed. Although the items excluded from segment operating income may be significant components in understanding and assessing the Company’s overall financial performance, management believes that segment operating income enhances an investor’s understanding of the Company’s results of operations by highlighting the income (loss) attributable to the normal, recurring operations of the Company’s business. However, segment operating income should not be viewed as a substitute for U.S. GAAP net income. In addition, the Company’s segment operating income measures may not be comparable to similarly titled measures reported by other companies.

The following table presents a summary of results and reconciles segment operating income to consolidated net income:

	Three Months Ended June 30									Six Months Ended June 30
	2007			2006			Change			2007			2006			Change
	(Dollars in thousands)									(Dollars in thousands)
Segment Operating Income (Loss)
Life Marketing	$	37,834		$	51,225			(26.1	)%	$	103,114		$	92,006			12.1	%
Acquisitions		30,814			18,958			62.5			63,063			38,864			62.3
Annuities		6,669			6,150			8.4			12,275			10,891			12.7
Stable Value Products		12,355			11,800			4.7			24,541			24,144			1.6
Asset Protection		11,522			8,904			29.4			21,606			17,642			22.5
Corporate and Other		(1,300	)		6,848			(119.0	)		477			18,511			(97.4	)
Total segment operating income (loss)		97,894			103,885			(5.8	)%		225,076			202,058			11.4

Realized investment gains (losses) – investments⁽¹⁾		(71,146	)		4,946						(62,198	)		4,773
Realized investment gains (losses) – derivatives⁽²⁾		74,693			(6,145	)					71,891			6,512
Income tax expense		(36,336	)		(35,745	)					(79,081	)		(74,265	)
Net income	$	65,105		$	66,941			(2.7	)	$	155,688		$	139,078			11.9

(1) Realized investment gains (losses) – investments	$	(66,609	)	$	14,663					$	(53,315	)	$	19,816
Less participating income from real estate ventures		3,707			8,168						6,857			13,494
Less related amortization of DAC		830			1,549						2,026			1,549
	$	(71,146	)	$	4,946					$	(62,198	)	$	4,773

(2) Realized investment gains (losses) – derivatives	$	76,281		$	(4,799	)				$	73,990		$	8,538
Less settlements on certain interest rate swaps		237			674						494			2,005
Less derivative gains related to certain annuities		1,351			672						1,605			21
	$	74,693		$	(6,145	)				$	71,891		$	6,512

Net income for the first six months of 2007 reflects an 11.4% increase in segment operating income compared to the same period of 2006. The two largest items contributing to this increase include a $15.7 million gain on the sale of the Life Marketing segment’s direct marketing subsidiary and a $24.2 million increase in operating earnings in the Acquisitions segment resulting primarily from the prior year acquisition of the Chase Insurance Group. These two favorable items were partially offset by a year-to-date decline in operating earnings for the Corporate & Other segment of $18.0 million resulting primarily from higher interest expense. Net realized investment gains were $9.7 million for the first six months of 2007 compared to $11.3 million for the same period of 2006, a decrease of $1.6 million.

Life Marketing segment operating income was $37.8 million and $103.1 million for the current quarter and year-to-date, respectively, representing a quarterly decrease of 26.1% and a year-to-date increase of 12.1% over the same periods of the prior year. This second quarter decrease was primarily due to $14.1 million of favorable DAC unlocking that occurred in the second quarter of 2006. The year-to-date increase was primarily due to a $15.7 million gain before taxes on the sale of the segment’s direct marketing subsidiary and favorable mortality in 2007 compared to 2006. The increases in the Acquisitions segment’s operating income for the current quarter and year-to-date are due to the acquisition of the Chase Insurance Group completed in the third quarter of 2006. This acquisition contributed $27.6 million to the Acquisition segment’s operating income for the first six months of 2007.

Favorable results in the market value adjusted annuity line, partially offset by unfavorable mortality results in the single premium immediate annuity line, resulted in a 12.7% increase in operating income for the Annuities segment for the first six months of 2007. A general improvement in the equity markets and increasing account balances contributed to the increase in operating earnings during the first six months of 2007 for the segment. Declines in average account values offset by increases in operating spreads resulted in slightly higher operating income for the second quarter and first six months of 2007 in the Stable Value Products segment compared to the same periods of 2006.

The Asset Protection segment’s operating income increases of 29.4% and 22.5% for the second quarter and first six months of 2007, respectively, were primarily the result of improvements in the segment’s service contract line, which were up $3.4 million for the quarter and $5.7 million year-to-date. Favorable results from the service contract line were partially offset by unfavorable results from other product lines and lines the segment is no longer marketing.

The declines in operating income for the Corporate and Other segment are primarily the result of increases in interest expense resulting from increased borrowings, partially offset by higher net investment income. The increase in interest expense is primarily due to the issuance of $200 million of subordinated debt securities to finance the Chase Insurance Group acquisition in the third quarter of 2006 and the issuance of non-recourse funding obligations to support the Company’s Regulation XXX redundant reserves.

RESULTS BY BUSINESS SEGMENT

In the following segment discussions, various statistics and other key data the Company uses to evaluate its segments are presented. Sales statistics are used by the Company to measure the relative progress in its marketing efforts, but may or may not have an immediate impact on reported segment operating income. Sales data for traditional life insurance are based on annualized premiums, while universal life sales are based on annualized planned (target) premiums plus 6% of amounts received in excess of target premiums. Sales of annuities are measured based on the amount of deposits received. Stable value contract sales are measured at the time that the funding commitment is made based on the amount of deposit to be received. Sales within the Asset Protection segment are generally based on the amount of single premium and fees received.

Sales and life insurance in-force amounts are derived from the Company’s various sales tracking and administrative systems, and are not derived from the Company’s financial reporting systems or financial statements. Mortality variances are derived from actual claims compared to expected claims. These variances do not represent the net impact to earnings due to the interplay of reserves and DAC amortization.

Life Marketing

The Life Marketing segment markets level premium term insurance (“traditional life”), universal life (“UL”), variable universal life, and bank owned life insurance (“BOLI”) products on a national basis primarily through networks of independent insurance agents and brokers, stockbrokers, and independent marketing organizations. Segment results were as follows:

	Three Months Ended June 30									Six Months Ended June 30
	2007			2006			Change			2007			2006			Change
	(Dollars in thousands)									(Dollars in thousands)
REVENUES
Gross premiums and policy fees	$	361,624		$	325,496			11.1	%	$	707,309		$	650,860			8.7	%
Reinsurance ceded		(239,702	)		(237,148	)		1.1			(447,316	)		(445,779	)		0.3
Net premiums and policy fees		121,922			88,348			38.0			259,993			205,081			26.8
Net investment income		82,291			75,474			9.0			163,394			148,327			10.2
Other income		30,992			32,735			(5.3	)		82,357			62,074			32.7
Total operating revenues		235,205			196,557			19.7			505,744			415,482			21.7

BENEFITS AND EXPENSES
Benefits and settlement expenses		152,147			122,432			24.3			301,476			258,331			16.7
Amortization of deferred policy acquisition costs		25,564			1,636			1462.6			54,262			21,102			157.1
Other operating expenses		19,660			21,264			(7.5	)		46,892			44,043			6.5
Total benefits and expenses		197,371			145,332			35.8			402,630			323,476			24.5

OPERATING INCOME		37,834			51,225			(26.1	)		103,114			92,006			12.1

INCOME BEFORE INCOME TAX	$	37,834		$	51,225			(26.1	)	$	103,114		$	92,006			12.1

The following table summarizes key data for the Life Marketing segment:

	Three Months Ended June 30								Six Months Ended June 30
	2007		2006			Change			2007		2006			Change
	(Dollars in thousands)								(Dollars in thousands)
Sales By Product
Traditional	$	43,955	$	35,733			23.0	%	$	77,447	$	73,209			5.8	%
Universal life		18,515		16,109			14.9			32,712		47,597			(31.3	)
Variable universal life		2,181		1,628			34.0			4,009		2,913			37.6
	$	64,651	$	53,470			20.9		$	114,168	$	123,719			(7.7	)

Sales By Distribution Channel
Brokerage general agents	$	41,210	$	32,644			26.2		$	71,089	$	70,823			0.4
Independent agents		10,629		9,216			15.3			18,957		23,016			(17.6	)
Stockbrokers/banks		9,452		8,082			17.0			17,945		21,649			(17.1	)
BOLI / other		3,360		3,528			(4.8	)		6,177		8,231			(25.0	)
	$	64,651	$	53,470			20.9		$	114,168	$	123,719			(7.7	)

Average Life Insurance In-Force⁽¹⁾
Traditional	$	425,847,790	$	374,705,974			13.6		$	418,070,072	$	368,990,677			13.3
Universal life		51,028,227		50,337,452			1.4			51,135,756		49,726,677			2.8
	$	476,876,017	$	425,043,426			12.2		$	469,205,828	$	418,717,354			12.1

Average Account Values
Universal life	$	4,927,779	$	4,746,318			3.8		$	4,904,775	$	4,677,818			4.9
Variable universal life		332,251		272,397			22.0			324,121		265,374			22.1
	$	5,260,030	$	5,018,715			4.8		$	5,228,896	$	4,943,192			5.8

Mortality Experience ⁽²⁾	$	1,188	$	(392	)				$	8,951	$	(40	)
(1) Amounts are not adjusted for reinsurance ceded. (2) Represents a favorable (unfavorable) variance as compared to pricing assumptions. Excludes results related to Chase Insurance Group which was acquired in the third quarter of 2006.

During 2005, the Company reduced its reliance on reinsurance (see additional comments below) and entered into a securitization structure to fund the additional statutory reserves required as a result of these changes in the Company’s reinsurance arrangements. The securitization structure results in a reduction of current taxes and a corresponding increase in deferred taxes as compared to the previous result obtained in using traditional reinsurance. The benefit of reduced current taxes is attributed to the applicable life products and is an important component of the profitability of these products. In addition to the fluctuations in premiums and benefits and settlement expenses discussed below, earnings emerge more slowly under a securitization structure relative to the previous reinsurance structure utilized by the Company.

Operating income declined 26.1% and increased 12.1% from the second quarter and first six months of 2006, respectively. The second quarter decline is primarily due to $14.1 million favorable DAC unlocking that occurred in the second quarter of 2006, while the year-to-date increase is primarily the result of a gain recognized during the first quarter of 2007 on the sale of the segment’s direct marketing subsidiary combined with favorable mortality results. Excluding the $15.7 million gain on the sale of a subsidiary which is included in other income, total revenues increased 17.9% on a year-to-date basis compared to the same period of 2006. These increases are the result of growth of life insurance in-force and average account values, and are partially offset by higher overall benefits and expenses (24.3% and 16.7% higher for the second quarter and first six months of 2007, respectively, as compared to the same periods of 2006).

Net premiums and policy fees grew by 38.0% in the current quarter and by 26.8% year-to-date due in part to the growth in life insurance in-force achieved over the last several quarters combined with an increase in retention levels on certain traditional life products. Beginning in the second quarter of 2005, the Company reduced its reliance on reinsurance by changing from coinsurance to yearly renewable term reinsurance agreements and increased the maximum amount retained on any one life from $500,000 to $1,000,000 on certain of its newly written traditional life products (products written during the second quarter of 2005 and later.) In addition to increasing net premiums, this change results in higher benefits and settlement expenses, and causes greater variability in financial results due to fluctuations in mortality results. The Company’s maximum retention level for newly issued universal life products is $1,000,000.

Net investment income in the segment increased 9.0% for the quarter and 10.2% year-to-date, reflecting the growth of the segment’s assets caused by the increase in life reserves. Other income increased 32.7% for the first six months of 2007, primarily due to a $15.7 million gain recognized on the sale of the segment’s direct marketing subsidiary. The remainder of the year-to-date increase in other income is due to additional income from the segment’s broker-dealer subsidiary resulting from increased fees related to variable annuity managed accounts and higher investment advisory fees.

Benefits and settlement expenses were 24.3% and 16.7% higher than the second quarter and first six months of 2006, respectively, due to growth in life insurance in-force, increased retention levels on certain newly written traditional life products and higher credited interest on UL products resulting from increases in account values, partially offset year-to-date by favorable fluctuations in mortality experience. The gross mortality variance (actual results compared to pricing) for the second quarter and first six months of 2007 was $0.8 million and $9.0 million more favorable, respectively, than the same periods of 2006. The estimated mortality impact on earnings for the second quarter and first six months of 2007 was an unfavorable $1.6 million and a favorable $5.8 million, respectively, which was approximately $0.4 million less favorable and $7.5 million more favorable, respectively, than estimated mortality impact on earnings for the same periods of 2006.

The increase in DAC amortization for the second quarter of 2007 compared to the prior year was primarily due to favorable DAC unlocking during the second quarter of 2006. An evaluation of DAC, including a review of the underlying assumptions of future mortality, expenses, lapses, premium persistency, investment yields, and interest spreads was performed by the Company on its West Coast Life UL product during the second quarter of 2006. As a result of this review, assumptions were updated based on actual experience and/or expectations for the future. This change in assumptions, and resulting adjustment to DAC, referred to as “unlocking”, resulted in a favorable adjustment of approximately $14.1 million during the second quarter of 2006. The year-to-date increase in DAC amortization compared to the same period of 2006 was primarily due to the 2006 DAC unlocking discussed above, combined with the increase in the Company’s block of term business not subject to reinsurance and overall growth in average life insurance in-force.

Other operating expenses for the segment were as follows:

Three Months Ended

June 30

Six Months Ended

June 30

2007