-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IrZxIqE+dvXsduGMGMzTfQAY6jd7lrjXP/osYz9udpjQ2BC8t1XSNPDVtqHxxChs TXjw2nb1yqiRit105YJRfQ== 0000310826-99-000013.txt : 19990326 0000310826-99-000013.hdr.sgml : 19990326 ACCESSION NUMBER: 0000310826-99-000013 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990325 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROTECTIVE LIFE INSURANCE CO CENTRAL INDEX KEY: 0000310826 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 630169720 STATE OF INCORPORATION: TN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 033-31940 FILM NUMBER: 99573075 BUSINESS ADDRESS: STREET 1: 2801 HIGHWAY 280 SOUTH CITY: BIRMINGHAM STATE: AL ZIP: 35223 BUSINESS PHONE: 2058799230 MAIL ADDRESS: STREET 1: PO BOX 2606 CITY: BIRMINGHAM STATE: AL ZIP: 35202 10-K 1 ------------------------------------------------------------------------------ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------------------------------- FORM 1O-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended Commission file number December 31, 1998 33-31940 33-39345 33-57052 333-02249 -------------------------------------------- PROTECTIVE LIFE INSURANCE COMPANY (Exact name of registrant as specified in its charter) Tennessee 63-0169720 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 2801 Highway 280 South Birmingham, Alabama 35223 (Address of principal (Zip Code) executive offices) Registrant's telephone number, including area code: (205) 879-9230 -------------------------------------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None -------------------------------------------- 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x/ Aggregate market value of voting stock held by nonaffiliates of the registrant: None Number of shares of Common Stock, $1.00 Par Value, outstanding as of March 5, 1999: 5,000,000 The registrant meets the conditions set forth in General Instruction I(1) (a) and (b) of Form 10-K and is therefore filing this Form with the reduced disclosure format pursuant to General Instruction I(2). DOCUMENTS INCORPORATED BY REFERENCE None, except Exhibits ------------------------------------------------------------------------------ PART I Item 1. Business Protective Life Insurance Company ("Protective"), a stock life insurance company, was founded in 1907. Protective is a wholly-owned subsidiary of Protective Life Corporation ("PLC"), an insurance holding company whose common stock is traded on the New York Stock Exchange (symbol: PL). Protective provides financial services through the production, distribution, and administration of insurance and investment products. Unless the context otherwise requires "Protective" refers to the consolidated group of Protective Life Insurance Company and its subsidiaries. Protective offers a competitive selection of individual life insurance, dental insurance, credit life and disability insurance, guaranteed investment contracts, guaranteed funding agreements, and fixed and variable annuities. Protective distributes these products through many channels, primarily independent agents, insurance brokers, stockbrokers, financial institutions, company sales representatives, and automobile dealerships. Protective also seeks to acquire insurance policies from other insurers. Protective operates seven divisions whose principal strategic focuses can be grouped into three general categories: life insurance, specialty insurance products, and retirement savings and investment products. The life insurance category includes the Acquisitions, Individual Life, and West Coast Divisions. The specialty insurance products category includes the Dental and Consumer Benefits ("Dental") and Financial Institutions Divisions. The retirement savings and investment products category includes the Guaranteed Investment Contracts and Investment Products Divisions. Protective also has an additional business segment which is described herein as Corporate and Other. The following table shows the percentages of pretax operating income represented by each of the strategic focuses and the Corporate and Other segment. Retirement Specialty Savings and Corporate Year Ended Life Insurance Investment and Dcember 31 Insurance Products Products Other ---------- --------- --------- ------------ -------- 1994 53.1% 17.5% 31.6% (2.1)% 1995 56.7 14.3 34.5 (5.5) 1996 55.3 7.9 38.8 (1.9) 1997 58.9 16.7 24.6 (0.2) 1998 58.1 15.6 23.1 3.2 Additional information concerning Protective's divisions may be found in "Management's Narrative Analysis of the Results of Operations" and Note K to Consolidated Financial Statements included herein. Item 2. Properties Protective's administrative office building is located at 2801 Highway 280 South, Birmingham, Alabama 35223. This campus includes the original 142,000 square-foot building which was completed in 1976 and a second contiguous 220,000 square-foot building which was completed in 1985. In addition, parking is provided for approximately 1,000 vehicles. Protective leases administrative space in 7 cities, including approximately 114,000 square feet in Birmingham, with most leases being for periods of three to five years. The aggregate monthly rent is approximately $325 thousand. Marketing offices are leased in 16 cities, with most leases being for periods of three to five years. The aggregate monthly rent is approximately $59 thousand. Item 3. Legal Proceedings There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business of Protective, to which Protective or any of its subsidiaries is a party or of which any of Protective's properties is subject. For additional information regarding legal proceedings see Note G to the consolidated financial statements included herein. Item 4. Submission of Matters to a Vote of Security Holders Not required in accordance with General Instruction I(2)(c). PART II Item 5. Market for the Registrant's Common Stock and Related Share-Owner Matters Protective is a wholly-owned subsidiary of PLC which also owns all of the preferred stock issued by Protective's subsidiary, Protective Life and Annuity Insurance Company ("PL&A"), formerly American Foundation Life Insurance Company. Therefore, neither Protective's Common Stock nor PL&A's Preferred Stock is publicly traded. At December 31, 1998, $608.6 million of consolidated share-owner's equity excluding net unrealized gains and losses represented net assets of Protective that cannot be transferred to PLC in the form of dividends, loans, or advances. Also, distributions, including cash dividends to PLC in excess of approximately $769.8 million, would be subject to federal income tax at rates then effective. Insurers are subject to various state statutory and regulatory restrictions on the insurers' ability to pay dividends. In general, dividends up to specific levels are considered ordinary and may be paid thirty days after written notice to the insurance commissioner of the state of domicile unless such commissioner objects to the dividend prior to the expiration of such period. Dividends in larger amounts are considered extraordinary and are subject to affirmative prior approval by such commissioner. The maximum amount that would qualify as ordinary dividends to PLC by Protective in 1999 is estimated to be $138.9 million. Protective paid $60 million of ordinary dividends to PLC in 1998. PL&A paid preferred dividends of $0.1 million in 1998 and 1997. Also in 1998, PL&A declared and paid a common stock dividend of 50,000 shares to Protective. Protective and PL&A expect to continue to be able to pay cash dividends, subject to their earnings and financial condition and other relevant factors. Item 6. Selected Financial Data Not required in accordance with General Instruction I(2)(a). Item 7. Management's Narrative Analysis of the Results of Operations In accordance with General Instruction I(2)(a), Protective includes the following analysis with the reduced disclosure format. Revenues The following table sets forth revenues by source for the periods shown:
Year Ended Percentage December 31 Increase 1998 1997 ---- ---- (in thousands) Premiums and policy fees............... $ 568,125 $ 480,206 18.3% Net investment income................... 603,795 557,488 8.3% Realized investment gains............... 2,136 1,824 17.1% Other income............................ 20,201 6,149 228.5% --------- --------- $ 1,194,257 $ 1,045,667
In 1998, premiums and policy fees, net of reinsurance ("premiums and policy fees") increased $87.9 million or 18.3% over 1997. The Individual Life Division's premiums and policy fees decreased $1.3 million due to an increased use of reinsurance by the Division. The full year effect of the June 1997 acquisition of West Coast Life Insurance Company ("West Coast") increased premiums and policy fees $8.3 million. In the Acquisitions Division, decreases in older acquired blocks resulted in a $9.5 million decrease in premiums and policy fees. The coinsurance of a block of policies from Lincoln National Corporation in October 1998 resulted in a $3.6 million increase in premiums and policy fees. Premiums and policy fees in the Dental Division increased $40.5 million. The full year effect of the September 1997 acquisition of the Western Diversified Group ("Western Diversified") and a coinsured block of credit insurance policies by the Financial Institutions Division increased premiums and policy fees $49.8 million. The increase in premiums and policy fees from the Investment Products Division was $6.4 million. Net investment income for 1998 was $46.3 million or 8.3% higher than for the preceding year primarily due to increases in the average amount of invested assets. Invested assets have increased primarily due to acquisitions and to receiving annuity and guaranteed investment contract (GIC) deposits. The full year effect of the 1997 acquisition of West Coast, Western Diversified, and the block of credit insurance policies resulted in an increase in net investment income of $43.1 million in 1998. The coinsurance of a block of policies from Lincoln National Corporation increased 1998 net investment income $6.0 million. The percentage earned on average cash and investments was 7.2% in 1998 and 7.6% in 1997. Protective generally purchases its investments with the intent to hold to maturity by purchasing investments that match future cash flow needs. However, Protective may sell any of its investments to maintain proper matching of assets and liabilities. Accordingly, Protective has classified its fixed maturities and certain other securities as "available for sale." The sales of investments that have occurred generally result from portfolio management decisions to maintain proper matching of assets and liabilities. Protective maintains an allowance for uncollectible amounts on investments. The allowance totaled $24.1 million at December 31, 1998 and $23.0 million at December 31, 1997. Realized investment gains in 1998 of $36.1 million were largely offset by realized investment losses of $34.0 million. Realized investment losses include a $1.1 million net increase to the allowance for uncollectible amounts of investments. Other income consists primarily of revenues of Protectove's non-insurance subsidiaries and rental of space in its administrative building to PLC. Other income increased $14.1 million in 1998 as compared to 1997. The full year effect of the 1997 acquisition of Western Diversified increased other income $12.8 million. Income Before Income Tax The following table sets forth operating income or loss and income or loss before income tax by business segment for the periods shown:
Operating Income (Loss) and Income (Loss) Before Income Tax Year Ended December 31 (in thousands) 1998 1997 ---- ---- Operating Income (Loss)(1) Life Insurance Individual Life $ 30,183 $ 22,480 West Coast 20,983 8,202 Acquisitions 52,940 56,672 Specialty Insurance Products Dental 10,206 11,767 Financial Institutions 17,650 13,017 Retirement Savings and Investment Products GIC 30,780 28,117 Investment Products 10,639 8,303 Corporate and Other 5,718 (259) ------------------------------------------------------------------------------------ Total operating income 179,099 148,299 ------------------------------------------------------------------------------------ Realized Investment Gains (Losses) GIC 1,609 (3,180) Investment Products 1,318 589 Unallocated Realized Investment Gains (Losses) (791) 4,415 Related Amortization of Deferred Policy Acquisition Costs Individual Life Investment Products (890) (373) ------------------------------------------------------------------------------------ Total net 1,246 1,451 ------------------------------------------------------------------------------------ Income (Loss) Before Income Tax Life Insurance Individual Life 30,183 22,480 West Coast 20,983 8,202 Acquisitions 52,940 56,672 Specialty Insurance Products Dental 10,206 11,767 Financial Institutions 17,650 13,017 Retirement Savings and Investment Products GIC 32,389 24,937 Investment Products 11,067 8,519 Corporate and Other 5,718 (259) Unallocated Realized Investment Gains (Losses) (791) 4,415 ------------------------------------------------------------------------------------ Total income before income tax $180,345 $149,750 ------------------------------------------------------------------------------------ (1)Income before income tax excluding realized investment gains and losses and related amortization of deferred policy acquisition costs.
The Individual Life Division's 1998 pretax income was $30.2 million, $7.7 million above 1997. The Division's mortality experience was at expected levels in 1998 and approximately $5.1 million more favorable than 1997. Headquartered in San Francisco, West Coast was acquired by the Company in June 1997. For the seven months of 1997 that it was a subsidiary of the company, the West Coast Division had pretax income of $8.2 million. The Division's 1998 pretax income was $21.0 million. In the ordinary course of business, the Acquisitions Division regularly considers acquisitions of smaller insurance companies or blocks of policies. Blocks of policies acquired through the Division are usually administered as "closed" blocks; i.e., no new policies are being marketed. Therefore, earnings from the Acquisitions Division are normally expected to decline over time (due to the lapsing of policies resulting from deaths of insureds of terminations of coverage) unless new acquisitions are made. The Acquisitions Division's 1998 pretax income decreased $3.7 million to $52.9 million, compared to 1997. The Division's mortality experience was at expected levels in 1998 compared to being approximately $5.1 million better than expected in 1997. In October 1998, the Division acquired approximately 260,000 policies from Lincoln National Corporation. The policies represent the payroll deduction business originally marketed and underwritten by Aetna. The Dental Division's 1998 pretax income was $10.2 million compared to $11.8 million in 1997. Dental earnings were $5.1 million, before a $2.5 million loss relating to its discounted fee-for-service dental program. At the end of the 1997 third quarter, the Financial Institutions Division acquired Western Diversified and coinsured an unrelated block of policies. The Division's 1998 pretax income increased $4.6 million to $17.7 million. Western Diversified and the coinsured block of policies represented $2.8 million of the increase. The GIC Division's 1998 pretax operating income increased to $30.8 million from $28.1 million in 1997 due to increased investment income. Realized investment gains associated with this Division in 1998 were $1.6 million as compared to realized investment losses of $3.2 million in 1997. As a result, total pretax income was $32.4 million in 1998 and $24.9 million in 1997. The Investment Products Division's 1998 pretax operating income was $10.6 million, an increase of $2.3 million. Realized investment gains, net of related amortization of deferred policy acquisition costs, were $0.4 million in 1998 as compared with $0.2 million in 1997. As a result, total pretax income was $11.1 million in 1998 and $8.5 million in 1997. The Corporate and Other segment consists of several small insurance lines of business, net investment income and other operating expenses not identified with the preceding business segments (including interest on substantially all debt). Pretax earnings for this segment were $5.7 million, $6.0 million higher in 1998 as compared to 1997, primarily due to increased net investment income on capital. Income Tax Expense The following table sets forth the effective income tax rates for the periods shown: Year Ended Effective Income December 31 Tax Rates ----------- ---------------- 1998............................. 35.0% 1997............................. 34.9% Management's current estimate of the effective income tax rate for 1999 is between 35% and 36%. Net Income The following table sets forth net income for the periods shown: Net Income --------------------- Year Ended Percentage December 31 Amount Increase (in thousands) 1998.................................. $117,183 20.3% 1997.................................. $ 97,448 18.1% Compared to 1997, net income in 1998 increased 20.3%, reflecting improved operating earnings in the Individual Life, West Coast, Financial Institutions, GIC, and Investment Products Divisions, and the Corporate and Other segment, and higher realized investment gains, offset by lower operating earnings in the Acquisitions and Dental Divisions. Recently Issued Accounting Standards For additional information regarding recently issued accounting standards see Note A to the consolidated financial statements included herein. Year 2000 Disclosure Computer hardware and software often denote the year using two digits rather than four; for example, the year 1998 often is denoted by such hardware and software as "98." It is probable that such hardware and software will malfunction when calculations involving the year 2000 are attempted because the hardware and/or software will interpret "00" as representing the year 1900 rather than the year 2000. This "Year 2000" issue potentially affects all individuals and companies (including Protective, its customers, business partners, suppliers, banks, custodians and administrators). The problem is most prevalent in older mainframe systems, but personal computers and equipment containing computer chips could also be affected. Protective shares computer hardware and software with its parent, PLC. PLC began work on the Year 2000 problem in 1995. At that time, PLC identified and assessed PLC's critical mainframe systems, and prioritized the remediation efforts that were to follow. During 1998 all other hardware and software, including non-information technology (non-IT) related hardware and software, were included in the process. PLC's Year 2000 plan includes all subsidiaries. PLC estimates that Year 2000 remediation is complete for most of its insurance administration and general administration systems. Of the general administration systems that are not yet remediated, the majority are new systems that were implemented during 1998 and are scheduled to be upgraded to the current release of the system during the second quarter of 1999. All remediated systems are currently in production. Personal computer network hardware and software have been reviewed, with upgrades implemented where necessary. A review of personal computer desktop software is in progress, but not complete. All Year 2000 personal computer preparations are expected to be completed by June 30, 1999. With respect to non-IT equipment and processes, the assessment and remediation is progressing on schedule and all known issues are expected to be remediated before December 31, 1999. Two insurance administration systems identified as mission critical are not yet fully remediated. A personal computer database system that processes member information for one subsidiary is currently being remediated. This effort is on schedule and targeted to be complete by June 30, 1999. Also, another personal computer application, which processes policy information for one line of business, is being re-written and is currently in test. This system is targeted to be in production by April 30, 1999. Future date tests are used to verify a system's ability to process transactions dated up to and beyond January 1, 2000. Future date tests are complete or in-progress for the majority of PLC's mission-critical systems. A large portion of the testing is conducted by a contract programming staff dedicated full time to Year 2000 preparations. These resources have been part of PLC's Year 2000 project since 1995. Integrated tests involve multiple system testing and are used to verify the Year 2000 readiness of interfaces and connectivity across multiple systems. PLC is using its mainframe computer to simulate a Year 2000 production environment and to facilitate integrated testing. Integrated testing will continue throughout 1999. Business partners and suppliers that provide products or services critical to PLC's operations are being reviewed and in some cases their Year 2000 preparations are being monitored by the Company. To date, no partners or suppliers have reported that they expect to be unable to continue supplying products and services after January 1, 2000. Initial reviews are targeted to be completed in the first quarter of 1999. Monitoring and testing of critical partners and suppliers will continue throughout 1999. Formal contingency planning will begin in March 1999 and continue throughout the year. These plans will augment PLC's existing disaster recovery plans. PLC cannot specifically identify all of the costs to develop and implement its Year 2000 plan. The cost of new systems to replace non-compliant systems have been capitalized in the ordinary course of business. Other costs have been expensed as incurred. Through December 31, 1998, costs that have been specifically identified as relating to the Year 2000 problem total $3.9 million, with an additional $1.3 million estimated to be required to support continued testing activity. PLC's Year 2000 efforts have not adversely affected its normal procurement and development of information technology. Although PLC believes that a process is in place to successfully address Year 2000 issues, there can be no assurances that PLC's efforts will be successful, that interactions with other service providers with Year 2000 issues will not impair Protective's operations, or that the Year 2000 issue will not otherwise adversely affect Protective. Should some of PLC's systems not be available due to Year 2000 problems, in a reasonably likely worst case scenario,Protective may experience significant delays in its ability to perform certain functions, but does not expect to be unable to perform critical functions or to otherwise conduct business. Item 8. Financial Statements and Supplementary Data INDEX TO FINANCIAL STATEMENTS Report of Independent Accountants Consolidated Statements of Income for the years ended December 31, 1998, 1997, and 1996 Consolidated Balance Sheets as of December 31, 1998 and 1997 Consolidated Statements of Share-Owner's Equity for the years ended December 31, 1998, 1997, and 1996 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997, and 1996 Notes to Consolidated Financial Statements Financial Statement Schedules: Schedule III -- Supplementary Insurance Information Schedule IV -- Reinsurance All other schedules to the consolidated financial statements required by Article 7 of Regulation S-X are not required under the related instructions or are inapplicable and therefore have been omitted. REPORT OF INDEPENDENT ACCOUNTANTS To the Directors and Share Owner Protective Life Insurance Company Birmingham, Alabama In our opinion, the consolidated financial statements and the financial statement schedules listed in the index on page 10 of this Form 10-K present fairly, in all material respects, the consolidated financial position of Protective Life Insurance Company and Subsidiaries at December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements and financial statement schedules are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP February 11, 1999 Birmingham, Alabama
PROTECTIVE LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands) Year Ended December 31 1998 1997 1996 ---- ---- ---- REVENUES Premiums and policy fees............................................... $1,027,340 $ 814,420 $770,224 Reinsurance ceded ..................................................... (459,215) (334,214) (308,174) --------- -------- ------- Net of reinsurance ceded............................................. 568,125 480,206 462,050 Net investment income.................................................. 603,795 557,488 498,781 Realized investment gains.............................................. 2,136 1,824 5,510 Other income........................................................... 20,201 6,149 5,010 --------- --------- ------- 1,194,257 1,045,667 971,351 --------- --------- ------- BENEFITS AND EXPENSES Benefits and settlement expenses (net of reinsurance ceded: 1998-$330,494; 1997-$180,605; 1996-$215,424)........................................ 730,496 658,872 626,893 Amortization of deferred policy acquisition costs ..................... 111,188 107,175 91,001 Other operating expenses (net of reinsurance ceded: 1998-$166,375; 1997-$90,045; 1996-$81,839).......................................... 172,228 129,870 128,148 --------- -------- ------- 1,013,912 895,917 846,042 --------- -------- ------- INCOME BEFORE INCOME TAX ................................................. 180,345 149,750 125,309 INCOME TAX EXPENSE (BENEFIT) Current.............................................................. 48,237 66,283 44,908 Deferred............................................................. 14,925 (13,981) (2,142) --------- -------- ------- 63,162 52,302 42,766 --------- -------- ------- NET INCOME ................................................... $ 117,183 $ 97,448 $ 82,543 ========= ======== =======
See notes to consolidated financial statements.
PROTECTIVE LIFE INSURANCE COMPANY CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share amounts) December 31 1998 1997 ---- ---- ASSETS Investments: Fixed maturities, at market (amortized cost: 1998-$6,307,274; 1997-$6,221,871)... $ 6,400,262 $ 6,348,252 Equity securities, at market (cost: 1998-$15,151; 1997-$24,983).................. 12,258 15,006 Mortgage loans on real estate.................................................... 1,623,603 1,313,478 Investment real estate, net of accumulated depreciation (1998-$782; 1997-$671)... 14,868 13,469 Policy loans..................................................................... 232,670 194,109 Other long-term investments...................................................... 70,078 54,704 Short-term investments........................................................... 159,655 54,337 ---------- --------- Total investments 8,513,394 7,993,355 Cash ............................................................................... 39,197 Accrued investment income .......................................................... 100,395 94,095 Accounts and premiums receivable, net of allowance for uncollectible amounts (1998-$4,304; 1997-$5,292).............................................. 31,265 42,255 Reinsurance receivables ............................................................ 756,370 591,457 Deferred policy acquisition costs .................................................. 841,425 632,605 Property and equipment, net ........................................................ 42,374 36,407 Other assets ....................................................................... 34,632 14,445 Assets related to separate accounts ................................................ Variable Annuity................................................................ 1,285,952 924,406 Variable Universal Life......................................................... 13,606 3,634 Other........................................................................... 3,482 3,425 --------- ----------- $11,622,895 $10,375,281 =========== =========== LIABILITIES Policy liabilities and accruals: Future policy benefits and claims............................................. $ 4,140,003 $ 3,324,294 Unearned premiums............................................................. 389,294 396,696 --------- --------- 4,529,297 3,720,990 Guaranteed investment contract deposits ........................................... 2,691,697 2,684,676 Annuity deposits .................................................................. 1,519,820 1,511,553 Other policyholders' funds ........................................................ 219,356 183,324 Other liabilities ................................................................. 226,310 246,081 Accrued income taxes .............................................................. (10,992) 941 Deferred income taxes ............................................................. 51,735 49,417 Note payable ...................................................................... 2,363 Indebtedness to related parties ................................................... 20,898 28,055 Liabilities related to separate accounts .......................................... Variable Annuity.............................................................. 1,285,952 924,406 Variable Universal Life....................................................... 13,606 3,634 Other......................................................................... 3,482 3,425 ---------- --------- Total liabilities........................................................... 10,553,524 9,356,502 ---------- --------- COMMITMENTS AND CONTINGENT LIABILITIES -- NOTE G SHARE-OWNER'S EQUITY Preferred Stock, $1.00 par value, shares authorized and issued: 2,000, liquidation preference $2,000 .................... 2 2 Common Stock, $1.00 par value ..................................................... 5,000 5,000 Shares authorized and issued: 5,000,000 Additional paid-in capital ........................................................ 327,992 327,992 Note receivable from PLC Employee Stock Ownership Plan ............................ (5,199) (5,378) Retained earnings ................................................................. 686,519 629,436 Accumulated other comprehensive income Net unrealized gains on investments (net of income tax: 1998-$29,646; 1997-$33,238) 55,057 61,727 ------------ ----------- Total share-owner's equity.................................................... 1,069,371 1,018,779 ------------ ----------- $11,622,895 $10,375,281 ============ ===========
See notes to consolidated financial statements.
PROTECTIVE LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF SHARE-OWNER'S EQUITY (Dollars in thousands, except per share amounts) Note Receivable Net Total Additional From Unrealized Share- Preferred Common Paid-In PLC Retained Gains (Losses) Owner's Stock Stock Capital ESOP Earnings on Investments Equity --------- ------- ---------- --------- -------- -------------- --------- Balance, December 31, 1995 ............................. $5,000 $144,494 $(5,765) $449,645 $57,863 $651,237 --------- Net income for 1996................................ 82,543 82,543 Decrease in net unrealized gains on investments (net of income tax: $(25,627)).................. (47,593) (47,593) Reclassification adjustment for amounts included in net income (net of income tax: $(1,928))........ (3,582) (3,582) --------- Comprehensive income for 1996...................... 31,368 --------- Redemption feature of preferred stock removed-Note I $ 2 1,998 2,000 Preferred dividends ($50 per share)................ (100) (100) Capital contribution from PLC...................... 91,500 91,500 Decrease in note receivable from PLC ESOP.......... 186 186 -------- -------- -------- --------- -------- ---------- --------- Balance, December 31, 1996 ......................... 2 5,000 237,992 (5,579) 532,088 6,688 776,191 --------- Net income for 1997................................ 97,448 97,448 Increase in net unrealized gains on investments (net of income tax-$30,275) 56,225 56,225 Reclassification adjustment for amounts included in net income (net of income tax: $(638))....... (1,186) (1,186) -------- Comprehensive income for 1997...................... 152,487 -------- Preferred dividends ($50 per share)................ (100) (100) Capital contribution from PLC...................... 90,000 90,000 Decrease in note receivable from PLC ESOP.......... 201 201 -------- -------- -------- --------- -------- ---------- --------- Balance, December 31, 1997 ......................... 2 5,000 327,992 (5,378) 629,436 61,727 1,018,779 Net income for 1998................................ 117,183 117,183 Decrease in net unrealized gains on investments (net of income tax-($2,844)) (5,281) (5,281) Reclassification adjustment for amounts included in net income (net of income tax: $(747))....... (1,389) (1,389) --------- Comprehensive income for 1998...................... 110,513 --------- Common dividends ($12 per share)................... (60,000) (60,000) Preferred dividends ($50 per share)................ (100) (100) Decrease in note receivable from PLC ESOP.......... 179 179 -------- -------- -------- ------- -------- --------- ---------- Balance, December 31, 1998 ........................$ 2 $ 5,000 $327,992 $(5,199) $686,519 $ 55,057 $1,069,371 ======== ======== ======== ======== ======== ========= ==========
See notes to consolidated financial statements.
PROTECTIVE LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) December 31 ----------------------------------- 1998 1997 1996 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income ................................................................... $ 117,183 $ 97,448 $ 82,543 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of deferred policy acquisition costs......................... 111,188 107,175 91,001 Capitalization of deferred policy acquisition costs....................... (192,838) (135,211) (77,078) Depreciation expense...................................................... 7,110 5,124 5,333 Deferred income taxes..................................................... 14,925 (17,918) (2,442) Accrued income taxes...................................................... (11,933) (5,558) 893 Interest credited to universal life and investment products............... 352,721 299,004 280,377 Policy fees assessed on universal life and investment products............ (139,689) (131,582) (116,401) Change in accrued investment income and other receivables................. (159,362) (158,798) (70,987) Change in policy liabilities and other policyholder funds of traditional life and health products 322,464 279,522 133,621 Change in other liabilities............................................... (19,771) 65,393 7,209 Other (net)............................................................... (22,634) (1,133) (4,281) ------- ------- ------- Net cash provided by operating activities.......................................... 379,364 403,466 329,788 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Maturities and principal reduction of investments: Investments available for sale............................................ 10,445,407 6,462,663 1,327,323 Other..................................................................... 198,559 324,242 168,898 Sale of investments: Investment available for sale............................................. 1,080,265 1,108,058 1,569,119 Other..................................................................... 155,906 695,270 568,218 Cost of investments acquired: Investments available for sale............................................ (11,507,234) (8,428,804) (3,798,631) Other..................................................................... (662,350) (718,335) (400,322) Acquisitions and bulk reinsurance assumptions ................................ (169,124) 264,126 Purchase of property and equipment ........................................... (13,077) (6,087) (6,899) Sale of property and equipment ............................................... 2,681 288 ----------- ---------- ----------- Net cash used in investing activities.............................................. (302,524) (729,436) (307,880) ----------- ---------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Borrowings under line of credit arrangements and long-term debt .............. 1,975,800 1,159,538 941,438 Capital contribution from PLC ................................................ 90,000 91,500 Principal payments on line of credit arrangements and long-term debt ......... (1,973,437) (1,159,538) (941,438) Principal payment on surplus note to PLC ..................................... (2,000) (4,693) (10,000) Dividends to share-owner ..................................................... (60,100) (100) (100) Investment product deposits and change in universal life deposits ............ 981,124 910,659 949,122 Investment product withdrawals ............................................... (1,037,424) (745,083) (944,244) ---------- ---------- ---------- Net cash provided by (used in) financing activities................................ (116,037) 250,783 86,278 ---------- ---------- ---------- INCREASE(DECREASE) IN CASH......................................................... (39,197) (75,187) 108,186 CASH AT BEGINNING OF YEAR.......................................................... 39,197 114,384 6,198 ---------- ----------- ----------- CASH AT END OF YEAR................................................................ $ 0 $ 39,197 $ 114,384 ========== =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year: Interest on debt.......................................................... $ 8,338 $ 4,343 $ 4,633 Income taxes.............................................................. $ 57,429 $ 70,133 $ 43,478 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Reduction of principal on note from ESOP ..................................... $ 179 $ 201 $ 186 Acquisitions and bulk reinsurance assumptions Assets acquired........................................................... $ 247,894 $ 1,114,832 $ 296,935 Liabilities assumed....................................................... (380,405) (902,267) (364,862) Net....................................................................... $ (132,511) $ 212,565 $ (67,927)
See notes to consolidated financial statements. PROTECTIVE LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All dollar amounts in tables are in thousands) Note A -- SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying consolidated financial statements of Protective Life Insurance Company and subsidiaries ("Protective") are prepared on the basis of generally accepted accounting principles. Such accounting principles differ from statutory reporting practices used by insurance companies in reporting to state regulatory authorities. (See also Note B.) The preparation of financial statements in conformity with generally accepted accounting principles requires management to make various estimates that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities, as well as the reported amounts of revenues and expenses. ENTITIES INCLUDED The consolidated financial statements include the accounts, after intercompany eliminations, of Protective Life Insurance Company and its wholly-owned subsidiaries. Protective is a wholly-owned subsidiary of Protective Life Corporation ("PLC"), an insurance holding company. NATURE OF OPERATIONS Protective provides financial services through the production, distribution, and administration of insurance and investment products. Protective markets individual life insurance, dental insurance and managed care services, credit life and disability insurance, guaranteed investment contracts, guaranteed funding agreements, and fixed and variable annuities throughout the United States. Protective also maintains a separate division devoted exclusively to the acquisition of insurance policies from other companies. The operating results of companies in the insurance industry have historically been subject to significant fluctuations due to competition, economic conditions, interest rates, investment performance, maintenance of insurance ratings, and other factors. RECENTLY ISSUED ACCOUNTING STANDARDS In 1997 Protective adopted Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities;" SFAS No. 130, "Reporting Comprehensive Income;" and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." In 1998 PLC adopted SFAS No. 132, "Employers' Disclosures About Pensions and Other Postretirement Benefits." The adoption of these accounting standards did not have a material effect on PLC's or Protective's financial statements. INVESTMENTS Protective has classified all of its investments in fixed maturities, equity securities, and short-term investments as "available for sale." Note A -- SIGNIFICANT ACCOUNTING POLICIES (Continued) Investments are reported on the following bases less allowances for uncollectible amounts on investments, if applicable: o Fixed maturities (bonds, bank loan participations, and redeemable preferred stocks) -- at current market value. o Equity securities (common and nonredeemable preferred stocks) -- at current market value. o Mortgage loans on real estate -- at unpaid balances, adjusted for loan origination costs, net of fees, and amortization of premium or discount. o Investment real estate -- at cost, less allowances for depreciation computed on the straight-line method. With respect to real estate acquired through foreclosure, cost is the lesser of the loan balance plus foreclosure costs or appraised value. o Policy loans -- at unpaid balances. o Other long-term investments -- at a variety of methods similar to those listed above, as deemed appropriate for the specific investment. o Short-term investments -- at cost, which approximates current market value. Substantially all short-term investments have maturities of three months or less at the time of acquisition and include approximately $0.9 million in bank deposits voluntarily restricted as to withdrawal. As prescribed by SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," certain investments are recorded at their market values with the resulting unrealized gains and losses reduced by a related adjustment to deferred policy acquisition costs, net of income tax reported as a component of share-owner's equity. The market values of fixed maturities increase or decrease as interest rates fall or rise. Therefore, although the adoption of SFAS No. 115 does not affect Protective's operations, its reported share-owner's equity will fluctuate significantly as interest rates change. Protective's balance sheets at December 31, prepared on the basis of reporting investments at amortized cost rather than at market values, are as follows: 1998 1997 ---- ---- Total investments.................... $ 8,412,167 $ 7,876,952 Deferred policy acquisition costs.. . 857,949 654,043 All other assets..................... 2,268,076 1,749,321 ----------- ----------- $11,538,192 $10,280,316 =========== =========== Deferred income taxes............... $ 22,089 $ 16,179 All other liabilities............... 10,501,789 9,307,085 ---------- --------- 10,523,878 9,323,264 Share-owner's equity................ 1,014,314 957,052 ---------- ---------- $11,538,192 $10,280,316 ========== ========== Realized gains and losses on sales of investments are recognized in net income using the specific identification basis. Note A -- SIGNIFICANT ACCOUNTING POLICIES (Continued) DERIVATIVE FINANCIAL INSTRUMENTS Protective does not use derivative financial instruments for trading purposes. Combinations of swaps, futures contracts and options on treasury notes are currently being used as hedges for asset/liability management of certain investments, primarily mortgage loans on real estate, mortgage-backed securities, and liabilities arising from interest-sensitive products such as guaranteed investment contracts and individual annuities. Realized investment gains and losses on such contracts are deferred and amortized over the life of the hedged asset. No realized investment gains or losses were deferred in 1998. Net realized gains of $1.5 million were deferred in 1997. At December 31, 1998 and 1997, options and open futures contracts with notional amounts of $975.0 million and $925.0 million, respectively, had net unrealized losses of $0.5 million and $0.4 million respectively. Protective uses interest rate swap contracts to convert certain investments and liabilities from a variable to a fixed rate of interest and from a fixed rate to variable rate of interest. At December 31, 1998, related open interest rate swap contracts with a notional amount of $55.3 million were in a $0.2 million net unrealized loss position. At December 31, 1997,related open interest rate swap contracts with a notional amount of $95.3 million were in a $0.1 million net unrealized loss position. CASH Cash includes all demand deposits reduced by the amount of outstanding checks and drafts. PROPERTY AND EQUIPMENT Property and equipment are reported at cost. Protective primarily uses the straight-line method of depreciation based upon the estimated useful lives of the assets. Major repairs or improvements are capitalized and depreciated over the estimated useful lives of the assets. Other repairs are expensed as incurred. The cost and related accumulated depreciation of property and equipment sold or retired are removed from the accounts, and resulting gains or losses are included in income. Property and equipment consisted of the following at December 31: 1998 1997 ---- ---- Home office building..........................$37,959 $37,459 Other, principally furniture and equipment.... 58,958 46,937 ------ ------- 96,917 84,396 Accumulated depreciation...................... 54,543 47,989 ------ ------- $42,374 $36,407 ====== ====== SEPARATE ACCOUNTS Protective operates separate accounts, some in which Protective bears the investment risk and others in which the investments risk rests with the contractholder. The assets and liabilities related to separate accounts in which Protective does not bear the investment risk are valued at market and reported separately as assets and liabilities related to separate accounts in the accompanying consolidated financial statements. REVENUES AND BENEFITS EXPENSE Traditional Life and Health Insurance Products-- Traditional life insurance products consist principally of those products with fixed and guaranteed premiums and benefits and include whole life insurance policies, term and term-like life insurance policies, limited-payment life insurance policies, and certain annuities with life contingencies. Life insurance and immediate annuity premiums are recognized as revenue when due. Health insurance premiums are recognized as revenue over the terms of the policies. Benefits and expenses are associated with earned premiums so that profits are recognized over the life of the contracts. This is accomplished by means of the provision for liabilities for future policy benefits and the amortization of deferred policy acquisition costs. Note A -- SIGNIFICANT ACCOUNTING POLICIES (Continued) Liabilities for future policy benefits on traditional life insurance products have been computed using a net level method including assumptions as to investment yields, mortality, persistency, and other assumptions based on Protective's experience modified as necessary to reflect anticipated trends and to include provisions for possible adverse deviation. Reserve investment yield assumptions are graded and range from 2.5% to 7.0%. The liability for future policy benefits and claims on traditional life and health insurance products includes estimated unpaid claims that have been reported to Protective and claims incurred but not yet reported. Policy claims are charged to expense in the period that the claims are incurred. Activity in the liability for unpaid claims is summarized as follows:
1998 1997 1996 ---- ---- ---- Balance beginning of year ..................... $106,121 $108,159 $ 73,642 Less reinsurance........................... 18,673 6,423 3,330 ------- ------- ------ Net balance beginning of year ................. 87,448 101,736 70,312 ------- ------- ------ Incurred related to: Current year .................................. 288,015 258,322 275,524 Prior year .................................... (10,198) (14,540) (2,417) ------- ------- ------- Total incurred............................. 277,817 243,782 273,107 ------- ------- ------- Paid related to: Current year .................................. 236,001 203,381 197,163 Prior year .................................... 58,951 58,104 57,812 ------- ------- ------- Total paid................................. 294,952 261,485 254,975 ------- ------- ------- Other changes: Acquisitions and reserve transfers....................... 0 3,415 13,292 ------- ------- ------- Net balance end of year ....................... 70,313 87,448 101,736 Plus reinsurance........................... 20,019 18,673 6,423 ------- ------- ------- Balance end of year .......................... $ 90,332 $106,121 $108,159 ======== ======== ========
o Universal Life and Investment Products-- Universal life and investment products include universal life insurance, guaranteed investment contracts, deferred annuities, and annuities without life contingencies. Revenues for universal life and investment products consist of policy fees that have been assessed against policy account balances for the costs of insurance, policy administration, and surrenders. That is, universal life and investment product deposits are not considered revenues in accordance with generally accepted accounting principles. Benefit reserves for universal life and investment products represent policy account balances before applicable surrender charges plus certain deferred policy initiation fees that are recognized in income over the term of the policies. Policy benefits and claims that are charged to expense include benefit claims incurred in the period in excess of related policy account balances and interest credited to policy account balances. Interest credit rates for universal life and investment products ranged from 3.4% to 9.4% in 1998. Protective's accounting policies with respect to variable universal life and variable annuities are identical except that policy account balances (excluding account balances that earn a fixed rate) are valued at market and reported as components of assets and liabilities related to separate accounts. Note A -- SIGNIFICANT ACCOUNTING POLICIES (Continued) DEFERRED POLICY ACQUISITION COSTS Commissions and other costs of acquiring traditional life and health insurance, universal life insurance, and investment products that vary with and are primarily related to the production of new business have been deferred. Traditional life and health insurance acquisition costs are amortized over the premium-payment period of the related policies in proportion to the ratio of annual premium income to total anticipated premium income. Acquisition costs for universal life and investment products are being amortized over the lives of the policies in relation to the present value of estimated gross profits before amortization. Under SFAS No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments," Protective makes certain assumptions regarding the mortality, persistency, expenses, and interest rates it expects to experience in future periods. These assumptions are to be best estimates and are to be periodically updated whenever actual experience and/or expectations for the future change from that assumed. Additionally, relating to SFAS No. 115, these costs have been adjusted by an amount equal to the amortization that would have been recorded if unrealized gains or losses on investments associated with Protective's universal life and investment products had been realized. The cost to acquire blocks of insurance representing the present value of future profits from such blocks of insurance is also included in deferred policy acquisition costs. Protective amortizes the present value of future profits over the premium payment period including accrued interest of up to approximately 8%. The unamortized present value of future profits for all acquisitions was approximately $370.3 million and $274.9 million at December 31, 1998 and 1997, respectively. During 1998 $132.5 million of present value of future profits on acquisitions made during the year was capitalized and $37.1 million was amortized. During 1997 $136.2 million of present value of future profits on acquisitions made during the year was capitalized, and $28.9 million was amortized. INCOME TAXES Protective uses the asset and liability method of accounting for income taxes. Income tax provisions are generally based on income reported for financial statement purposes. Deferred federal income taxes arise from the recognition of temporary differences between the bases of assets and liabilities determined for financial reporting purposes and the bases determined for income tax purposes. Such temporary differences are principally related to the deferral of policy acquisition costs and the provision for future policy benefits and expenses. RECLASSIFICATIONS Certain reclassifications have been made in the previously reported financial statements and accompanying notes to make the prior year amounts comparable to those of the current year. Such reclassifications had no effect on net income, total assets, or share-owner's equity. Note B -- RECONCILIATION WITH STATUTORY REPORTING PRACTICES Financial statements prepared in conformity with generally accepted accounting principles ("GAAP") differ in some respects from the statutory accounting practices prescribed or permitted by insurance regulatory authorities. The most significant differences are: (a) acquisition costs of obtaining new business are deferred and amortized over the approximate life of the policies rather than charged to operations as incurred, (b) benefit liabilities are computed using a net level method and are based on realistic estimates of expected mortality, interest, and withdrawals as adjusted to provide for possible unfavorable deviation from such assumptions, (c) deferred income taxes are provided for temporary differences between financial and taxable earnings, (d) the Asset Valuation Reserve and Interest Maintenance Reserve are restored to stock-owner's equity, (e) furniture and equipment, agents' debit balances, and prepaid expenses are reported as assets rather than being charged directly to surplus (referred to as nonadmitted items), (f) certain items of interest income, principally accrual of mortgage and bond discounts are amortized differently, and (g) bonds are stated at market instead of amortized cost. Note B -- RECONCILIATION WITH STATUTORY REPORTING PRACTICES (Continued) The reconciliations of net income and share-owner's equity prepared in conformity with statutory reporting practices to that reported in the accompanying consolidated financial statements are as follows:
Net Income Share-Owner's Equity ----------------------------------------------------------------- 1998 1997 1996 1998 1997 1996 ---- ---- ---- ---- ---- ---- In conformity with statutory reporting practices:(1)................................... $147,077 $134,417 $102,337 $ 531,956 $ 579,111 $ 456,320 Additions (deductions) by adjustment: Deferred policy acquisition costs, net of amortization.............................. 68,155 10,310 (2,830) 841,425 632,605 488,201 Deferred income tax......................... (14,925) 13,981 2,142 (51,735) (49,417) (37,722) Asset Valuation Reserve..................... 66,922 67,369 64,233 Interest Maintenance Reserve................ (1,355) (1,434) (2,142) 15,507 9,809 17,682 Nonadmitted items........................... 42,835 30,500 21,610 Other timing and valuation adjustments...... (76,214) (54,494) (11,210) (282,480) (215,448) (197,227) Noninsurance affiliates..................... 18,171 17,530 11,104 (4) 4 Consolidation elimination................... (23,726) (22,862) (16,858) (95,059) (35,746) (36,910) -------- ------- ------ ------- ------- ------- In conformity with generally accepted accounting principles ................. $117,183 $ 97,448 $ 82,543 $1,069,371 $1,018,779 $ 776,191 ======== ====== ====== ========= ========= ======= (1) Consolidated
Note C -- INVESTMENT OPERATIONS Major categories of net investment income for the years ended December 31 are summarized as follows:
1998 1997 1996 ---- ---- ---- Fixed maturities.................................... $463,416 $396,255 $310,353 Equity securities................................... 905 1,186 2,124 Mortgage loans on real estate....................... 158,461 161,604 153,463 Investment real estate.............................. 1,224 2,004 1,875 Policy loans........................................ 12,346 11,370 10,378 Other, principally short-term investments........... 16,536 21,876 51,637 ------- ------- ------- 652,888 594,295 529,830 Investment expenses................................. 49,093 36,807 31,049 ------- ------- ------- $603,795 $557,488 $498,781 ======= ======= ======= Realized investment gains (losses) for the years ended December 31 are summarized as follows: Fixed maturities.................................... $4,374 $ (8,355) $ (7,101) Equity securities................................... (4,465) 5,975 1,733 Mortgage loans and other investments................ 2,227 4,204 10,878 ------ ----- ------ $2,136 $ 1,824 $ 5,510 ====== ===== =====
Protective recognizes permanent impairments through changes to an allowance for uncollectible amounts on investments. The allowance totaled $24.1 million at December 31, 1998 and $23.0 million at December 31, 1997. Additions and reductions to the allowance are included in realized investment gains (losses). Without such additions/reductions, Protective had net realized investment gains of $3.2 million in 1998, net realized investment losses of $6.1 million in 1997, and net realized investment gains of $3.7 million in 1996. In 1998, gross gains on the sale of investments available for sale (fixed maturities, equity securities and short-term investments) were $32.3 million and gross losses were $32.5 million. In 1997, gross gains were $21.3 million and gross losses were $23.5 million. In 1996, gross gains were $6.9 million and gross losses were $11.8 million. Note C -- INVESTMENT OPERATIONS (Continued) The amortized cost and estimated market values of Protective's investments classified as available for sale at December 31 are as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Market 1998 Cost Gains Losses Values ---- --------- ---------- ---------- --------- Fixed maturities: Bonds: Mortgage-backed............................. $2,581,561 $ 41,626 $33,939 $2,589,248 United States Government and authorities............................... 72,697 2,812 75,509 States, municipalities, and political subdivisions.................... 29,521 1,131 30,652 Public utilities............................ 533,082 15,066 548,148 Convertibles and bonds with warrants.................................. 694 179 515 All other corporate bonds................... 3,083,782 98,992 32,629 3,150,145 Redeemable preferred stocks ..................... 5,937 108 6,045 ----------- --------- ------- ---------- 6,307,274 159,735 66,747 6,400,262 Equity securities................................... 15,151 456 3,349 12,258 Short-term investments.............................. 159,655 159,655 ----------- -------- ------- ---------- $6,482,080 $160,191 $70,096 $6,572,175 =========== ======== ======= ========== Gross Gross Estimated Amortized Unrealized Unrealized Market 1997 Cost Gains Losses Values ---- ---------- --------- ---------- --------- Fixed maturities: Bonds: Mortgage-backed............................. $2,982,266 $ 54,103 $16,577 $3,019,792 United States Government and authorities............................... 160,484 1,366 0 161,850 States, municipalities, and political subdivisions.................... 31,621 532 0 32,153 Public utilities............................ 481,679 7,241 0 488,920 Convertibles and bonds with warrants.................................. 694 0 168 526 All other corporate bonds................... 2,559,186 80,903 1,019 2,639,070 Redeemable preferred stocks ..................... 5,941 0 0 5,941 --------- -------- ------ --------- 6,221,871 144,145 17,764 6,348,252 Equity securities................................... 24,983 300 10,277 15,006 Short-term investments.............................. 54,337 0 0 54,337 --------- ------- ------ --------- $6,301,190 $144,445 $28,041 $6,417,595 ========= ======= ====== =========
Note C -- INVESTMENT OPERATIONS (Continued) The amortized cost and estimated market values of fixed maturities at December 31, by expected maturity, are shown below. Expected maturities are derived from rates of prepayment that may differ from actual rates of prepayment.
Estimated Amortized Market Cost Values --------- ------------ 1998 - ---- Due in one year or less.......................... $ 705,859 $ 709,686 Due after one year through five years............ 3,255,973 3,325,078 Due after five years through ten years........... 1,655,055 1,690,581 Due after ten years.............................. 690,387 674,917 -------- --------- $6,307,274 $6,400,262 ========== ========== Estimated Amortized Market Cost Values --------- ----------- 1997 - ---- Due in one year or less.......................... $ 456,248 $ 460,994 Due after one year through five years............ 2,774,769 2,815,553 Due after five years through ten years........... 2,377,989 2,440,193 Due after ten years.............................. 612,865 631,512 --------- ---------- $6,221,871 $6,348,252 ========== ==========
The approximate percentage distribution of Protective's fixed maturity investments by quality rating at December 31 is as follows: Rating 1998 1997 ------ ---- ---- AAA................................................. 34.3% 41.1% AA.................................................. 6.2 4.8 A................................................... 29.4 29.1 BBB................................................. 26.5 21.9 BB or less......................................... 3.5 3.0 Redeemable preferred stocks......................... 0.1 0.1 100.0% 100.0% At December 31, 1998 and 1997, Protective had bonds which were rated less than investment grade of $222.9 million and $195.2 million, respectively, having an amortized cost of $252.0 million and $193.6 million, respectively. At December 31, 1998, approximately $83.5 million of the bonds rates less than investment grade were securities issued in company-sponsored commercial mortgage loan securitizations. Approximately $817.9 million of bonds are not publically traded. The change in unrealized gains (losses), net of income tax on fixed maturity and equity securities for the years ended December 31 is summarized as follows: 1998 1997 1996 ---- ---- ---- Fixed maturities................ $(21,705) $72,741 $(56,898) Equity securities............... 4,605 (8,813) $ 207 At December 31, 1998, all of Protective's mortgage loans were commercial loans of which 75% were retail, 10% were apartments, 8% were warehouses, and 6% were office buildings. Protective specializes in making mortgage loans on either credit-oriented or credit-anchored commercial properties, most of which are strip shopping centers in smaller towns and cities. No single tenant's leased space represents more than 5% of mortgage loans. Approximately 82% of the mortgage loans are on properties located in the following states listed in decreasing order of significance: Georgia, Florida, Texas, North Carolina, Tennessee, Virginia, Alabama, South Carolina, Kentucky, Ohio, Maryland, California, Mississippi, and Washington. Note C -- INVESTMENT OPERATIONS (Continued) Many of the mortgage loans have call provisions after three to ten years. Assuming the loans are called at their next call dates, approximately $48.1 million would become due in 1999, $348.9 million in 2000 to 2003, and $209.1 million in 2004 to 2008. At December 31, 1998, the average mortgage loan was approximately $2.0 million, and the weighted average interest rate was 8.3%. The largest single mortgage loan was $12.8 million. At December 31, 1998 and 1997, Protective's problem mortgage loans and foreclosed properties totaled $11.7 million and $17.7 million, respectively. Since Protective'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's evaluation of its mortgage loan portfolio, Protective does not expect any material losses on its mortgage loans. Certain investments, principally real estate, with a carrying value of $10.6 million were nonincome producing for the twelve months ended December 31, 1998. Policy loan interest rates generally range from 4.5% to 8.0%. Note D -- FEDERAL INCOME TAXES Protective's effective income tax rate varied from the maximum federal income tax rate as follows:
1998 1997 1996 ---- ---- ---- Statutory federal income tax rate applied to pretax income................. 35.0% 35.0% 35.0% Dividends received deduction and tax-exempt interest....................... (0.1) (0.2) (0.4) Low-income housing credit.................................................. (0.5) (0.6) (0.6) Tax benefits arising from prior acquisitions and other adjustments............................................................... 0.1 0.7 0.1 State income taxes......................................................... 0.5 ----- ----- ----- Effective income tax rate.................................................. 35.0% 34.9% 34.1% ===== ===== =====
The provision for federal income tax differs from amounts currently payable due to certain items reported for financial statement purposes in periods which differ from those in which they are reported for income tax purposes. Details of the deferred income tax provision for the years ended December 31 are as follows:
1998 1997 1996 ---- ---- ---- Deferred policy acquisition costs..................................... $60,746 $ 7,054 $15,542 Benefit and other policy liability changes............................ (41,268) (23,564) (16,321) Temporary differences of investment income............................ (3,491) 2,516 (1,163) Other items........................................................... (1,062) 13 (200) ------- -------- -------- $14,925 $(13,981) $(2,142)
Note D -- FEDERAL INCOME TAXES (Continued) The components of Protective's net deferred income tax liability as of December 31 were as follows:
1998 1997 ---- ---- Deferred income tax assets: Policy and policyholder liability reserves................... $190,328 $138,701 Other........................................................ 2,091 1,029 -------- -------- 192,419 139,730 -------- -------- Deferred income tax liabilities: Deferred policy acquisition costs............................ 211,641 150,895 Unrealized gain on investments............................... 32,513 38,252 -------- ------- 244,154 189,147 -------- ------- Net deferred income tax liability $ 51,735 $ 49,417 ======== ========
Under pre-1984 life insurance company income tax laws, a portion of Protective's gain from operations which was not subject to current income taxation was accumulated for income tax purposes in a memorandum account designated as Policyholders' Surplus. The aggregate accumulation in this account at December 31, 1998 was approximately $70.5 million. Should the accumulation in the Policyholders' Surplus account exceed certain stated maximums, or should distributions including cash dividends be made to PLC in excess of approximately $769 million, such excess would be subject to federal income taxes at rates then effective. Deferred income taxes have not been provided on amounts designated as Policyholders' Surplus. Under current income tax laws, Protective does not anticipate involuntarily paying income tax on amounts in the Policyholders' Surplus accounts. Protective's income tax returns are included in the consolidated income tax returns of PLC. The allocation of income tax liabilities among affiliates is based upon separate income tax return calculations. Note E -- DEBT At December 31, 1998, PLC had borrowed $18.5 million at a rate of 5.8%. PLC had also borrowed $30.0 million at a rate of 5.4% under a term note that contains, among other provisions, requirements for maintaining certain financial ratios, and restrictions on indebtedness incurred by PLC's subsidiaries including Protective. Additionally, PLC, on a consolidated basis, cannot incur debt in excess of 50% of its total capital. Protective has arranged sources of credit to temporarily fund scheduled investment commitments. Protective expects that the rate received on its investments will equal or exceed its borrowing rate. Protective had no such temporary borrowings outstanding at December 31, 1998 and 1997. Also, Protective has a mortgage note on investment real estate amounting to approximately $2.4 million that matures in 2003. Included in indebtedness to related parties is a surplus debenture issued by Protective to PLC. At December 31, 1998, the balance of the surplus debenture was $18.0 million. The debenture matures in 2003. Indebtedness to related parties also consists of payables to affiliates under control of PLC in the amount of $2.9 million at December 31, 1998. Protective routinely receives from or pays to affiliates under the control of PLC reimbursements for expenses incurred on one another's behalf. Receivables and payables among affiliates are generally settled monthly. Interest expense on borrowed money totaled $8.3 million, $4.3 million, and $4.6 million, in 1998, 1997, and 1996, respectively. Note F -- RECENT ACQUISITIONS In June 1997, Protective acquired West Coast Life Insurance Company ("West Coast"). In September 1997, Protective acquired the Western Diversified Group. In October 1997, Protective coinsured a block of credit policies. In October 1998 Protective coinsured a block of life insurance policies from Lincoln National Corporation. The policies represent the payroll deduction business originally marketed and underwritten by Aetna. These transactions have been accounted for as purchases, and the results of the transactions have been included in the accompanying financial statements since the effective dates of the agreements. Note G -- 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 does not believe such assessments will be materially different from amounts already provided for in the financial statements. Most of these laws do provide, however, that an assessment may be excused or deferred if it would threaten an insurer's own financial strength. A number of civil jury verdicts have been returned against insurers in the jurisdictions in which Protective does business involving the insurers' sales practices, alleged agent misconduct, failure to properly supervise agents, and other matters. Increasingly these lawsuits have resulted in the award of substantial judgments against the insurer that are disproportionate to the actual damages, including material amounts of punitive damages. In addition, in some class action and other lawsuits involving insurers' sales practices, insurers have made material settlement payments. In some states (including Alabama), juries have substantial discretion in awarding punitive damages which creates the potential for unpredictable material adverse judgments in any given punitive damage suit. Protective and its subsidiaries, like other insurers, in the ordinary course of business, are involved in such litigation or alternatively in arbitration. Although the outcome of any litigation or arbitration cannot be predicted with certainty, Protective believes that at the present time there are no pending or threatened lawsuits that are reasonably likely to have a material adverse effect on the financial position, results of operations, or liquidity of Protective. Note H -- SHARE-OWNER'S EQUITY AND RESTRICTIONS At December 31, 1998, approximately $608.6 million of consolidated share-owner's equity excluding net unrealized gains and losses represented net assets of Protective that cannot be transferred in the form of dividends, loans, or advances to PLC. In general, dividends up to specified levels are considered ordinary and may be paid thirty days after written notice to the insurance commissioner of the state of domicile unless such commissioner objects to the dividend prior to the expiration of such period. Dividends in larger amounts are considered extraordinary and are subject to affirmative prior approval by such commissioner. The maximum amount that would qualify as ordinary dividends to PLC by Protective in 1999 is estimated to be $138.9 million. Dividends of $60.0 million were paid to PLC in 1998. Note I -- PREFERRED STOCK PLC owns all of the 2,000 shares of preferred stock issued by Protective's subsidiary, Protective Life and Annuity Insurance Company ("PL&A"). During 1996, PL&A's articles of incorporation were amended such that the preferred stock is redeemable solely at the discretion of PL&A. Prior to November 1998, the stock paid, when and if declared, annual minimum cumulative dividends of $50 per share, and noncumulative participating dividends to the extent PL&A's statutory earnings for the immediately preceding fiscal year exceeded $1 million. Dividends of $0.1 million were paid to PLC in 1998, 1997, and 1996. Effective November 3, 1998, PL&A's articles of incorporation were amended such that the provision for an annual minimum cumulative dividend was removed. Note J -- RELATED PARTY MATTERS On August 6, 1990, PLC announced that its Board of Directors approved the formation of an Employee Stock Ownership Plan ("ESOP"). On December 1, 1990, Protective transferred to the ESOP 520,000 shares of PLC's common stock held by it in exchange for a note. The outstanding balance of the note, $5.2 million at December 31, 1998, is accounted for as a reduction to share-owner's equity. The stock will be used to match employee contributions to PLC's existing 401(k) Plan. The ESOP shares are dividend paying. Dividends on the shares are used to pay the ESOP's note to Protective. Protective leases furnished office space and computers to affiliates. Lease revenues were $3.0 million in 1998, $3.1 million in 1997, and $3.7 million in 1996. Protective purchases data processing, legal, investment and management services from affiliates. The costs of such services were $56.2 million, $51.6 million, and $50.4 million, in 1998, 1997, and 1996, respectively. Commissions paid to affiliated marketing organizations of $8.4 million, $5.2 million, and $7.4 million, in 1998, 1997, and 1996, respectively, were included in deferred policy acquisition costs. Certain corporations with which PLC's directors were affiliated paid Protective premiums, policy fees, or deposits for various types of insurance and investment products. Such premiums, policy fees, and deposits amounted to $28.6 million, $21.4 million and $31.2 million in 1998, 1997, and 1996, respectively. Protective and/or PLC paid commissions, interest on debt and investment products, and fees to these same corporations totaling $7.3 million, $5.4 million and $5.0 million in 1998, 1997, and 1996, respectively. For a discussion of indebtedness to related parties, see Note E. Note K -- OPERATING SEGMENTS Protective operates seven divisions whose principal strategic focuses can be grouped into three general categories: Life Insurance, Specialty Insurance Products, and Retirement Savings and Investment Products. Each division has a senior officer of Protective responsible for its operations. A division is generally distinguished by products and/or channels of distribution. A brief description of each division follows. Life Insurance Individual Life Division. The Individual Life Division markets universal life, variable universal life, and level premium term and term-like insurance products on a national basis through a network of independent insurance agents. West Coast Division. The West Coast Division sells universal life and level premium term-like insurance products in the life insurance brokerage market and in the "bank owned life insurance" market. Acquisitions Division. The Acquisitions Division focuses solely on acquiring, converting, and servicing policies acquired from other companies. These acquisitions may be accomplished through acquisitions of companies or through the assumption or reinsurance of life insurance and related policies. Specialty Insurance Products Dental and Consumer Benefits Division. The Division's primary focus is on indemnity and prepaid dental products. In 1997, the Division exited from the traditional group major medical business, fulfilling the Division's strategy to focus primarily on dental and related products. Financial Institutions Division. The Financial Institutions Division specializes in marketing credit life and disability insurance products through banks, consumer finance companies and automobile dealers. The Division also includes a small property casualty insurer that sells automobile service contracts. Note K -- OPERATING SEGMENTS (continued) Retirement Savings and Investment Products Guaranteed Investment Contracts Division. The Guaranteed Investment Contracts ("GIC") Division markets GICs to 401(k) and other qualified retirement savings plans. The Division also offers related products, including fixed and floating rate funding agreements offered to the trustees of municipal bond proceeds, bank trust departments, and money market funds, and long-term annuity contracts offered to fund certain state obligations. Investment Products Division. The Investment Products Division manufactures, sells, and supports fixed and variable annuity products. These products are primarily sold through stockbrokers, but are also sold through financial institutions and the Individual Life Division's sales force. Corporate and Other Protective has an additional business segment herein referred to as Corporate and Other. The Corporate and Other segment primarily consists of net investment income and expenses not attributable to the Divisions above (including net investment income on capital and interest on substantially all debt). Protective uses the same accounting policies and procedures to measure operating segment income and assets as it uses to measure its consolidated net income and assets. Operating segment income is generally income before income tax. Premiums and policy fees, other income, benefits and settlement expenses, and amortization of deferred policy acquisition costs 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 which most appropriately reflects the operations of that segment. Unallocated realized investment gains (losses) are deemed not to be associated with any specific segment. Assets are allocated based on policy liabilities and deferred policy acquisition costs directly attributable to each segment. There are no significant intersegment transactions. Operating segment income and assets for the years ended December 31 are as follows:
Life Insurance Individual Operating Segment Income Life West Coast Acquisitions - -------------------------------------------------------------------------------------------------------------------------- 1998 Premiums and policy fees $ 228,701 $ 75,757 $ 125,329 Reinsurance ceded (102,533) (53,377) (28,594) - -------------------------------------------------------------------------------------------------------------------------- Net of reinsurance ceded 126,168 22,380 96,735 Net investment income 55,779 63,492 112,154 Realized investment gains (losses) Other income 70 6 1,713 - -------------------------------------------------------------------------------------------------------------------------- Total revenues 182,017 85,878 210,602 - -------------------------------------------------------------------------------------------------------------------------- Benefits and settlement expenses 106,308 54,617 112,051 Amortization of deferred policy acquisition costs 30,543 4,924 18,894 Other operating expenses 14,983 5,354 26,717 - -------------------------------------------------------------------------------------------------------------------------- Total benefits and expenses 151,834 64,895 157,662 - -------------------------------------------------------------------------------------------------------------------------- Income before income tax 30,183 20,983 52,940 Income tax expense - -------------------------------------------------------------------------------------------------------------------------- Net income - -------------------------------------------------------------------------------------------------------------------------- 1997 Premiums and policy fees $ 182,746 $ 41,290 $ 120,504 Reinsurance ceded (55,266) (27,168) (17,869) - -------------------------------------------------------------------------------------------------------------------------- Net of reinsurance ceded 127,480 14,122 102,635 Net investment income 54,593 30,194 110,155 Realized investment gains (losses) Other income 617 10 - -------------------------------------------------------------------------------------------------------------------------- Total revenues 182,690 44,316 212,800 - -------------------------------------------------------------------------------------------------------------------------- Benefits and settlement expenses 114,678 28,304 116,506 Amortization of deferred policy acquisition costs 27,354 961 16,606 Other operating expenses 18,178 6,849 23,016 - -------------------------------------------------------------------------------------------------------------------------- Total benefits and expenses 160,210 36,114 156,128 - -------------------------------------------------------------------------------------------------------------------------- Income before income tax 22,480 8,202 56,672 Income tax expense - -------------------------------------------------------------------------------------------------------------------------- Net income - -------------------------------------------------------------------------------------------------------------------------- 1996 Premiums and policy fees $ 154,295 $ 125,798 Reinsurance ceded (37,585) (19,255) - -------------------------------------------------------------------------------------------------------------------------- Net of reinsurance ceded 116,710 106,543 Net investment income 48,442 106,015 Realized investment gains (losses) 3,098 Other income 1,056 641 - -------------------------------------------------------------------------------------------------------------------------- Total revenues 169,306 213,199 - -------------------------------------------------------------------------------------------------------------------------- Benefits and settlement expenses 96,404 118,181 Amortization of deferred policy acquisition costs 28,393 17,162 Other operating expenses 28,611 24,292 - -------------------------------------------------------------------------------------------------------------------------- Total benefits and expenses 153,408 159,635 - -------------------------------------------------------------------------------------------------------------------------- Income before income tax 15,898 53,564 Income tax expense - -------------------------------------------------------------------------------------------------------------------------- Net income - -------------------------------------------------------------------------------------------------------------------------- Operating Segment Assets 1998 Investments and other assets $1,076,202 $1,149,642 $1,600,123 Deferred policy acquisition costs 301,941 144,455 255,347 - -------------------------------------------------------------------------------------------------------------------------- Total assets $1,378,143 $1,294,097 $1,855,470 - -------------------------------------------------------------------------------------------------------------------------- 1997 Investments and other assets $ 960,316 $ 910,030 $1,401,294 Deferred policy acquisition costs 252,321 108,126 138,052 - -------------------------------------------------------------------------------------------------------------------------- Total assets $1,212,637 $1,018,156 $1,539,346 - -------------------------------------------------------------------------------------------------------------------------- 1996 Investments and other assets $ 814,728 $1,423,081 Deferred policy acquisition costs 220,232 156,172 - -------------------------------------------------------------------------------------------------------------------------- Total assets $1,034,960 $1,579,253 - -------------------------------------------------------------------------------------------------------------------------- (1)Adjustments represent the inclusion of unallocated realized investment gains (losses) and the recognition of income tax expense. There are no asset adjustments.
Retirement Savings and Specialty Insurance Products Investment Products Dental and Guaranteed Corporate Consumer Financial Investment Investment and Total Benefits Institutions Contracts Products Other Adjustments (1) Consolidated - ------------------------------------------------------------------------------------------------------------------------- $ 277,316 $ 301,230 $ 18,809 $ 198 $ 1,027,340 (85,753) (188,958) (459,215) - ------------------------------------------------------------------------------------------------------------------------- 191,563 112,272 18,809 198 568,125 15,245 25,068 $213,136 105,827 13,094 603,795 1,609 1,318 $ (791) 2,136 4,295 10,302 1,799 2,016 20,201 - ------------------------------------------------------------------------------------------------------------------------- 211,103 147,642 214,745 127,753 15,308 1,194,257 - ------------------------------------------------------------------------------------------------------------------------- 140,632 52,629 178,745 85,045 469 730,496 10,352 28,526 735 17,213 1 111,188 49,913 48,837 2,876 14,428 9,120 172,228 - ------------------------------------------------------------------------------------------------------------------------- 200,897 129,992 182,356 116,686 9,590 1,013,912 - ------------------------------------------------------------------------------------------------------------------------- 10,206 17,650 32,389 11,067 5,718 180,345 63,162 63,162 - ------------------------------------------------------------------------------------------------------------------------- $ 117,183 - ------------------------------------------------------------------------------------------------------------------------- $ 260,590 $ 196,694 $ 12,367 $ 229 $ 814,420 (109,480) (124,431) (334,214) - ------------------------------------------------------------------------------------------------------------------------- 151,110 72,263 12,367 229 480,206 23,810 16,341 $211,915 105,196 5,284 557,488 (3,180) 589 $ 4,415 1,824 1,278 3,033 (192) 1,403 6,149 - ------------------------------------------------------------------------------------------------------------------------- 176,198 91,637 208,735 117,960 6,916 1,045,667 - ------------------------------------------------------------------------------------------------------------------------- 110,148 27,643 179,235 82,019 339 658,872 15,711 30,812 618 15,110 3 107,175 38,572 20,165 3,945 12,312 6,833 129,870 - ------------------------------------------------------------------------------------------------------------------------- 164,431 78,620 183,798 109,441 7,175 895,917 - ------------------------------------------------------------------------------------------------------------------------- 11,767 13,017 24,937 8,519 (259) 149,750 52,302 52,302 - ------------------------------------------------------------------------------------------------------------------------- $ 97,448 - ------------------------------------------------------------------------------------------------------------------------- $ 288,050 $ 193,236 $ 8,189 $ 656 $ 770,224 (131,520) (119,814) (308,174) - ------------------------------------------------------------------------------------------------------------------------- 156,530 73,422 8,189 656 462,050 16,249 13,898 $214,369 98,719 1,089 498,781 (7,963) 3,858 $ 6,517 5,510 2,193 56 1,064 5,010 - ------------------------------------------------------------------------------------------------------------------------- 174,972 87,320 206,406 110,822 2,809 971,351 - ------------------------------------------------------------------------------------------------------------------------- 125,797 42,781 169,927 73,093 710 626,893 5,326 24,900 509 14,710 1 91,001 43,028 10,673 3,840 13,196 4,508 128,148 - ------------------------------------------------------------------------------------------------------------------------- 174,151 78,354 174,276 100,999 5,219 846,042 - ------------------------------------------------------------------------------------------------------------------------- 821 8,966 32,130 9,823 (2,410) 125,309 42,766 42,766 - ------------------------------------------------------------------------------------------------------------------------- $ 82,543 - ------------------------------------------------------------------------------------------------------------------------- $197,337 $645,909 $2,869,304 $2,542,536 $700,417 $10,781,470 23,836 39,212 1,448 75,177 9 841,425 - ------------------------------------------------------------------------------------------------------------------------- $221,173 $685,121 $2,870,752 $2,617,713 $700,426 $11,622,895 - ------------------------------------------------------------------------------------------------------------------------- $208,071 $536,058 $2,887,732 $2,313,279 $525,896 $ 9,742,676 22,459 52,836 1,785 56,074 952 632,605 - ------------------------------------------------------------------------------------------------------------------------- $230,530 $588,894 $2,889,517 $2,369,353 $526,848 $10,375,281 - ------------------------------------------------------------------------------------------------------------------------- $205,696 $312,826 $2,606,873 $1,821,250 $490,688 $ 7,675,142 27,944 32,040 1,164 50,637 12 488,201 - ------------------------------------------------------------------------------------------------------------------------- $233,640 $344,866 $2,608,037 $1,871,887 $490,700 $ 8,163,343 - -------------------------------------------------------------------------------------------------------------------------
Note L -- EMPLOYEE BENEFIT PLANS PLC has a defined benefit pension plan covering substantially all of its employees. The plan is not separable by affiliates participating in the plan. However, approximately 81% of the participants in the plan are employees of Protective. The benefits are based on years of service and the employee's highest thirty-six consecutive months of compensation. PLC's funding policy is to contribute amounts to the plan sufficient to meet the minimum finding requirements of ERISA plus such additional amounts as PLC may determine to be appropriate from time to time. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. The actuarial present value of benefit obligations and the funded status of the plan taken as a whole at December 31 are as follows:
1998 1997 ---- ---- Projected benefit obligation, beginning of the year ............................ $ 30,612 $25,196 Service cost - benefits earned during the year ................................. 2,585 2,112 Interest cost - on projected benefit obligation ................................ 2,203 2,036 Actuarial gain ................................................................. 2,115 3,421 Plan amendment ................................................................. 160 Benefits paid .................................................................. (1,128) (2,153) ------ ------ Projected benefit obligation, end of the year .................................. 36,547 30,612 ------ ------ Fair value of plan assets beginning of the year ................................ 21,763 19,779 Actual return on plan assets ................................................... 1,689 1,625 Employer contribution .......................................................... 2,823 2,512 Benefits paid .................................................................. (1,128) (2,153) ------ ------ Fair value of plan assets end of the year ..................................... 25,147 21,763 ------ ------ Plan assets less than the projected benefit obligation ......................... (11,400) (8,849) Unrecognized net actuarial loss from past experience different from that assumed 9,069 6,997 Unrecognized prior service cost ................................................ 652 605 Unrecognized net transition asset .............................................. (34) (51) -------- ------- Net pension liability recognized in balance sheet .............................. $ (1,713) $(1,298) ======== =======
Net pension cost of the defined benefit pension plan includes the following components for the years ended December 31: 1998 1997 1996 ---- ---- ---- Service cost ..............................$ 2,585 $ 2,112 $ 1,908 Interest cost ............................. 2,203 2,036 1,793 Expected return on plan assets ............ (1,950) (1,793) (1,593) Amortization of prior service cost ........ 112 100 100 Amortization of transition asset .......... (17) (17) (17) Recognized net actuarial loss ............. 305 152 210 ----- ----- ----- Net pension cost ..........................$ 3,238 $ 2,590 $ 2,401 Protective's share of the net pension cost was $2.6 million, $1.8 million, and $1.5 million, in 1998, 1997, and 1996, respectively. Assumptions used to determine the benefit obligations as of December 31 were as follows: 1998 1997 1996 ---- ---- ---- Weighted average discount rate ............... 6.75% 7.25% 7.75% Rates of increase in compensation level ...... 4.75% 5.25% 5.75% Expected long-term rate of return on assets .. 8.50% 8.50% 8.50% Assets of the pension plan are included in the general assets of Protective. Upon retirement, the amount of pension plan assets vested in the retiree is used to purchase a single premium annuity from Protective in the retiree's name. Therefore, amounts presented above as plan assets exclude assets relating to retirees. PLC also sponsors an unfunded excess benefits plan, which is a nonqualified plan that provides defined pension benefits in excess of limits imposed by federal income tax law. At December 31, 1998 and 1997, the projected benefit obligation of this plan totaled $11.7 million and $10.0 million, respectively, of which $7.8 million and $6.6 million, respectively, have been recognized in PLC's financial statements. Net pension cost of the excess benefits plan includes the following components for the years ended December 31: 1998 1997 1996 ---- ---- ---- Service cost ............................... $ 611 $ 544 $ 424 Interest cost ............................... 722 651 505 Plan amendment ............................. 351 Amortization of prior service cost........... 112 112 112 Amortization of transition asset ............ 37 37 37 Recognized net actuarial loss................ 173 180 155 --- --- --- Net pension cost............................. $1,655 $1,875 $1,233 ====== ====== ====== In addition to pension benefits, PLC provides limited healthcare benefits to eligible retired employees until age 65. The postretirement benefit is provided by an unfunded plan. At December 31, 1998 and 1997, the liability for such benefits totaled $1.2 million and $1.3 million, respectively. The expense recorded by PLC was $0.1 million in 1998, 1997 and 1996. PLC's obligation is not materially affected by a 1% change in the healthcare cost trend assumptions used in the calculation of the obligation. Life insurance benefits for retirees are provided through the purchase of life insurance policies upon retirement equal to the employees' annual compensation up to a maximum of $75,000. This plan is partially funded at a maximum of $50,000 face amount of insurance. PLC sponsors a defined contribution plan which covers substantially all employees. Employee contributions are made on a before-tax basis as provided by Section 401(k) of the Internal Revenue Code. In 1990, PLC established an Employee Stock Ownership Plan ("ESOP") to match voluntary employee contributions to PLC's 401(k) Plan. In 1994, a stock bonus was added to the 401(k) Plan for employees who are not otherwise under a bonus plan. Expense related to the ESOP consists of the cost of the shares allocated to participating employees plus the interest expense on the ESOP's note payable to Protective less dividends on shares held by the ESOP. At December 31, 1998, PLC had committed up to 101,124 shares to be released to fund employee benefits. The expense recorded by PLC for these employee benefits was less than $0.1 million in 1998 and 1997, and $1.0 million in 1996. Note M -- STOCK BASED COMPENSATION Certain Protective employees participate in PLC's Long-Term Incentive Plan (previously known as the Performance Share Plan) and receive stock appreciation rights (SARs) from PLC. Since 1973 PLC has had a Performance Share Plan to motivate senior management to focus on PLC's long-range earnings performance. The criterion for payment of performance share awards is based upon a comparison of PLC's average return on average equity or total return over a four year award period (earlier upon the death, disability or retirement of the executive, or in certain circumstances, of a change in control of PLC) to that of a comparison group of publicly held life insurance companies, multiline insurers, and insurance holding companies. If PLC's results are below the median of the comparison group, no portion of the award is earned. If PLC's results are at or above the 90th percentile, the award maximum is earned. Under the plan approved by share-owners in 1992 and 1997, up to 6,400,000 shares may be issued in payment of awards. The number of shares granted in 1998, 1997, and 1996 were 71,340, 98,780 and 104,580 shares, respectively, having an approximate market value on the grant date of $2.3 million, $2.0 million, and $1.8 million, respectively. At December 31, 1998, outstanding awards measured at target and maximum payouts were 474,695 and 638,090 shares, respectively. The expense recorded by PLC for the Performance Share Plan was $2.7 million, $2.7 million, and $3.0 million in 1998, 1997, and 1996, respectively. During 1996, stock appreciation rights (SARs) were granted to certain executives of PLC to provide long-term incentive compensation based on the performance of PLC's Common Stock. Under this arrangement PLC will pay (in shares of PLC Common Stock) an amount equal to the difference between the specified base price of PLC's Common Stock and the market value at the exercise date. The SARs are exercisable after five years (earlier upon the death, disability or retirement of the executive, or in certain circumstances, of a change in control of PLC) and expire in 2006 or upon termination of employment. The number of SARs granted during 1996 and outstanding at December 31, 1998 was 675,000. The SARs have a base price of $17.4375 per share of PLC Common Stock (the market price on the grant date was $17.50 per share). The estimated fair value of the SARs on the grant date was $3.0 million. This estimate was derived using the Roll-Geske variation of the Black-Sholes option pricing model. Assumptions used in the pricing model are as follows: expected volatility rate of 15% (approximately equal to that of the S & P Life Insurance Index), a risk free interest rate of 6.35%, a dividend yield rate of 1.97%, and an expected exercise date of August 15, 2002. The expense recorded by PLC for the SARs was $0.6 million in 1998 and 1997. Note N -- REINSURANCE Protective assumes risks from and reinsures certain parts of its risks with other insurers under yearly renewable term, coinsurance, and modified coinsurance agreements. Yearly renewable term and coinsurance agreements are accounted for by passing a portion of the risk to the reinsurer. Generally, the reinsurer receives a proportionate part of the premiums less commissions and is liable for a corresponding part of all benefit payments. Modified coinsurance is accounted for similarly to coinsurance except that the liability for future policy benefits is held by the original company, and settlements are made on a net basis between the companies. Protective has reinsured approximately $64.8 billion, $34.1 billion, and $18.8 billion in face amount of life insurance risks with other insurers representing $294.4 million, $147.2 million, and $113.5 million of premium income for 1998, 1997, and 1996, respectively. Protective has also reinsured accident and health risks representing $164.8 million, $187.7 million, and $194.7 million of premium income for 1998, 1997, and 1996, respectively. In 1998 and 1997, policy and claim reserves relating to insurance ceded of $658.7 million and $485.8 million respectively are included in reinsurance receivables. Should any of the reinsurers be unable to meet its obligation at the time of the claim, obligation to pay such claim would remain with Protective. At December 31, 1998 and 1997, Protective had paid $22.8 million and $25.6 million, respectively, of ceded benefits which are recoverable from reinsurers. In addition, at December 31, 1998, Protective had receivables of $75.0 million related to insurance assumed. A substantial portion of Protective's new life insurance and credit insurance sales are being reinsured. Note O -- ESTIMATED MARKET VALUES OF FINANCIAL INSTRUMENTS The carrying amount and estimated market values of Protective's financial instruments at December 31 are as follows:
1998 1997 ___________________________________ _______________________ Estimated Estimated Carrying Market Carrying Market Amount Values Amount Values Assets (see Notes A and C): Investments: Fixed maturities..................... $6,400,262 $6,400,262 $6,348,252 $6,348,252 Equity securities.................... 12,258 12,258 15,006 15,006 Mortgage loans on real estate........ 1,623,603 1,774,379 1,313,478 1,405,474 Short-term investments............... 159,655 159,655 54,337 54,337 Cash ..................................... 39,197 39,197 Liabilities (see Notes A and E): Guaranteed investment contract deposits 2,691,697 2,751,007 2,684,676 2,687,331 Annuity deposits..................... 1,519,820 1,513,148 1,511,553 1,494,600 Notes payable........................ 2,363 2,363 Other (see Note A): Derivative Financial Instruments..... (734) (545)
Except as noted below, fair values were estimated using quoted market prices. Protective estimates the fair value of its mortgage loans using discounted cash flows from the next call date. Protective believes the fair value of its short-term investments and notes payable approximate book value due to either being short-term or having a variable rate of interest. Protective estimates the fair value of its guaranteed investment contracts and annuities using discounted cash flows and surrender values, respectively. Protective believes it is not practicable to determine the fair value of its policy loans since there is no stated maturity, and policy loans are often repaid by reductions to policy benefits.
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION PROTECTIVE LIFE INSURANCE COMPANY AND SUBSIDIARIES (in thousands) - ------------------------------------------------------------------------------------------------------------------- COL. A COL. B COL. C COL. D COL. E COL. F COL. G COL. H COL. I COL. J - ------------------------------------------------------------------------------------------------------------------- GIC and Future Annuity Amortization Deferred Policy Deposits Premiums Benefits of Deferred Policy Benefits and Other and Net and Policy Other Acquisition and Unearned Policyholders' Policy Investment Settlement Acquisition Operating Segment Costs Claims Premiums Funds Fees Income (1) Expenses Costs Expenses (1) - ------------------------------------------------------------------------------------------------------------------------------------ Year Ended December 31,1998: Life Insurance Individual Life $301,941 $1,054,253 $ 355 $ 10,802 $126,168 $ 55,779 $106,308 $ 30,543 $ 14,983 West Coast 144,455 1,006,280 0 77,254 22,380 63,492 54,617 4,924 5,354 Acquisitions 255,347 1,383,759 553 233,846 96,735 112,154 112,051 18,894 26,717 Specialty Insurance Products Dental and Consumer Benefits 23,836 111,916 3,341 78,224 191,563 15,245 140,632 10,352 49,913 Financial Institutions 39,212 215,451 385,006 105,434 112,272 25,068 52,629 28,526 48,837 Retirement Savings and Investment Products Guaranteed Investment Contracts 1,448 172,674 0 2,691,697 213,136 178,745 735 2,876 Investment Products 75,177 194,726 0 1,233,528 18,809 105,827 85,045 17,213 14,428 Corporate and Other 9 944 39 88 198 13,094 469 1 9,120 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL $841,425 $4,140,003 $389,294 $4,430,873 $568,125 $603,795 $730,496 $111,188 $172,228 ==================================================================================================================================== Year Ended December 31,1997: Life Insurance Individual Life $252,321 $ 920,924 $ 356 $ 16,334 $127,480 $ 54,593 $114,678 $ 27,354 $ 18,178 West Coast 108,126 739,463 0 95,495 14,122 30,194 28,304 961 6,849 Acquisitions 138,052 1,025,340 1,437 311,150 102,635 110,155 116,506 16,606 23,016 Specialty Insurance Products Dental and Consumer Benefits 22,459 120,925 2,536 80,654 151,110 23,810 110,148 15,711 38,572 Financial Institutions 52,836 159,422 391,085 6,791 72,263 16,341 27,643 30,812 20,165 Retirement Savings and Investment Products Guaranteed Investment Contracts 1,785 180,690 0 2,684,676 0 211,915 179,235 618 3,945 Investment Products 56,074 177,150 0 1,184,268 12,367 105,196 82,019 15,110 12,312 Corporate and Other 952 380 1,282 185 229 5,284 339 3 6,833 - ------------------------------------------------------------------------------------------------------------------------------- TOTAL $632,605 $3,324,294 $396,696 $4,379,553 $480,206 $557,488 $658,872 $107,175 $129,870 =============================================================================================================================== Year Ended December 31,1996: Life Insurance Individual Life $220,232 $ 793,370 $ 685 $ 15,577 $116,710 $ 48,442 $ 96,404 $ 28,393 $ 28,611 Acquisitions 156,172 1,117,159 1,087 251,450 106,543 106,015 118,181 17,162 24,292 Specialty Insurance Products Dental and Consumer Benefits 27,944 119,010 2,572 83,632 156,530 16,249 125,797 5,326 43,027 Financial Institutions 32,040 119,242 253,154 1,880 73,422 13,898 42,781 24,900 10,673 Retirement Savings and Investment Products Guaranteed Investment 1,164 149,755 0 2,474,728 0 214,369 169,927 509 3,840 Contracts Investment Products 50,637 149,743 0 1,120,557 8,189 98,719 73,093 14,710 13,197 Corporate and Other 12 170 55 192 656 1,089 710 1 4,508 - ------------------------------------------------------------------------------------------------------------------------------- TOTAL $488,201 $2,448,449 $257,553 $3,948,016 $462,050 $498,781 $626,893 $ 91,001 $ 128,148 =============================================================================================================================== (1) Allocations of Net Investment Income and Other Operating Expenses are based on a number of assumptions and estimates and results would change if different methods were applied.
SCHEDULE IV -- REINSURANCE PROTECTIVE LIFE INSURANCE COMPANY AND SUBSIDIARIES (Dollars in thousands) - ------------------------------------------------------------------------------------------------------------------------------------ COL. A COL. B COL. C COL. D COL. E COL. F - ------------------------------------------------------------------------------------------------------------------------------------ Percentage Ceded to Assumed of Amount Gross Other from Other Net Assumed Amount Companies Companies Amount to Net Year Ended December 31,1998: Life insurance in force........................... $ 91,980,657 $ 64,846,246 $ 18,010,434 $ 45,144,845 39.9% =================================================================================================================================== Premiums and policy fees: Life insurance.................................... $ 537,002 $ 294,363 $ 87,964 $ 330,603 26.6% Accident and health insurance..................... 361,705 164,852 14,279 211,132 6.8% Property and liability insurance.................. 26,389 26,289 0.0% - ---------------------------------------------------------------------------------------------------------------------- TOTAL......................................... $ 925,096 $ 459,215 $ 102,243 $ 568,124 ====================================================================================================================== Year Ended December 31,1997: Life insurance in force........................... $ 78,240,282 $ 34,139,554 $ 11,013,202 $ 55,113,930 20.0% =================================================================================================================================== Premiums and policy fees: Life insurance.................................... $ 387,108 $ 147,184 $ 74,738 $ 314,662 23.8% Accident and health insurance..................... 336,575 187,539 10,510 159,546 6.7% Property and liability insurance.................. 6,139 176 35 5,998 0.6% - ---------------------------------------------------------------------------------------------------------------------- TOTAL......................................... $ 729,822 $ 334,899 $ 85,283 $ 480,206 ====================================================================================================================== Year Ended December 31,1996: Life insurance in force........................... $ 53,052,020 $ 18,840,221 $ 16,275,386 $ 50,487,185 32.2% =================================================================================================================================== Premiums and policy fees: Life insurance.................................... $ 272,331 $ 113,487 $ 129,717 $ 288,561 45.0% Accident and health insurance..................... 338,709 194,687 29,467 173,489 17.0% - ---------------------------------------------------------------------------------------------------------------------- TOTAL......................................... $ 611,040 $ 308,174 $ 159,184 $ 462,050 ======================================================================================================================
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures None PART III Item 10. Directors and Executive Officers of the Registrant Not required in accordance with General Instruction I(2)(c). Item 11. Executive Compensation Not required in accordance with General Instruction I(2)(c). Item 12. Security Ownership of Certain Beneficial Owners and Management Not required in accordance with General Instruction I(2)(c). Item 13. Certain Relationships and Related Transactions Not required in accordance with General Instruction I(2)(c). PART IV Item14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) The following documents are filed as part of this report: 1. Financial Statements (Item 8) 2. Financial Statement Schedules (see index annexed) 3. Exhibits: The exhibits listed in the Exhibit Index on page 37 of this Form 10-K are filed herewith or are incorporated herein by reference. No management contract or compensatory plan or arrangement is required to be filed as an exhibit to this form. The Registrant will furnish a copy of any of the exhibits listed upon the payment of $5.00 per exhibit to cover the cost of the Registrant in furnishing the exhibit. (b) Reports on Form 8-K: None SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Birmingham, State of Alabama on March 25, 1999. PROTECTIVE LIFE INSURANCE COMPANY By:/s/ DRAYTON NABERS, JR. ------------------------ March 25, 1999 Chairman of the Board Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated: Signature Title Date --------- ----- ---- (i) Principal Executive Officer /s/ DRAYTON NABERS, JR. Chairman of the Board March 25, 1999 ----------------------- Drayton Nabers, Jr. (ii) Principal Financial Officer /s/ JOHN D. JOHNS President March 25, 1999 ---------------------- John D. Johns (iii) Principal Accounting Officer /s/ JERRY W. DEFOOR Vice President and Controller, March 25, 1999 ---------------------- Jerry W. DeFoor and Chief Accounting Officer (iv) Board of Directors: /s/ DRAYTON NABERS, JR. Director March 25, 1999 ----------------------- Drayton Nabers, Jr. /s/ JOHN D. JOHNS Director March 25, 1999 ------------------------ John D. Johns * Director March 25, 1999 ------------------------ Danny L. Bentley * Director March 25, 1999 ------------------------ Richard J. Bielen * Director March 25, 1999 ------------------------ R. Stephen Briggs * Director March 25, 1999 ------------------------ Carolyn King * Director March 25, 1999 ------------------------ Deborah J. Long * Director March 25, 1999 ------------------------ Jim E. Massengale Signature Title Date * Director March 25, 1999 ------------------------- Steven A. Schultz * Director March 25, 1999 -------------------------- Wayne E. Stuenkel * Director March 25, 1999 -------------------------- A. S. Williams III *By: /s/ JERRY W. DEFOOR ---------------------------- Jerry W. DeFoor Attorney-in-fact
EXHIBIT INDEX Item Number Document **** 2 -- Stock Purchase Agreement * 3(a) -- Articles of Incorporation * 3(b) -- By-laws ** 4(a) -- Group Modified Guaranteed Annuity Contract *** 4(b) -- Individual Certificate ** 4(h) -- Tax-Sheltered Annuity Endorsement ** 4(i) -- Qualified Retirement Plan Endorsement ** 4(j) -- Individual Retirement Annuity Endorsement ** 4(l) -- Section 457 Deferred Compensation Plan Endorsement * 4(m) -- Qualified Plan Endorsement ** 4(n) -- Application for Individual Certificate ** 4(o) -- Adoption Agreement for Participation in Group Modified Guaranteed Annuity *** 4(p) -- Individual Modified Guaranteed Annuity Contract ** 4(q) -- Application for Individual Modified Guaranteed Annuity Contract ** 4(r) -- Tax-Sheltered Annuity Endorsement ** 4(s) -- Individual Retirement Annuity Endorsement ** 4(t) -- Section 457 Deferred Compensation Plan Endorsement ** 4(v) -- Qualified Retirement Plan Endorsement **** 4(w) -- Endorsement -- Group Policy **** 4(x) -- Endorsement -- Certificate **** 4(y) -- Endorsement -- Individual Contract **** 4(z) -- Endorsement (Annuity Deposits) -- Group Policy **** 4(aa) -- Endorsement (Annuity Deposits) -- Certificate **** 4(bb) -- Endorsement (Annuity Deposits) -- Individual Contracts ***** 4(cc) -- Endorsement -- Individual ***** 4(dd) -- Endorsement -- Group Contract/Certificate ****** 4(ee) -- Endorsement (96) -- Individual ****** 4(ff) -- Endorsement (96) -- Group Contract ****** 4(gg) -- Endorsement (96) -- Group Certificate ****** 4(hh) -- Individual Modified Guaranteed Annuity Contract (96) ******* 4(ii) -- Settlement Endorsement * 10(a) -- Bond Purchase Agreement * 10(b) -- Escrow Agreement 24 -- Power of Attorney 27 -- Financial Data Schedule 99 -- Safe Harbor for Forward-Looking Statements * Previously filed or incorporated by reference in Form S-1 Registration Statement, Registration No. 33-31940. ** Previously filed or incorporated by reference in Amendment No. 1 to Form S-1 Registration Statement, Registration No. 33-31940. *** Previously filed or incorporated by reference from Amendment No. 2 to Form S-1 Registration Statement, Registration No. 33-31940. **** Previously filed or incorporated by reference from Amendment No. 2 to Form S-1 Registration Statement, Registration No. 33-57052. ***** Previously filed or incorporated by reference from Amendment No. 3 to Form S-1 Registration Statement, Registration No. 33-57052. ****** Previously filed or incorporated by reference from S-1 Registration Statement, Registration No. 333-02249. ******* Previously filed or incorporated by reference from Amendment No. 1 to Form S-1 Registration Statement, Registration No. 333-02249.
EX-24 2 EXHIBIT 24 DIRECTORS' POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, That each of the undersigned Directors of Protective Life Insurance Company, a Tennessee corporation, ("Company") by his execution hereof or upon an identical counterpart hereof, does hereby constitute and appoint John D. Johns, Deborah J. Long, Nancy Kane, or Jerry W. DeFoor, and each or any of them, his true and lawful attorneys-in-fact and agents, for him and in his name, place and stead, to execute and sign the 1998 Annual Report on Form 10-K to be filed by the Company with the Securities and Exchange Commission, pursuant to the provisions of the Securities Exchange Act of 1934 and, further, to execute and sign any and all amendments to such Annual Report, and to file same, with all exhibits and schedules thereto and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all the acts of said attorneys-in-fact and agents or any of them which they may lawfully do in the premises or cause to be done by virtue hereof. IN WITNESS WHEREOF, each of the undersigned has hereunto set his hand and seal this 1st day of March, 1999. WITNESS TO ALL SIGNATURES: /S/ JERRY W. DEFOOR /S/ DRAYTON NABERS, JR. Jerry W. DeFoor Drayton Nabers, Jr. /S/ JOHN D. JOHNS John D. Johns /S/ R. STEPHEN BRIGGS R. Stephen Briggs /S/ JIM E. MASSENGALE Jim E. Massengale /S/ A. S. WILLIAMS III A. S. Williams III /S/ CAROLYN KING Carolyn King /S/ DEBORAH J. LONG Deborah J. Long /S/ STEVEN A. SCHULTZ Steven A. Schultz /S/ WAYNE E. STUENKEL Wayne E. Stuenkel /S/ DANNY L. BENTLEY Danny L. Bentley /S/ RICHARD J. BIELEN Richard J. Bielen EX-27 3
7 This schedule contains summary financial information extracted from the consolidated financial statements of Protective Life Insurance Company and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 6,400,262 0 0 12,258 1,623,603 14,868 8,513,394 0 756,370 841,425 11,622,895 4,140,003 389,294 0 219,356 2,363 0 2 5,000 1,064,369 11,622,895 568,125 603,795 2,136 20,201 730,496 111,188 172,228 180,345 63,162 117,183 0 0 0 117,183 0 0 0 0 0 0 0 0 0 Protective Life Insurance Company is a wholly-owned subsidiary of Protective Life Corporation (NYSE: PL) and is not required to present EPS information.
EX-99 4 Exhibit 99 to Form 10-K of Protective Life Insurance Company for fiscal year Ended December 31, 1998 Safe Harbor for Forward-Looking Statements The Private Securities Litigation Reform Act of 1995 (the "Act") encourages companies to make "forward-looking statements" by creating a safe harbor to protect the companies from securities law liability in connection with forward-looking statements. Forward-looking statements can be identified by use of words such as "expect," "estimate," "project," "budget," "forecast," "anticipated," "plan," and similar expressions. Protective Life Insurance Company ("Protective") intends to qualify both its written and oral forward-looking statements for protection under the Act. To qualify oral forward-looking statements for protection under the Act, a readily available written document must identify important factors that could cause actual results to differ materially from those in the forward-looking statements. Protective provides the following information to qualify forward-looking statements for the safe harbor protection of the Act. The operating results of companies in the insurance industry have historically been subject to significant fluctuations due to competition, economic conditions, interest rates, investment performance, maintenance of insurance ratings, and other factors. Certain known trends and uncertainties which may affect future results of Protective are discussed more fully below. MATURE INDUSTRY; COMPETITION. Life and health insurance is a mature industry. In recent years, the industry has experienced virtually no growth in life insurance sales, though the aging population has increased the demand for retirement savings products. Insurance is a highly competitive industry and Protective encounters significant competition in all lines of business from other insurance companies, many of which have greater financial resources than Protective, as well as competition from other providers of financial services. The life and health insurance industry is consolidating, with larger, more efficient organizations emerging from consolidation. Also, mutual insurance companies are converting to stock ownership which will give them greater access to capital markets. Management believes that Protective's ability to compete is dependent upon, among other things, its ability to attract and retain distribution channels to market its insurance and investment products, its ability to develop competitive and profitable products, its ability to maintain low unit costs, and its maintenance of strong financial strength ratings from rating agencies. Protective competes against other insurance companies and financial institutions in the origination of commercial mortgage loans. RATINGS. Ratings are an important factor in the competitive position of life insurance companies. Rating organizations periodically review the financial performance and condition of insurers, including Protective's insurance subsidiaries. A downgrade in the ratings of Protective's life insurance subsidiaries could adversely affect its ability to sell its products and its ability to compete for attractive acquisition opportunities. Rating organizations assign ratings based upon several factors. While most of the considered factors relate to the rated company, some of the factors relate to general economic conditions and circumstances outside the rated company's control. For the past several years rating downgrades in the industry have exceeded upgrades. POLICY CLAIMS FLUCTUATIONS. Protective's results may fluctuate from year to year on account of fluctuations in policy claims received by Protective. LIQUIDITY AND INVESTMENT PORTFOLIO. Many of the products offered by Protective's insurance subsidiaries allow policyholders and contractholders to withdraw their funds under defined circumstances. Protective's insurance subsidiaries design products and configure investment portfolios to provide and maintain sufficient liquidity to support anticipated withdrawal demands and contract benefits and maturities. Formal asset/liability management programs and procedures are used to monitor the relative duration of Protective's assets and liabilities. While Protective's insurance subsidiaries own a significant amount of liquid assets, many of their assets are relatively illiquid. Significant unanticipated withdrawal or surrender activity could, under some circumstances, compel Protective's insurance subsidiaries to dispose of illiquid assets on unfavorable terms, which could have a material adverse effect on Protective. INTEREST RATE FLUCTUATIONS. Sudden changes in interest rates expose insurance companies to the risk of not earning anticipated spreads between the interest rate earned on investments and the credited rates paid on outstanding policies. Both rising and declining interest rates can negatively affect Protective's spread income. For example, certain of Protective's insurance and investment products guarantee a minimum credited interest rate. While Protective develops and maintains asset/liability management programs and procedures designed to preserve spread income in rising or falling interest rate environments, no assurance can be given that significant changes in interest rates will not materially affect such spreads. Lower interest rates may result in lower sales of Protective's insurance and investment products. REGULATION AND TAXATION. Protective's insurance subsidiaries are subject to government regulation in each of the states in which they conduct business. Such regulation is vested in state agencies having broad administrative power dealing with many aspects of the insurance business, which may include premium rates, marketing practices, advertising, policy forms, and capital adequacy, and is concerned primarily with the protection of policyholders rather than share owners. Protective cannot predict the form of any future regulatory initiatives. Under the Internal Revenue Code of 1986, as amended (the Code), income tax payable by policyholders on investment earnings is deferred during the accumulation period of certain life insurance and annuity products. This favorable tax treatment may give certain of Protective's products a competitive advantage over other non-insurance products. To the extent that the Code is revised to reduce the tax-deferred status of life insurance and annuity products, or to increase the tax-deferred status of competing products, all life insurance companies, including Protectives subsidiaries, would be adversely affected with respect to their ability to sell such products, and, depending on grandfathering provisions, the surrenders of existing annuity contracts and life insurance policies. Protective cannot predict what future initiatives may be proposed which may affect Protective. LITIGATION. A number of civil jury verdicts have been returned against insurers in the jurisdictions in which Protective does business involving the insurers' sales practices, alleged agent misconduct, failure to properly supervise agents, and other matters. Increasingly these lawsuits have resulted in the award of substantial judgments against the insurer that are disproportionate to the actual damages, including material amounts of punitive damages. In some states (including Alabama), juries have substantial discretion in awarding punitive damages which creates the potential for unpredictable material adverse judgments in any given punitive damages suit. Protective and its subsidiaries, like other insurers, in the ordinary course of business, are involved in such litigation or alternatively in arbitration. The outcome of any such litigation or arbitration cannot be predicted with certainty. In addition, in some class action and other lawsuits involving insurers' sales practices, insurers have made material settlement payments. INVESTMENT RISKS. Protective's invested assets are subject to customary risks of defaults and changes in market values. The value of Protective's commercial mortgage portfolio depends in part on the financial condition of the tenants occupying the properties which Protective has financed. Factors that may affect the overall default rate on, and market value of, Protective's invested assets include interest rate levels, financial market performance, and general economic conditions, as well as particular circumstances affecting the businesses of individual borrowers and tenants. CONTINUING SUCCESS OF ACQUISITION STRATEGY. Protective has actively pursued a strategy of acquiring blocks of insurance policies. This acquisition strategy has increased Protective's earnings in part by allowing Protective to position itself to realize certain operating efficiencies associated with economies of scale. There can be no assurance, however, that suitable acquisitions, presenting opportunities for continued growth and operating efficiencies, will continue to be available to Protective, or that Protective will realize the anticipated financial results from its acquisitions. RELIANCE UPON THE PERFORMANCE OF OTHERS. Protective's results may be affected by the performance of others because Protective has entered into various ventures involving other parties. Examples include, but are not limited to: many of Protective's products are sold through independent distribution channels; the Investment Products Division's variable annuity deposits are invested in funds managed by unaffiliated investment managers; and a portion of the sales in the Individual Life, Dental, and Financial Institutions Divisions comes from arrangements with unrelated marketing organizations. YEAR 2000. Computer hardware and software often denote the year using two digits rather than four; for example, the year 1998 often is denoted by such hardware and software as "98." It is probable that such hardware and software will malfunction when calculations involving the year 2000 are attempted because the hardware and/or software will interpret "00" as representing the year 1900 rather that the year 2000. This "Year 2000" issue potentially affects all individuals and companies (including Protective, its customers, business partners, suppliers, banks, custodians and administrators). The problem is most prevalent in older mainframe systems, but personal computers and equipment containing computer chips could also be affected. Protective Life shares computer hardware and software with its parent, Protective Life Corporation ("PLC"), and other affiliates of PLC. Due to the fact that PLC does not control all of the factors that could impact its Year 2000 readiness, there can be no assurances that PLC's Year 2000 efforts will be successful, that interactions with other service providers with Year 2000 issues will not impair PLC's operations, or that the Year 2000 issue will not otherwise adversely affect PLC. Should some of PLC's systems not be available due to Year 2000 problems, in a reasonably likely worst case scenario, PLC may experience significant delays in its ability to perform certain functions, but does not expect an inability to perform critical functions or to otherwise conduct business. However, other worst case scenarios, depending upon their duration, could have a material adverse effect on PLC and Protective and their operations. REINSURANCE. Protective's insurance subsidiaries cede insurance to other insurance companies. However, Protective remains liable with respect to ceded insurance should any reinsurer fail to meet the obligations assumed by it. The cost of reinsurance is, in some cases, reflected in the premium rates charged by Protective. Under certain reinsurance agreements, the reinsurer may increase the rate it charges Protective for the reinsurance, though Protective does not anticipate increases to occur. Therefore, if the cost of reinsurance were to increase with respect to policies where the rates have been guaranteed by Protective, Protective could be adversely affected. Additionally, Protective assumes policies of other insurers. Any regulatory or other adverse development affecting the ceding insurer could also have an adverse effect on Protective. Forward-looking statements express expectations of future events and/or results. All forward-looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected. Due to these inherent uncertainties, investors are urged not to place undue reliance on forward-looking statements. In addition, Protective undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events, or changes to projections over time. -----END PRIVACY-ENHANCED MESSAGE-----