-----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, MLxz3O+RFiNOx0Kv+s8AEUPKAVS08It5erozGlB2VSPBeIp2rK1i62cb3oBUx3Gy 0z+hU1zHBuUu2iQa7wsPtQ== 0000912057-96-005143.txt : 19960327 0000912057-96-005143.hdr.sgml : 19960327 ACCESSION NUMBER: 0000912057-96-005143 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960326 SROS: NONE 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 033-31940 FILM NUMBER: 96538407 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-K405 1 10-K405 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-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, 1995 33-31940 33-39345 33-57052
------------------------ 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 Identification No.) organization) 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 8, 1996: 5,000,000 THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION J(1)(A) AND (B) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION J(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 and the principal operating subsidiary of Protective Life Corporation ("PLC"), an insurance holding company whose common stock is traded on the New York Stock Exchange. Protective provides financial services through the production, distribution, and administration of insurance and investment products. Protective has six operating divisions: Acquisitions, Financial Institutions, Group, Guaranteed Investment Contracts, Individual Life, and Investment Products. Protective also has an additional business segment which is described herein as Corporate and Other. Unless the context otherwise requires "Protective" refers to the consolidated group of Protective Life Insurance Company and its subsidiaries. Protective markets individual life insurance; group life, health, dental, and cancer insurance; annuities and investment products; credit life and disability insurance; and guaranteed investment contracts. Its products are distributed nationally through independent agents and brokers; through broker-dealers and financial institutions to their customers; through full-time sales representatives; and through other insurance companies. Protective also seeks to acquire blocks of insurance policies from other insurers. Over the last twenty-five years PLC has made several acquisitions of smaller insurance companies or blocks of policies. Many of these transactions involved Protective. Additionally, PLC has from time to time merged other life insurance companies it has acquired into Protective. In the second quarter of 1994, Protective coinsured a small block of payroll deduction policies. In the fourth quarter of 1994, Protective acquired through coinsurance a block of 130,000 policies. In the second quarter of 1995, Protective coinsured a block of 28,000 policies. In March 1996, Protective coinsured a block of 38,000 policies. ITEM 2. PROPERTIES Protective's administrative office building is located at 2801 Highway 280 South, Birmingham, Alabama. This building 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 4 cities, substantially all under leases for periods of three to five years. The aggregate monthly rent is approximately $61 thousand. Marketing offices are leased in 10 cities, substantially all under leases for periods of three to five years with only two leases running longer than five years. The aggregate monthly rent is approximately $23 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 J(2)(c). PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Protective is a wholly-owned subsidiary of PLC which also owns all of the redeemable preferred stock issued by Protective's subsidiary, American Foundation Life Insurance Company ("American Foundation"). Therefore, neither Protective's Common Stock nor American Foundation's Preferred Stock is publicly traded. At December 31, 1995, $329 million of consolidated stockholder's equity excluding net unrealized gains and losses represented net assets of Protective that cannot be transferred to PLC in the form of dividends, 2 loans, or advances. Also, distributions, including cash dividends to PLC in excess of approximately $322 million, would be subject to Federal income tax at rates then effective. Protective does not anticipate involuntarily paying tax on such distributions. In addition, 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 1996 is estimated to be $129 million. The American Foundation Preferred Stock pays, when and if declared, annual minimum cumulative dividends of $0.1 million and noncumulative participating dividends to the extent American Foundation's statutory earnings for the immediately preceding fiscal year exceed $1 million. In 1995, Protective paid common dividends of $5.0 million to PLC. American Foundation paid preferred dividends of $0.1 million and $0.9 million in 1995 and 1994, respectively. Protective and American Foundation 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 J(2)(a). ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS In accordance with General Instruction J(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 DECEMBER 31 PERCENTAGE ---------------------- INCREASE 1995 1994 (DECREASE) ---------- ---------- ------------- (IN THOUSANDS) Premiums and Policy Fees........................... $ 369,888 $ 402,772 (8.2%) Net Investment Income.............................. 458,433 408,933 12.1% Realized Investment Gains (Losses)................. 1,951 6,298 (69.0%) Other Income....................................... 3,543 11,977 (70.4%) ---------- ---------- $ 833,815 $ 829,980 ---------- ---------- ---------- ----------
Premiums and policy fees decreased $32.9 million or 8.2% in 1995 over 1994. Premiums and policy fees from the Financial Institutions Division decreased $74.2 million. This resulted from a reinsurance arrangement begun in the 1995 first quarter whereby all of the Division's new credit insurance sales are being ceded to a reinsurer. Increases in premiums and policy fees from the Group and Individual Life Divisions represent increases of $11.4 million and $14.1 million, respectively. Policy fees related to Protective's annuity products increased $2.9 million in 1995. The 1994 coinsurance of two blocks of policies resulted in a $11.1 million increase in premiums and policy fees in 1995. On June 15, 1995, Protective coinsured a block of policies which resulted in a $8.3 million increase in premiums and policy fees. Decreases in premiums and policy fees in older acquired blocks resulted in a $7.2 million decrease. Net investment income for 1995 was $49.5 million or 12.1% higher than for the preceding year primarily due to increases in the average amount of invested assets. Invested assets have increased primarily due to receiving annuity and guaranteed investment contract (GIC) deposits and to acquisitions. (Annuity and GIC deposits are not considered revenues in accordance with generally accepted accounting principles.) The coinsurance of two blocks of policies in 1994 and one block of policies in the second quarter of 1995 resulted in an increase in net investment income of $8.9 million in 1995. The percentage earned on average cash and investments was 7.9% in 1995 and 8.2% in 1994. 3 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 investments 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. In 1995, realized investment gains on the sale of fixed maturity and equity securities of $6.2 million were partially offset by realized investment losses of $4.2 million incurred from sales of mortgage loans and other investments that occurred to maintain proper matching of assets and liabilities. Protective has established an allowance for uncollectible amounts on investments. The allowance totaled $32.7 million at December 31, 1995 and $35.2 million at December 31, 1994. Additions to the allowance are treated as realized investment losses. Other income consists primarily of fees from administrative-services-only types of group accident and health insurance contracts, and from rental of space in its administrative building to PLC. During 1994, Protective recognized approximately $8.2 million in settlement of litigation in which Protective was a plaintiff relating to an acquisition made in 1974. Other income from all other sources decreased $0.2 million in 1995 as compared to 1994. INCOME BEFORE INCOME TAX The following table sets forth income or loss before income tax by business segment for the periods shown:
INCOME (LOSS) BEFORE INCOME TAX ----------------------- YEAR ENDED DECEMBER 31 ----------------------- 1995 1994 ---------- -------- (IN THOUSANDS) BUSINESS SEGMENT Acquisitions......................................... $ 52,136 $ 39,176 Financial Institutions............................... 8,212 8,176 Group................................................ 10,502 11,169 Guaranteed Investment Contracts...................... 30,555 33,197 Individual Life...................................... 17,713 17,223 Investment Products.................................. 11,951 107 Corporate and Other.................................. (14,257) (8,736) Unallocated Realized Investment Gains (Losses)....... 921 5,266 ---------- -------- $ 117,733 $105,578 ---------- -------- ---------- --------
Pretax earnings from the Acquisitions Division increased $13.0 million in 1995 as compared to 1994. Earnings from the Acquisitions Division are normally expected to decline over time (due to the lapsing of policies resulting from deaths of insureds or terminations of coverage) unless new acquisitions are made. The two blocks of policies coinsured during 1994 and the block of policies coinsured during the second quarter of 1995 represent $11.7 million of the increase. The Financial Institutions Division's 1995 pretax earnings were relatively unchanged as compared to 1994. The Division has entered into a reinsurance arrangement whereby all of the Division's new credit insurance sales are being ceded to a reinsurer. In the 1995 second quarter the Division also ceded a block of older policies. These reinsurance transactions are expected to improve the Division's return on investment. Group 1995 pretax earnings were $0.7 million lower than 1994. Although total dental earnings were up $2.6 million, lower traditional group life and health earnings offset the increase. The Guaranteed Investment Contracts ("GIC") Division had pretax operating earnings of $34.5 million in 1995 and $30.2 million in 1994. Operating earnings in 1995 were benefited by lower expenses and a favorable interest rate environment. This increase was also partially due to the growth in GIC deposits placed with Protective. At December 31, 1995, GIC deposits totaled $2.5 billion compared to $2.3 billion one year earlier. Realized investment gains associated with this Division in 1994 were $3.0 million as compared to 4 realized investment losses of $3.9 million in 1995. As a result, total pretax earnings were $33.2 million in 1994 and $30.6 million in 1995. The rate of growth in GIC deposits has decreased as the amount of maturing contracts has increased. The Individual Life Division had 1995 pretax earnings of $17.7 million, $0.5 million higher than 1994. Favorable mortality experience and a growing amount of business in force contributed to the increase, although lower investment income allocated to the Division and expenses relating to the development of a new variable universal life product largely offset the increase. The Investment Products Division's 1995 pretax earnings of $12.0 million were $11.8 million higher than 1994. During 1994 the Division completed the amortization of the deferred policy acquisition costs related to its book value annuities. Accordingly, 1995 operating earnings were $7.2 million higher due to lower amortization. The Division also benefited from a favorable interest rate environment. Realized investment losses, net of related amortization of deferred policy acquisition costs were $0.8 million in 1994, as compared with realized investment gains, net of amortization, of $3.4 million in 1995. Fixed annuity deposits totaled $996 million and variable annuity deposits totaled $392 million at December 31, 1995. Variable annuity deposits of $322 million are reported in the accompanying financial statements as "liabilities related to separate accounts." 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 losses for this segment were $5.5 million higher in 1995 as compared to 1994. The segment's 1994 results include approximately $8.2 million received in settlement of litigation relating to an acquisition made in 1974. All other expenses decreased approximately $2.7 million in 1995 as compared to 1994. INCOME TAX EXPENSE The following table sets forth the effective income tax rates for the periods shown:
YEAR ENDED EFFECTIVE INCOME TAX DECEMBER 31 RATES - ------------- --------------------- 1995..................................... 34.0% 1994..................................... 31.1
For the year ended December 31, 1995, the effective income tax rate was 34.0%. Management's estimate of the effective income tax rate for 1996 is 34.0%. NET INCOME The following table sets forth net income for the periods shown:
NET INCOME ------------------------------- YEAR ENDED PERCENTAGE DECEMBER 31 AMOUNT INCREASE - ------------- --------------- ------------- (IN THOUSANDS) 1995.................................... $ 77,696 6.8% 1994.................................... 72,723 29.5
Compared to 1994, net income in 1995 increased 6.8%, reflecting improved earnings in the Acquisitions, Financial Institutions, Individual Life, and Investment Products Divisions, and higher investment income partially offset by lower earnings in the Group and GIC Divisions and the Corporate and Other segment as well as lower realized investment gains. RECENTLY ISSUED ACCOUNTING STANDARDS For additional information regarding recently issued accounting standards see Note A to the consolidated financial statements included herein. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 5 INDEX TO FINANCIAL STATEMENTS Report of Independent Accountants...................................................... 7 Consolidated Statements of Income for the years ended December 31, 1995, 1994, and 1993.................................................................................. 8 Consolidated Balance Sheets as of December 31, 1995 and 1994........................... 9 Consolidated Statements of Stockholder's Equity for the years ended December 31, 1995, 1994, and 1993..................................................... 10 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994, and 1993.................................................................................. 11 Notes to Consolidated Financial Statements............................................. 12 Financial Statement Schedules: Schedule III -- Supplementary Insurance Information.................................. 29 Schedule IV -- Reinsurance........................................................... 30
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. 6 REPORT OF INDEPENDENT ACCOUNTANTS To the Directors and Stockholder Protective Life Insurance Company Birmingham, Alabama We have audited the consolidated financial statements and the financial statement schedules of Protective Life Insurance Company and Subsidiaries listed in the index on page 6 of this Form 10-K. 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 in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Protective Life Insurance Company and Subsidiaries as of December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. As discussed in Note A to the Consolidated Financial Statements, the Company changed its method of accounting for certain investments in debt and equity securities in 1993. /s/ COOPERS & LYBRAND L.L.P. February 12, 1996 Birmingham, Alabama 7 PROTECTIVE LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31 ---------------------------------- 1995 1994 1993 ---------- ---------- ---------- REVENUES Premiums and policy fees (net of reinsurance ceded: 1995 - $333,173; 1994 - $172,575; 1993 - $126,912)................................................ $ 369,888 $ 402,772 $ 351,423 Net investment income...................................................... 458,433 408,933 354,165 Realized investment gains (losses)......................................... 1,951 6,298 5,054 Other income............................................................... 3,543 11,977 4,756 ---------- ---------- ---------- 833,815 829,980 715,398 ---------- ---------- ---------- BENEFITS AND EXPENSES Benefits and settlement expenses (net of reinsurance ceded: 1995 - $247,224; 1994 - $112,922; 1993 - $84,949)................................ 509,506 517,110 461,636 Amortization of deferred policy acquisition costs.......................... 84,500 88,089 73,335 Other operating expenses (net of reinsurance ceded: 1995 - $84,855; 1994 - $14,326; 1993 - $10,759).................................................. 122,076 119,203 94,315 ---------- ---------- ---------- 716,082 724,402 629,286 ---------- ---------- ---------- INCOME BEFORE INCOME TAX..................................................... 117,733 105,578 86,112 INCOME TAX EXPENSE Current.................................................................... 47,009 37,586 33,039 Deferred................................................................... (6,972) (4,731) (3,082) ---------- ---------- ---------- 40,037 32,855 29,957 ---------- ---------- ---------- NET INCOME................................................................... $ 77,696 $ 72,723 $ 56,155 ---------- ---------- ---------- ---------- ---------- ----------
See notes to consolidated financial statements. 8 PROTECTIVE LIFE INSURANCE COMPANY CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
DECEMBER 31 ------------------------ 1995 1994 ---------- ---------- ASSETS Investments: Fixed maturities, at market (amortized cost: 1995-$3,798,868; 1994-$3,698,370)............................................................. $3,891,932 $3,493,646 Equity securities, at market (cost: 1995-$35,498;1994-$45,958)................ 38,711 45,005 Mortgage loans on real estate................................................. 1,835,057 1,488,495 Investment real estate, net of accumulated depreciation (1995-$1,032; 1994-$695)................................................................... 20,788 20,170 Policy loans.................................................................. 143,372 147,608 Other long-term investments................................................... 43,875 50,751 Short-term investments........................................................ 46,891 54,683 ---------- ---------- Total investments........................................................... 6,020,626 5,300,358 Cash............................................................................ 6,198 Accrued investment income....................................................... 61,004 55,630 Accounts and premiums receivable, net of allowance for uncollectible amounts (1995-$2,342; 1994-$2,464)............................................. 35,492 28,928 Reinsurance receivables......................................................... 271,018 122,175 Deferred policy acquisition costs............................................... 410,183 434,200 Property and equipment, net..................................................... 34,211 33,185 Receivables from related parties................................................ 1,961 281 Other assets.................................................................... 13,096 11,802 Assets related to separate accounts............................................. 324,904 124,145 ---------- ---------- $7,178,693 $6,110,704 ---------- ---------- ---------- ---------- LIABILITIES Policy liabilities and accruals: Future policy benefits and claims............................................. $1,928,154 $1,694,295 Unearned premiums............................................................. 193,767 103,479 ---------- ---------- 2,121,921 1,797,774 Guaranteed investment contract deposits......................................... 2,451,693 2,281,673 Annuity deposits................................................................ 1,280,069 1,251,318 Other policyholders' funds...................................................... 134,380 144,461 Other liabilities............................................................... 109,538 94,181 Accrued income taxes............................................................ 838 (4,699) Deferred income taxes........................................................... 67,420 (14,667) Indebtedness to related parties................................................. 34,693 39,443 Liabilities related to separate accounts........................................ 324,904 124,145 ---------- ---------- Total liabilities......................................................... 6,525,456 5,713,629 ---------- ---------- COMMITMENTS AND CONTINGENT LIABILITIES -- NOTE G REDEEMABLE PREFERRED STOCK, $1.00 par value, at redemption value Shares authorized and issued: 2,000............................................ 2,000 2,000 ---------- ---------- STOCKHOLDER'S EQUITY Common Stock, $1.00 par value................................................... 5,000 5,000 Shares authorized and issued: 5,000,000 Additional paid-in capital...................................................... 144,494 126,494 Net unrealized gains on investments (Net of income tax: 1995-$31,157; 1994-$(57,902))................................................................ 57,863 (107,532) Retained earnings............................................................... 449,645 377,049 Note receivable from PLC Employee Stock Ownership Plan.......................... (5,765) (5,936) ---------- ---------- Total stockholder's equity................................................ 651,237 395,075 ---------- ---------- $7,178,693 $6,110,704 ---------- ---------- ---------- ----------
See notes to consolidated financial statements. 9 PROTECTIVE LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NET NOTE ADDITIONAL UNREALIZED RECEIVABLE TOTAL COMMON PAID-IN GAINS (LOSSES) RETAINED FROM PLC STOCKHOLDER'S STOCK CAPITAL ON INVESTMENTS EARNINGS ESOP EQUITY ------ ---------- --------------- -------- ---------- ------------- Balance, December 31, 1992................... $5,000 $ 85,494 $ 3,156 $247,986 $ (6,120) $ 335,516 Net income for 1993........................ 56,155 56,155 Preferred dividends ($750 per share)....... (1,500) (1,500) Transfer of Southeast Health Plan, Inc. common stock to PLC....................... 2,535 2,535 Increase in net unrealized gains on investments............................... 36,128 36,128 Capital contribution from PLC.............. 41,000 41,000 Decrease in note receivable from PLC ESOP...................................... 156 156 ------ ---------- --------------- -------- ---------- ------------- Balance, December 31, 1993................... 5,000 126,494 39,284 305,176 (5,964) 469,990 Net income for 1994........................ 72,723 72,723 Preferred dividends ($425 per share)....... (850) (850) Decrease in net unrealized gains on investments............................... (146,816) (146,816) Decrease in note receivable from PLC ESOP...................................... 28 28 ------ ---------- --------------- -------- ---------- ------------- Balance, December 31, 1994................... 5,000 126,494 (107,532) 377,049 (5,936) 395,075 Net income for 1995........................ 77,696 77,696 Common dividends ($1.00 per share)......... (5,000) (5,000) Preferred dividends ($50 per share)........ (100) (100) Increase in net unrealized gains on investments............................... 165,395 165,395 Capital contribution from PLC.............. 18,000 18,000 Decrease in note receivable form PLC ESOP...................................... 171 171 ------ ---------- --------------- -------- ---------- ------------- Balance, December 31, 1995................... $5,000 $ 144,494 $ 57,863 $449,645 $ (5,765) $ 651,237 ------ ---------- --------------- -------- ---------- ------------- ------ ---------- --------------- -------- ---------- -------------
See notes to consolidated financial statements. 10 PROTECTIVE LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31 ------------------------------------- 1995 1994 1993 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income.................................................................... $ 77,696 $ 72,723 $ 56,155 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of deferred policy acquisition costs........................... 84,501 88,089 73,335 Capitalization of deferred policy acquisition costs......................... (89,266) (127,566) (92,935) Depreciation expense........................................................ 4,317 4,280 2,660 Deferred income taxes....................................................... (6,971) (4,731) 16,987 Accrued income taxes........................................................ 5,537 (12,182) 5,040 Interest credited to universal life and investment products................. 286,710 260,081 220,772 Policy fees assessed on universal life and investment products.............. (100,840) (85,532) (67,314) Change in accrued investment income and other receivables................... (161,924) (32,242) (91,864) Change in policy liabilities and other policyholder funds of traditional life and health products................................................... 201,353 61,322 47,212 Change in other liabilities................................................. (3,270) 18,564 11,970 Other (net)................................................................. (6,634) (1,475) 10,517 ----------- ----------- ----------- Net cash provided by operating activities....................................... 291,209 241,331 192,535 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Maturities and principal reductions of investments: Investments available for sale.............................................. 2,014,060 386,498 Other....................................................................... 78,568 153,945 1,319,590 Sale of investments: Investment available for sale............................................... 1,523,454 630,095 Other....................................................................... 141,184 59,550 244,683 Cost of investments acquired: Investments available for sale.............................................. (3,626,877) (1,807,658) Other....................................................................... (540,648) (220,839) (2,320,628) Acquisitions and bulk reinsurance assumptions................................. 106,435 14,170 Principal payments on subordinated debenture of PLC........................... Purchase of property and equipment............................................ (5,629) (4,889) (3,451) Sale of property and equipment................................................ 286 470 1,817 ----------- ----------- ----------- Net cash used in investing activities........................................... (415,602) (696,393) (743,819) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from borrowing under line of credit arrangements and long-term debt......................................................................... 1,162,700 572,586 574,423 Proceeds from surplus note to PLC............................................. 35,000 Capital contribution from PLC................................................. 18,000 41,000 Principal payments on line of credit arrangements and long-term debt.......... (1,162,700) (572,704) (577,767) Principal payment on surplus note to PLC...................................... (4,750) (9,500) (22,500) Dividends to stockholder...................................................... (5,100) (850) (1,500) Investment product deposits and change in universal life deposits............. 908,063 1,417,980 1,198,263 Investment product withdrawals................................................ (785,622) (976,401) (683,251) ----------- ----------- ----------- Net cash provided by financing activities....................................... 130,591 431,111 563,668 ----------- ----------- ----------- INCREASE(DECREASE) IN CASH...................................................... 6,198 (23,951) 12,384 CASH AT BEGINNING OF YEAR....................................................... 0 23,951 11,567 ----------- ----------- ----------- CASH AT END OF YEAR............................................................. $ 6,198 $ 0 $ 23,951 ----------- ----------- ----------- ----------- ----------- ----------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year: Interest on debt............................................................ $ 6,029 $ 5,029 $ 3,803 Income taxes................................................................ $ 41,397 $ 49,765 $ 27,432 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Minority interest in consolidated subsidiary.................................. $ (1,311) Reduction of principal on note from ESOP...................................... $ 171 $ 28 $ 156 Acquisitions and bulk reinsurance assumptions Assets acquired............................................................. $ 613 $ 117,349 $ 423,140 Liabilities assumed......................................................... (21,800) (166,595) (429,580) ----------- ----------- ----------- Net......................................................................... $ (21,187) $ (49,246) $ (6,440) ----------- ----------- ----------- ----------- ----------- -----------
See notes to consolidated financial statements. 11 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 including Wisconsin National Life Insurance Company ("Wisconsin National") and American Foundation Life Insurance Company ("American Foundation"). Protective is a wholly-owned subsidiary of Protective Life Corporation ("PLC"), an insurance holding company. NATURE OF OPERATIONS Protective markets individual life insurance; group life, health, dental, and cancer insurance; annuities and investment products; credit life and disability insurance; and guaranteed investment contracts. Its products are distributed nationally through independent agents and brokers; through broker-dealers and financial institutions to their customers; through full-time sales representatives; and through other insurance companies. Protective also seeks to acquire blocks of insurance policies from other insurers. 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 Protective adopted Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities," at December 31, 1993, which requires Protective to carry its investment in fixed maturities and certain other securities at market value instead of amortized cost. In 1995 Protective adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosures." Under these new standards, a loan is considered impaired, based on current information and events, if it is probable that Protective will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. Since Protective'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, and therefore no allowance for losses is required under SFAS No. 114 at December 31, 1995. In 1995 PLC adopted SFAS No. 123, "Accounting for Stock-Based Compensation," which changes the way stock-based compensation expense is measured and requires additional disclosures relating to PLC's stock-based compensation plans. The adoption of this accounting standard did not have a material effect on PLC's or Protective's financial statements. 12 PROTECTIVE LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS) NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) In 1995 the Financial Accounting Standards Board issued: SFAS No. 120, "Accounting and Reporting by Mutual Life Insurance Enterprises and by Insurance Enterprises for Certain Long-Duration Participating Contracts;" SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of;" and SFAS No. 122, "Accounting for Mortgage Servicing Rights." Protective anticipates that the impact of adopting these three accounting standards will be immaterial to its financial condition. INVESTMENTS Protective has classified all of its investments in fixed maturities, equity securities, and short-term investments as "available for sale." Investments are reported on the following bases less allowances for uncollectible amounts on investments, if applicable: - Fixed maturities (bonds, bank loan participations, and redeemable preferred stocks) -- at current market value. - Equity securities (common and nonredeemable preferred stocks) -- at current market value. - Mortgage loans on real estate -- at unpaid balances, adjusted for loan origination costs, net of fees, and amortization of premium or discount. - 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. - Policy loans -- at unpaid balances. - Other long-term investments -- at a variety of methods similar to those listed above, as deemed appropriate for the specific investment. - 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 $5.2 million in bank deposits voluntarily restricted as to withdrawal. As prescribed by SFAS No. 115, 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 stockholder'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 stockholders' equity will fluctuate significantly as interest rates change. 13 PROTECTIVE LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS) NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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:
1995 1994 ------------ ------------ Total investments................................................. $ 5,915,357 $ 5,499,511 Deferred policy acquisition costs................................. 426,432 400,480 All other assets.................................................. 747,884 376,146 ------------ ------------ $ 7,089,673 $ 6,276,137 ------------ ------------ ------------ ------------ Deferred income taxes............................................. $ 36,263 $ 43,235 All other liabilities............................................. 6,458,036 5,728,296 ------------ ------------ 6,494,299 5,771,531 Redeemable preferred stock........................................ 2,000 2,000 Stockholder's equity.............................................. 593,374 502,606 ------------ ------------ $ 7,089,673 $ 6,276,137 ------------ ------------ ------------ ------------
Realized gains and losses on sales of investments are recognized in net income using the specific identification basis. DERIVATIVE FINANCIAL INSTRUMENTS Protective does not use derivative financial instruments for trading purposes. Combinations of 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, 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. Net realized losses of $15.2 million were deferred in 1995 and net realized gains of $7.9 million were deferred in 1994. At December 31, 1995 and 1994, open futures contracts with notional amounts of $25.0 million and $137.5 million, respectively, had net unrealized losses of $0.6 million and $0.4 million respectively. Protective uses interest rate swap contracts to convert certain investments from a variable to a fixed rate of interest. At December 31, 1995, related open interest rate swap contracts with a notional amount of $170.3 million were in a $1.3 million net unrealized gain position. At December 31, 1994, related open interest rate swap contracts with a notional amount of $230.0 million were in an $8.9 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 uses both accelerated and straight-line methods 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. 14 PROTECTIVE LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS) NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Property and equipment consisted of the following at December 31:
1995 1994 --------- --------- Home office building.................................................... $ 35,284 $ 35,321 Other, principally furniture and equipment.............................. 30,356 25,687 --------- --------- 65,640 61,008 Accumulated depreciation................................................ 31,429 27,823 --------- --------- $ 34,211 $ 33,185 --------- --------- --------- ---------
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, BENEFITS, CLAIMS, AND EXPENSES - 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 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. 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. 15 PROTECTIVE LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS) NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Activity in the liability for unpaid claims is summarized as follows:
1995 1994 1993 ---------- ---------- ---------- Balance beginning of year................................ $ 79,462 $ 77,191 $ 68,203 Less reinsurance....................................... 5,024 3,973 3,809 ---------- ---------- ---------- Net balance beginning of year............................ 74,438 73,218 64,394 ---------- ---------- ---------- Incurred related to: Current year............................................. 217,366 203,453 194,394 Prior year............................................... (8,337) (6,683) (5,123) ---------- ---------- ---------- Total incurred....................................... 209,029 196,770 189,271 ---------- ---------- ---------- Paid related to: Current year............................................. 164,321 148,548 141,361 Prior year............................................... 48,834 47,002 39,086 ---------- ---------- ---------- Total paid........................................... 213,155 195,550 180,447 ---------- ---------- ---------- Net balance end of year.................................. 70,312 74,438 73,218 Plus reinsurance....................................... 3,330 5,024 3,973 ---------- ---------- ---------- Balance end of year...................................... $ 73,642 $ 79,462 $ 77,191 ---------- ---------- ---------- ---------- ---------- ----------
- 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 3.0% to 9.4% in 1995. At December 31, 1995, Protective estimates the fair value of its guaranteed investment contracts to be $2,660.0 million using discounted cash flows. The surrender value of Protective's annuities which approximates fair value was $1,296.7 million. - 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 from surrender charges and investment, mortality, and expense margins. 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 initial assumptions. 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. 16 PROTECTIVE LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS) NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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, discounted at interest rates averaging 15%. For acquisitions occurring after 1988, Protective amortizes the present value of future profits over the premium payment period including accrued interest at 8%. The unamortized present value of future profits for such acquisitions was approximately $102.5 million and $84.4 million at December 31, 1995 and 1994, respectively. During 1995 $26.5 million of present value of future profits on acquisitions made during the year was capitalized, and $3.2 million was amortized. The unamortized present value of future profits for all acquisitions was $123.9 million at December 31, 1995 and $110.3 million at December 31, 1994. PARTICIPATING POLICIES Participating business comprises approximately 1% of the individual life insurance in force and 2% of the individual life insurance premium income. Policyholder dividends totaled $2.6 million in 1995, 1994, and 1993. 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 stockholder's equity. NOTE B -- RECONCILIATION WITH STATUTORY REPORTING PRACTICES Financial statements prepared in conformity with generally accepted accounting principals ("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 stockholder'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. 17 PROTECTIVE LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS) NOTE B -- RECONCILIATION WITH STATUTORY REPORTING PRACTICES (CONTINUED) The reconciliations of net income and stockholder's equity prepared in conformity with statutory reporting practices to that reported in the accompanying consolidated financial statements are as follows:
NET INCOME STOCKHOLDER'S EQUITY -------------------------------- -------------------------------- 1995 1994 1993 1995 1994 1993 ---------- --------- --------- ---------- --------- --------- In conformity with statutory reporting practices: Protective Life Insurance Company........... $ 105,744 $ 54,812 $ 41,471 $ 322,416 $ 304,858 $ 263,075 Wisconsin National Life Insurance Company... 10,954 10,132 9,591 62,529 57,268 50,885 American Foundation Life Insurance Company.................................... 3,330 3,072 1,415 18,781 20,327 18,290 Capital Investors Life Insurance Company.... 182 170 207 1,315 1,125 824 Empire General Life Assurance Corporation... 1,003 690 408 20,685 21,270 10,588 Protective Life Insurance Corporation of Alabama.................................... 546 69 16 2,675 2,133 2,064 Consolidation elimination................... (6,500) 30 (103,985) (100,123) (80,651) ---------- --------- --------- ---------- --------- --------- 115,259 68,945 53,138 324,416 306,858 265,075 Additions (deductions) by adjustment: Deferred policy acquisition costs, net of amortization............................... (765) 41,718 25,686 410,183 434,200 299,307 Policy liabilities and accruals............. (48,330) (34,632) (15,586) (186,512) (140,298) (69,844) Deferred income tax......................... 6,972 4,731 3,081 (67,420) 14,667 (69,118) Asset Valuation Reserve..................... 105,769 24,925 43,398 Interest Maintenance Reserve................ (1,235) (1,716) (1,432) 14,412 3,583 10,489 Nonadmitted items........................... 20,603 21,445 7,742 Timing and valuation differences on mortgage loans on real estate and fixed maturity investments................................ (619) (961) 1,645 25,060 6,877 7,350 Net unrealized gains and losses on investments................................ 57,863 (107,532) 39,284 Realized investment gains (losses).......... 6,781 (6,664) (7,860) Noninsurance affiliates..................... (22) (12) 9 31 Consolidation elimination................... 2,515 (4,415) (2,107) (46,222) (162,835) (65,620) Other adjustments, net...................... (2,860) 5,717 (398) (4,924) (4,815) 1,896 ---------- --------- --------- ---------- --------- --------- In conformity with generally accepted accounting principles........................ $ 77,696 $ 72,723 $ 56,155 $ 653,237 $ 397,075 $ 469,990 ---------- --------- --------- ---------- --------- --------- ---------- --------- --------- ---------- --------- ---------
18 PROTECTIVE LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS) NOTE C -- INVESTMENT OPERATIONS Major categories of net investment income for the years ended December 31 are summarized as follows:
1995 1994 1993 ---------- ---------- ---------- Fixed maturities......................................... $ 272,942 $ 237,264 $ 211,566 Equity securities........................................ 1,338 2,435 1,519 Mortgage loans on real estate............................ 162,135 141,751 130,262 Investment real estate................................... 1,855 1,950 2,119 Policy loans............................................. 8,958 8,397 7,558 Other, principally short-term investments................ 40,348 35,062 18,779 ---------- ---------- ---------- 487,576 426,859 371,803 Investment expenses...................................... 29,143 17,926 17,638 ---------- ---------- ---------- $ 458,433 $ 408,933 $ 354,165 ---------- ---------- ---------- ---------- ---------- ----------
Realized investment gains (losses) for the years ended December 31 are summarized as follows:
1995 1994 1993 ---------- ---------- ---------- Fixed maturities.......................................... $ 6,118 $ (8,646) $ 10,508 Equity securities......................................... 44 7,735 2,230 Mortgage loans and other investments...................... (4,211) 7,209 (7,684) ---------- ---------- ---------- $ 1,951 $ 6,298 $ 5,054 ---------- ---------- ---------- ---------- ---------- ----------
Protective has established an allowance for uncollectible amounts on investments. The allowance totaled $32.7 million at December 31, 1995 and $35.2 million at December 31, 1994. Additions to the allowance are included in realized investment gains (losses). Without such additions/reductions, Protective had realized investment losses of $0.5 million in 1995 and realized investment gains of $6.3 million and $13.8 million in 1994 and 1993, respectively. In 1995, gross gains on the sale of investments available for sale (fixed maturities, equity securities and short-term investments) were $18.0 million and gross losses were $11.8 million. In 1994, gross gains were $15.2 million and gross losses were $16.4 million. In 1993, gross gains on the sale of fixed maturities were $8.3 million and gross losses were $0.4 million. 19 PROTECTIVE LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS) 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 1995 COST GAINS LOSSES VALUES - ----------------------------------------- ------------ ----------- ----------- ------------ Fixed maturities: Bonds: Mortgage-backed securities........... $ 2,006,858 $ 46,934 $ 4,017 $ 2,049,775 United States Government and authorities......................... 105,388 2,290 101 107,577 States, municipalities, and political subdivisions........................ 10,888 702 0 11,590 Public utilities..................... 322,110 5,904 770 327,244 Convertibles and bonds with warrants............................ 638 0 145 493 All other corporate bonds............ 1,126,318 50,103 7,573 1,168,848 Bank loan participations............... 220,811 0 0 220,811 Redeemable preferred stocks............ 5,857 61 324 5,594 ------------ ----------- ----------- ------------ 3,798,868 105,994 12,930 3,891,932 Equity securities........................ 35,448 6,438 3,175 38,711 Short-term investments................... 46,891 0 0 46,891 ------------ ----------- ----------- ------------ $ 3,881,207 $ 112,432 $ 16,105 $ 3,977,534 ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET 1994 COST GAINS LOSSES VALUES - ----------------------------------------- ------------ ---------- ---------- ------------ Fixed maturities: Bonds: Mortgage-backed securities........... $ 2,002,842 $ 7,538 $ 112,059 $ 1,898,321 United States Government and authorities......................... 90,468 290 8,877 81,881 States, municipalities, and political subdivisions........................ 10,902 5 1,230 9,677 Public utilities..................... 414,011 1,091 36,982 378,120 Convertibles and bonds with warrants............................ 687 0 302 385 All other corporate bonds............ 927,779 3,437 56,788 874,428 Bank loan participations............... 244,881 0 0 244,881 Redeemable preferred stocks............ 6,800 37 884 5,953 ------------ ---------- ---------- ------------ 3,698,370 12,398 217,122 3,493,646 Equity securities........................ 45,958 3,994 4,947 45,005 Short-term investments................... 54,683 0 0 54,683 ------------ ---------- ---------- ------------ $ 3,799,011 $ 16,392 $ 222,069 $ 3,593,334 ------------ ---------- ---------- ------------ ------------ ---------- ---------- ------------
20 PROTECTIVE LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS) 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 ------------ ------------ 1995 - ----------------------------------------------------------------------- Due in one year or less.............................................. $ 410,489 $ 411,839 Due after one year through five years................................ 1,090,323 1,101,226 Due after five years through ten years............................... 1,481,248 1,524,555 Due after ten years.................................................. 816,808 854,312 ------------ ------------ $ 3,798,868 $ 3,891,932 ------------ ------------ ------------ ------------ 1994 - ----------------------------------------------------------------------- Due in one year or less.............................................. $ 577,146 $ 540,223 Due after one year through five years................................ 1,351,435 1,299,248 Due after five years through ten years............................... 994,994 929,764 Due after ten years.................................................. 774,795 724,411 ------------ ------------ $ 3,698,370 $ 3,493,646 ------------ ------------ ------------ ------------
The approximate percentage distribution of Protective's fixed maturity investments by quality rating at December 31 is as follows:
RATING 1995 1994 - ------------------------------------------------------------ ------ ------ AAA......................................................... 56.1% 57.6% AA.......................................................... 4.5 5.5 A........................................................... 12.6 12.5 BBB Bonds..................................................... 19.0 14.9 Bank loan participations.................................. 0.4 1.4 BB or Less Bonds..................................................... 2.0 2.3 Bank loan participations.................................. 5.3 5.6 Redeemable preferred stocks................................. 0.1 0.2 ------ ------ 100.0% 100.0% ------ ------ ------ ------
At December 31, 1995 and 1994, Protective had bonds which were rated less than investment grade of $75.7 million and $82.5 million, respectively, having an amortized cost of $82.2 million and $89.4 million, respectively. Additionally, Protective had bank loan participations which were rated less than investment grade of $206.0 million and $195.1 million, respectively, having an amortized cost of $206.0 million and $195.1 million, respectively. 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:
1995 1994 1993 ---------- ----------- --------- Fixed maturities........................................... $ 193,562 $ (175,723) $ 1,198 Equity securities.......................................... $ 2,740 $ (5,342) $ 1,565
At December 31, 1995, all of Protective's mortgage loans were commercial loans of which 81% were retail, 7% 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 21 NOTE C -- INVESTMENT OPERATIONS (CONTINUED) in smaller towns and cities. No single tenant's leased space represents more than 4% of mortgage loans. Approximately 82% of the mortgage loans are on properties located in the following states listed in decreasing order of significance: South Carolina, Georgia, Alabama, Tennessee, Texas, Florida, North Carolina, Virginia, California, Mississippi, Colorado, Ohio, Kentucky, Louisiana, Indiana, and Illinois. Many of the mortgage loans have call provisions after five to seven years. Assuming the loans are called at their next call dates, approximately $174.3 million would become due in 1996, $497.3 million in 1997 to 2000, and $275.7 million in 2001 to 2005. At December 31, 1994, the average mortgage loan was $1.6 million, and the weighted average interest rate was 9.3%. The largest single mortgage loan was $13.1 million. While Protective's mortgage loans do not have quoted market values, at December 31, 1995 and 1994, Protective estimates the market value of its mortgage loans to be $2,001.1 million and $1,535.3 million, respectively, using discounted cash flows from the next call date. At December 31, 1995 and 1994, Protective's problem mortgage loans and foreclosed properties totaled $26.1 million and $24.0 million, respectively. Protective expects no significant loss of principal. Certain investments, principally real estate, with a carrying value of $9.5 million were nonincome producing for the twelve months ended December 31, 1995. Mortgage loans to affiliates of both Fletcher Bright and Edens & Avant totaled $95.4 million and $69.1 million, respectively, at December 31, 1995. Most of such loans were not made to, or in reliance on the credit of, Mr. Bright or Edens & Avant. 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. Policy loan interest rates generally range from 4.5% to 8.0%. The fair values of Protective's other long-term investments approximate cost. NOTE D -- FEDERAL INCOME TAXES Protective's effective income tax rate varied from the maximum federal income tax rate as follows:
1995 1994 1993 ----------- ----------- ----------- Statutory federal income tax rate applied to pretax income.. 35.0% 35.0% 35.0% Dividends received deduction and tax-exempt interest........ (0.5) (0.4) (0.5) Low-income housing credit................................... (0.7) (0.7) Tax benefits arising from prior acquisitions and other adjustments................................................ 0.2 (2.8) (1.1) --- --- --- Effective income tax rate................................... 34.0% 31.1% 33.4% --- --- --- --- --- ---
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:
1995 1994 1993 ---------- ---------- ---------- Deferred policy acquisition costs......................... $ (11,606) $ 34,561 $ 8,861 Benefit and other policy liability changes................ 52,496 (52,288) (10,416) Temporary differences of investment income................ (34,175) 15,524 Other items............................................... (13,687) (2,528) (1,527) ---------- ---------- ---------- $ (6,972) $ (4,731) $ (3,082) ---------- ---------- ---------- ---------- ---------- ----------
22 NOTE D -- FEDERAL INCOME TAXES (CONTINUED) The components of Protective's net deferred income tax liability as of December 31 were as follows:
1995 1994 ---------- ---------- Deferred income tax assets: Policy and policyholder liability reserves.......................... $ 63,830 $ 116,326 Unrealized loss on investments...................................... 23,485 Other............................................................... 2,303 ---------- ---------- 66,133 139,811 ---------- ---------- Deferred income tax liabilities: Deferred policy acquisition costs................................... 102,154 113,760 Unrealized gain on investments...................................... 31,399 Other............................................................... 11,384 ---------- ---------- 133,553 125,144 ---------- ---------- Net deferred income tax liability................................... $ 67,420 $ (14,667) ---------- ---------- ---------- ----------
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, 1995 was approximately $50.7 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 $322 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. Protective does not anticipate involuntarily paying income tax on amounts in the Policyholders' Surplus accounts. At December 31, 1995 Protective has an unused capital loss carryforward of $5.7 million which will expire in 2000. 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, 1995, PLC had borrowed 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. Included in indebtedness to related parties are three surplus debentures issued by Protective to PLC. At December 31, 1995, the balance of the three surplus debentures combined was $34.7 million. Future maturities of these debentures are $14.7 million in 1996 and $20.0 million in 2003. Interest expense totaled $6.0 million, $5.0 million, and $5.0 million, in 1995, 1994, and 1993, respectively. NOTE F -- ACQUISITIONS In April 1994 Protective acquired through coinsurance a block of payroll deduction policies. In October 1994, Protective acquired through coinsurance a block of individual life insurance policies. In June 1995 Protective acquired through coinsurance a block of term life insurance policies. 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 23 NOTE G -- COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED) 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 life and health 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. Some of the lawsuits have resulted in the award of substantial judgments against the insurer, including material amounts of punitive damages. In some states, juries have substantial discretion in awarding punitive damages in these circumstances. Protective and its subsidiaries, like other life and health insurers, from time to time are involved in such litigation. To date, no such lawsuit has resulted in the award of any significant amount of damages against Protective. Although the outcome of any litigation cannot be predicted with certainty, Protective is not aware of any litigation that will have a material adverse effect on the financial position of Protective. NOTE H -- STOCKHOLDER'S EQUITY AND RESTRICTIONS At December 31, 1995, approximately $329 million of consolidated stockholder'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 1996 is estimated to be $129 million. NOTE I -- REDEEMABLE PREFERRED STOCK PLC owns all of the 2,000 shares of redeemable preferred stock issued by Protective's subsidiary, American Foundation. The entire issue was reissued in 1991 and will be redeemed September 30, 1996 for $1 thousand per share, or $2 million. The stock pays, when and if declared, annual minimum cumulative dividends of $50 per share, and noncumulative participating dividends to the extent American Foundation's statutory earnings for the immediately preceding fiscal year exceed $1 million. Dividends of $0.1 million, $0.9 million, and $1.5 million were paid to PLC in 1995, 1994, and 1993, respectively. NOTE J -- RELATED PARTY MATTERS Receivables from related parties consisted of receivables from affiliates under control of PLC in the amounts of $2.0 million and $0.3 million at December 31, 1995 and 1994, respectively. 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. 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, $5.8 million at December 31, 1995, is accounted for as a reduction to stockholder'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 $3.1 million in 1995, $2.8 million in 1994, and $2.8 million in 1993. Protective purchases data processing, legal, investment and management services from affiliates. The costs of such services were $38.1 million, $29.8 million, and $20.4 million in 1995, 1994, and 1993, respectively. Commissions paid to affiliated marketing organizations of $10.9 million, $10.1 million, and $5.8 million in 1995, 1994, and 1993, respectively, were included in deferred policy acquisition costs. Certain corporations with which PLC's directors were affiliated paid Protective premiums and policy fees for various types of group insurance. Such premiums and policy fees amounted to $21.2 million, 24 NOTE J -- RELATED PARTY MATTERS (CONTINUED) $21.1 million, and $10.3 million in 1995, 1994, and 1993, respectively. Protective and/or PLC paid commissions, interest, and service fees to these same corporations totaling $5.3 million, $4.9 million, and $6.1 million, in 1995, 1994, and 1993, respectively. For a discussion of indebtedness to related parties, see Note E. NOTE K -- BUSINESS SEGMENTS Protective operates predominantly in the life and accident and health insurance industry. The following table sets forth total revenues, income before income tax, and identifiable assets of Protective's business segments. The primary components of revenues are premiums and policy fees, net investment income, and realized investment gains and losses. Premiums and policy fees are attributed directly to each business segment. Net investment income is allocated based on directly related assets required for transacting that segment of business. Realized investment gains (losses) and 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.
1995 1994 1993 ------------ ------------ ------------ TOTAL REVENUES Acquisitions.................................................. $ 193,544 $ 170,659 $ 123,855 Financial Institutions........................................ 33,152 107,194 96,443 Group......................................................... 159,263 148,313 143,423 Guaranteed Investment Contracts............................... 199,468 183,591 167,233 Individual Life............................................... 139,424 122,248 111,497 Investment Products........................................... 104,984 79,773 69,550 Corporate and Other........................................... 3,059 12,936 1,521 Unallocated Realized Investment Gains (Losses)................ 921 5,266 1,876 ------------ ------------ ------------ $ 833,815 $ 829,980 $ 715,398 ------------ ------------ ------------ ------------ ------------ ------------ Acquisitions.................................................. 23.2% 20.6% 17.3% Financial Institutions........................................ 4.0 12.9 13.5 Group......................................................... 19.1 17.9 20.0 Guaranteed Investment Contracts............................... 23.9 22.1 23.4 Individual Life............................................... 16.7 14.7 15.6 Investment Products........................................... 12.6 9.6 9.7 Corporate and Other........................................... 0.4 1.6 0.2 Unallocated Realized Investment Gains (Losses)................ 0.1 0.6 0.3 ------------ ------------ ------------ 100.0% 100.0% 100.0% ------------ ------------ ------------ ------------ ------------ ------------
25 NOTE K -- BUSINESS SEGMENTS (CONTINUED)
1995 1994 1993 ------------ ------------ ------------ INCOME BEFORE INCOME TAX Acquisitions.................................................. $ 52,136 $ 39,176 $ 29,845 Financial Institutions........................................ 8,212 8,176 7,220 Group......................................................... 10,502 11,169 10,435 Guaranteed Investment Contracts............................... 30,555 33,197 27,218 Individual Life............................................... 17,713 17,223 20,324 Investment Products........................................... 11,951 107 3,402 Corporate and Other........................................... (14,257) (8,736) (14,208) Unallocated Realized Investment Gains (Losses)................ 921 5,266 1,876 ------------ ------------ ------------ $ 117,733 $ 105,578 $ 86,112 ------------ ------------ ------------ ------------ ------------ ------------ Acquisitions.................................................. 44.3% 37.1% 34.6% Financial Institutions........................................ 7.0 7.7 8.4 Group......................................................... 8.9 10.6 12.1 Guaranteed Investment Contracts............................... 26.0 31.5 31.6 Individual Life............................................... 15.0 16.3 23.6 Investment Products........................................... 10.1 0.1 4.0 Corporate and Other........................................... (12.1) (8.3) (16.5) Unallocated Realized Investment Gains (Losses)................ 0.8 5.0 2.2 ------------ ------------ ------------ 100.0% 100.0% 100.0% ------------ ------------ ------------ ------------ ------------ ------------ IDENTIFIABLE ASSETS Acquisitions.................................................. $ 1,255,542 $ 1,204,883 $ 1,076,182 Financial Institutions........................................ 265,132 211,652 189,943 Group......................................................... 240,222 215,904 208,790 Guaranteed Investment Contracts............................... 2,536,939 2,211,079 2,041,463 Individual Life............................................... 887,927 752,168 641,992 Investment Products........................................... 1,578,789 1,284,186 876,691 Corporate and Other........................................... 414,142 230,832 272,788 ------------ ------------ ------------ $ 7,178,693 $ 6,110,704 $ 5,307,849 ------------ ------------ ------------ ------------ ------------ ------------ Acquisitions.................................................. 17.5% 19.7% 20.3% Financial Institutions........................................ 3.7 3.5 3.6 Group......................................................... 3.3 3.5 3.9 Guaranteed Investment Contracts............................... 35.3 36.2 38.5 Individual Life............................................... 12.4 12.3 12.1 Investment Products........................................... 22.0 21.0 16.5 Corporate and Other........................................... 5.8 3.8 5.1 ------------ ------------ ------------ 100.0% 100.0% 100.0% ------------ ------------ ------------ ------------ ------------ ------------
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 80% 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 funding 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. 26 NOTE L -- EMPLOYEE BENEFIT PLANS (CONTINUED) The actuarial present value of benefit obligations and the funded status of the plan taken as a whole at December 31 is as follows:
1995 1994 --------- --------- Accumulated benefit obligation, including vested benefits of $16,676 in 1995 and $11,992 in 1994.................................................................. $ 17,415 $ 12,348 --------- --------- Projected benefit obligation for service rendered to date......................... $ 24,877 $ 20,302 Plan assets at fair value (group annuity contract with Protective)................ 18,254 15,679 --------- --------- Plan assets less than the projected benefit obligation............................ (6,623) (4,623) Unrecognized net loss from past experience different from that assumed............ 4,882 2,400 Unrecognized prior service cost................................................... 805 905 Unrecognized net transition asset................................................. (84) (101) --------- --------- Net pension liability recognized in balance sheet................................. $ (1,020) $ (1,419) --------- --------- --------- ---------
Net pension cost includes the following components for the years ended December 31:
1995 1994 1993 --------- --------- --------- Service cost -- benefits earned during the year............... $ 1,540 $ 1,433 $ 1,191 Interest cost on projected benefit obligation................. 1,636 1,520 1,396 Actual return on plan assets.................................. (1,358) (1,333) (1,270) Net amortization and deferral................................. 114 210 704 --------- --------- --------- Net pension cost.............................................. $ 1,932 $ 1,830 $ 2,021 --------- --------- --------- --------- --------- ---------
Protective's share of the net pension cost was $1.2 million, $1.2 million, and $1.5 million, in 1995, 1994, and 1993, respectively. Assumptions used to determine the benefit obligations as of December 31 were as follows:
1995 1994 1993 ----------- ----------- ----------- Weighted average discount rate................................... 7.25% 8.00% 7.50% Rates of increase in compensation level.......................... 5.25% 6.00% 5.50% 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, 1995, the projected benefit obligation of this plan totaled $5.7 million. 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, 1995, the liability for such benefits totaled $1.5 million. The expense recorded by PLC was $0.2 million in 1995, 1994, and 1993. 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. 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 to match 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 27 NOTE L -- EMPLOYEE BENEFIT PLANS (CONTINUED) 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, 1995, PLC had committed 70,088 shares to be released to fund employee benefits. The expense recorded by PLC for this employee benefit was $0.7 million, $0.6 million and $0.2 million in 1995, 1994, and 1993, respectively. NOTE M -- 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. While the amount retained on an individual life will vary based upon age and mortality prospects of the risk, Protective, generally, will not carry more than $500,000 individual life insurance on a single risk. Protective has reinsured approximately $17.5 billion, $8.6 billion, and $7.5 billion, in face amount of life insurance risks with other insurers representing $116.1 million, $46.0 million, and $37.9 million of premium income for 1995, 1994, and 1993, respectively. Protective has also reinsured accident and health risks representing $217.1 million, $126.5 million and $88.9 million, of premium income for 1995, 1994, and 1993, respectively. In 1995 and 1994, policy and claim reserves relating to insurance ceded of $232.3 million and $120.0 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, 1995 and 1994, Protective had paid $4.1 million and $5.4 million, respectively, of ceded benefits which are recoverable from reinsurers. During 1995 the Company entered into a reinsurance agreement whereby all of the Company's new credit insurance sales are being ceded to a reinsurer. Included in the preceding paragraph are credit life and credit accident and health insurance premiums of $68.2 million and $57.6 million respectively, and reserves totaling $100.8 million which were ceded during 1995. NOTE N -- ESTIMATED MARKET VALUES OF FINANCIAL INSTRUMENTS The carrying amount and estimated market values of Protective's financial instruments at December 31 are as follows:
1995 1994 -------------------------- -------------------------- ESTIMATED ESTIMATED CARRYING MARKET CARRYING MARKET AMOUNT VALUES AMOUNT VALUES ------------ ------------ ------------ ------------ Assets (see Notes A and C): Investments: Fixed maturities....................................... $ 3,891,932 $ 3,891,932 $ 3,493,646 $ 3,493,646 Equity securities...................................... 38,711 38,711 45,005 45,005 Mortgage loans on real estate.......................... 1,835,057 2,001,100 1,488,495 1,535,300 Short-term investments................................. 46,891 46,891 54,683 54,683 Cash..................................................... 6,198 6,198 Other (see Note A): Futures contracts........................................ (633) (416) Interest rate swaps...................................... 1,299 (8,952)
28 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 - -------------------------------------------------------------------------------------------------- GIC AND FUTURE ANNUITY DEFERRED POLICY DEPOSITS PREMIUMS POLICY BENEFITS AND OTHER AND ACQUISITION AND UNEARNED POLICYHOLDERS' POLICY SEGMENT COSTS CLAIMS PREMIUMS FUNDS FEES - ----------------------------------- ----------- ---------- -------- -------------- -------- Year Ended December 31, 1995: Acquisitions..................... $123,889 $ 851,994 $ 590 $ 250,550 $98,501 Financial Institutions........... 36,283 84,162 189,973 1,495 23,875 Group............................ 24,974 123,279 2,806 85,925 142,483 Guaranteed Investment Contracts....................... 993 68,704 0 2,451,693 0 Individual Life.................. 186,496 672,569 336 14,709 99,018 Investment Products.............. 37,534 127,104 0 1,061,507 4,566 Corporate and Other.............. 14 342 62 263 1,445 Unallocated Realized Investment Gains (Losses).................. 0 0 0 0 0 ----------- ---------- -------- -------------- -------- TOTAL.......................... $410,183 $1,928,154 $193,767 $3,866,142 $369,888 ----------- ---------- -------- -------------- -------- ----------- ---------- -------- -------------- -------- Year Ended December 31, 1994: Acquisitions..................... $110,203 $ 856,889 $ 381 $ 266,828 $86,376 Financial Institutions........... 68,060 43,198 99,798 2,758 98,027 Group............................ 22,685 116,324 2,905 84,689 131,096 Guaranteed Investment Contracts....................... 996 0 0 2,281,674 0 Individual Life.................. 162,186 571,070 320 13,713 84,925 Investment Products.............. 70,053 102,705 0 1,027,527 1,635 Corporate and Other.............. 17 4,109 75 263 713 Unallocated Realized Investment Gains (Losses).................. 0 0 0 0 0 ----------- ---------- -------- -------------- -------- TOTAL.......................... $434,200 $1,694,295 $103,479 $3,677,452 $402,772 ----------- ---------- -------- -------------- -------- ----------- ---------- -------- -------------- -------- Year Ended December 31, 1993: Acquisitions..................... $ 69,942 $ 705,487 $ 501 $ 259,513 $58,562 Financial Institutions........... 59,163 39,508 85,042 2,913 87,355 Group............................ 20,520 99,412 2,786 83,522 126,027 Guaranteed Investment Contracts....................... 1,464 0 0 2,015,075 0 Individual Life.................. 129,265 483,604 368 11,762 77,338 Investment Products.............. 18,934 52,516 0 789,668 856 Corporate and Other.............. 19 318 88 339 1,285 Unallocated Realized Investment Gains (Losses).................. 0 0 0 0 0 ----------- ---------- -------- -------------- -------- TOTAL.......................... $299,307 $1,380,845 $88,785 $3,162,792 $351,423 ----------- ---------- -------- -------------- -------- ----------- ---------- -------- -------------- -------- - ----------------------------------- ------------------------------------------------------------------ COL. A COL. G COL. H COL. I COL. J - ----------------------------------- ------------------------------------------------------------------ AMORTIZATION REALIZED BENEFITS OF DEFERRED OTHER NET INVESTMENT AND POLICY OPERATING INVESTMENT GAINS SETTLEMENT ACQUISITION EXPENSES SEGMENT INCOME (1) (LOSSES) EXPENSES COSTS (1) - ----------------------------------- ---------- ----------- ---------- ------------ ----------- Year Ended December 31, 1995: Acquisitions..................... $ 95,018 $ 0 $100,016 $20,601 $ 20,791 Financial Institutions........... 9,276 0 (19,574) 28,609 15,905 Group............................ 14,329 0 109,447 3,052 36,262 Guaranteed Investment Contracts....................... 203,376 (3,908) 165,963 386 2,564 Individual Life.................. 40,237 0 80,067 20,403 21,241 Investment Products.............. 95,661 4,938 72,111 11,446 9,476 Corporate and Other.............. 536 0 1,476 3 15,837 Unallocated Realized Investment Gains (Losses).................. 0 921 0 0 0 ---------- ----------- ---------- ------------ ----------- TOTAL.......................... $458,433 $ 1,951 $509,506 $84,500 $122,076 ---------- ----------- ---------- ------------ ----------- ---------- ----------- ---------- ------------ ----------- Year Ended December 31, 1994: Acquisitions..................... $ 83,750 $ 532 $ 97,649 $14,460 $ 19,374 Financial Institutions........... 9,164 46,360 36,592 16,065 Group............................ 14,381 98,930 2,724 35,490 Guaranteed Investment Contracts....................... 180,591 3,000 147,383 892 2,119 Individual Life.................. 37,319 67,451 18,771 18,803 Investment Products.............. 80,759 (2,500) 58,424 14,647 6,595 Corporate and Other.............. 2,969 913 3 20,757 Unallocated Realized Investment Gains (Losses).................. 0 5,266 0 0 0 ---------- ----------- ---------- ------------ ----------- TOTAL.......................... $408,933 $ 6,298 $517,110 $88,089 $119,203 ---------- ----------- ---------- ------------ ----------- ---------- ----------- ---------- ------------ ----------- Year Ended December 31, 1993: Acquisitions..................... $ 65,290 $ 73,463 $ 7,831 $ 12,715 Financial Institutions........... 8,921 42,840 31,202 15,181 Group............................ 14,522 101,266 2,272 29,450 Guaranteed Investment Contracts....................... 166,058 $ 1,175 137,380 1,170 1,466 Individual Life.................. 34,153 55,972 18,069 17,133 Investment Products.............. 66,691 2,003 49,569 12,788 3,790 Corporate and Other.............. (1,470) 1,146 3 14,580 Unallocated Realized Investment Gains (Losses).................. 0 1,876 0 0 0 ---------- ----------- ---------- ------------ ----------- TOTAL.......................... $354,165 $ 5,054 $461,636 $73,335 $ 94,315 ---------- ----------- ---------- ------------ ----------- ---------- ----------- ---------- ------------ ----------- - ------------------------------ (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.
29 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, 1995: Life insurance in force............... $ 50,346,719 $ 17,524,366 $ 11,537,144 $ 44,359,497 26.0% ------------- ------------- ------------- ------------- --- ------------- ------------- ------------- ------------- --- Premiums and policy fees: Life insurance...................... $ 287,526 $ 116,091 $ 66,565 $ 238,000 28.0% Accident/health insurance........... 335,387 217,082 13,583 131,888 10.3% ------------- ------------- ------------- ------------- TOTAL............................. $ 622,913 $ 333,173 $ 80,148 $ 369,888 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Year Ended December 31, 1994: Life insurance in force............... $ 40,909,454 $ 8,639,272 $ 8,968,166 $ 41,238,348 21.7% ------------- ------------- ------------- ------------- --- ------------- ------------- ------------- ------------- --- Premiums and policy fees: Life insurance...................... $ 256,840 $ 46,029 $ 31,032 $ 241,843 12.8% Accident/health insurance........... 283,883 126,545 3,591 160,929 2.2% ------------- ------------- ------------- ------------- TOTAL............................. $ 540,723 $ 172,574 $ 34,623 $ 402,772 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Year Ended December 31, 1993: Life insurance in force............... $ 40,149,017 $ 7,484,566 $ 2,301,577 $ 34,966,028 6.6% ------------- ------------- ------------- ------------- --- ------------- ------------- ------------- ------------- --- Premiums and policy fees: Life insurance...................... $ 230,706 $ 37,995 $ 8,329 $ 201,040 4.1% Accident/health insurance........... 254,672 88,917 3,963 169,718 2.3% ------------- ------------- ------------- ------------- TOTAL............................. $ 485,378 $ 126,912 $ 12,292 $ 370,758 ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
30 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 J(2)(c). ITEM 11. EXECUTIVE COMPENSATION Not required in accordance with General Instruction J(2)(c). ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Not required in accordance with General Instruction J(2)(c). ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not required in accordance with General Instruction J(2)(c). PART IV ITEM 14. 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 33 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 31 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 22, 1996. PROTECTIVE LIFE INSURANCE COMPANY By: /s/ DRAYTON NABERS, JR. ----------------------------------- President 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. President March 22, 1996 ------------------------------ Drayton Nabers, Jr. (ii) Principal Financial Officer /s/ JOHN D. JOHNS Executive Vice President and March 22, 1996 ------------------------------ Chief Financial Officer John D. Johns (iii) Principal Accounting Officer /s/ JERRY W. DEFOOR Vice President and Controller, March 22, 1996 ------------------------------ and Chief Accounting Officer Jerry W. DeFoor (iv) Board of Directors: /s/ DRAYTON NABERS, JR. Director March 22, 1996 ------------------------------ Drayton Nabers, Jr. /s/ JOHN D. JOHNS Director March 22, 1996 ------------------------------ John D. Johns * Director March 22, 1996 ------------------------------ Ormond L. Bentley * Director March 22, 1996 ------------------------------ R. Stephen Briggs * Director March 22, 1996 ------------------------------ Carolyn King * Director March 22, 1996 ------------------------------ Deborah J. Long * Director March 22, 1996 ------------------------------ Jim E. Massengale * Director March 22, 1996 ------------------------------ Steven A. Schultz * Director March 22, 1996 ------------------------------ Wayne E. Stuenkel * Director March 22, 1996 ------------------------------ A. S. Williams III *By: /s/ JERRY W. DEFOOR ------------------------------ Jerry W. DeFoor ATTORNEY-IN-FACT
32 EXHIBIT INDEX
ITEM NUMBER DOCUMENT - --------------------- -------------------------------------------------------------------------------------------------- * 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 24 -- Power of Attorney 27 -- Financial Data Schedule - ------------------------ *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.
33 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 and identical counterpart hereof, does hereby constitute and appoint John D. Johns, Deborah J. Long, Maria Gutierrez Matthews, or Jerry W. DeFoor, to execute and sign the 1995 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 20th day of March, 1996. WITNESS TO ALL SIGNATURES: /s/ JOHN K. WRIGHT /s/ DRAYTON NABERS, JR. - ----------------------------------- --------------------------------- John K. Wright Drayton Nabers, Jr. /s/ R. STEPHEN BRIGGS --------------------------------- R. Stephen Briggs /s/ JOHN D. JOHNS --------------------------------- John D. Johns /s/ ORMOND L. BENTLEY --------------------------------- Ormond L. Bentley /s/ CAROLYN KING --------------------------------- Carolyn King /s/ DEBORAH J. LONG --------------------------------- Deborah J. Long /s/ JIM E. MASSENGALE --------------------------------- Jim E. Massengale /s/ STEVEN A. SCHULTZ --------------------------------- Steven A. Schultz /s/ WAYNE E. STUENKEL --------------------------------- Wayne E. Stuenkel /s/ A. S. WILLIAMS III --------------------------------- A. S. Williams III EX-27 3 EXHIBIT 27
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-31-1995 JAN-01-1995 DEC-31-1995 3,891,932 0 0 38,711 1,835,057 20,788 6,020,626 6,198 271,018 410,183 7,178,693 1,928,154 193,767 0 134,380 0 2,000 0 5,000 646,237 7,178,693 369,888 458,433 1,951 3,543 509,506 84,500 122,076 117,733 40,037 77,696 0 0 0 77,696 0 0 0 0 0 0 0 0 0 Protective Live Insurance Company is a wholly-owned subsidiary of Protective Life Corporation (NYSE:PL) and is not required to present EPS information.
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