AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 19, 1999
REGISTRATION NO. 333-42425
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 1
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PROTECTIVE LIFE AND ANNUITY
INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
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<CAPTION>
ALABAMA 63-0761690 6311
<S> <C> <C>
(State or other jurisdiction of (I.R.S. Employer (Primary Standard
incorporation or organization) Identification Number) Industrial
Classification Code)
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2801 HIGHWAY 280 SOUTH
BIRMINGHAM, ALABAMA 35223
(205) 879-9230
(Address, including zip code, and telephone number, including
area code, of principal executive office)
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CAROLYN KING
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
P. O. BOX 2606
BIRMINGHAM, ALABAMA 35202
(205) 879-9230
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
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COPIES TO:
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STEPHEN E. ROTH, ESQ. STEVE M. CALLAWAY, ESQ.
SUTHERLAND, ASBILL & BRENNAN LLP PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
1275 PENNSYLVANIA AVENUE, N.W. P. O. BOX 2606
WASHINGTON, D.C. 20004-2404 BIRMINGHAM, ALABAMA 35202
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If any of the securities that have been registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933 check the following box. [X]
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PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
Cross Reference Sheet Pursuant to
Regulation S-K, Item 501(b)
FORM S-1 ITEM NUMBER AND CAPTION HEADING IN PROSPECTUS
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<S> <C> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus ............. Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus ...................................... Summary; Table of Contents
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges ....................... Outside Front Cover Page; Summary
4. Use of Proceeds .................................... Investments by Protective Life and Annuity Insurance
Company
5. Determination of Offering Price .................... Not Applicable
6. Dilution ........................................... Not Applicable
7. Selling Security Holders ........................... Not Applicable
8. Plan of Distribution ............................... Distribution of Contracts
9. Description of Securities to be Registered ......... Summary; Description of the Contract
10. Interests of Named Experts and Counsel ............. Not Applicable
11. Information with Respect to the Registrant ......... Protective Life and Annuity Insurance Company; Directors
and Executive Officers; Executive Compensation; Financial
Statements; Legal Proceedings
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities ..... Undertakings
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[GRAPHIC LOGO PLATINUM SERIES ANNUITY APPEARS HERE]
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A MODIFIED GUARANTEED ANNUITY ISSUED BY
PROTECTIVE LIFE AND ANNUITY
INSURANCE COMPANY
2801 HIGHWAY 280 SOUTH
BIRMINGHAM, ALABAMA 35223
TELEPHONE: 1-800-866-3555
This Prospectus describes the Platinum Series Annuity Contract, a group
modified guaranteed annuity contract. This Contract is designed for investors
who desire to accumulate capital on a tax deferred basis for retirement or
other long term investment purposes. It may be purchased on a non-qualified
basis or for use with certain qualified retirement plans.
An Annuity Premium of at least $10,000 is required to purchase a Contract.
Any subsequent Premium you want to add to your Contract must also be at least
$10,000.
You may allocate each Annuity Premium to one or more investment periods,
called Guaranteed Periods, from those we offer at the time you make the
deposit. You must allocate at least $10,000 to each Guaranteed Period. The
amounts you allocate will earn interest for the selected period at the interest
rate we offer at the time of your deposit.
If you surrender your Contract, or any portion of it, before the end of a
Guaranteed Period, we may assess a surrender charge on the amount you
surrender. We may also apply a Market Value Adjustment to the amount you
surrender, which could increase or decrease the value of your Contract. Under
certain conditions, you may withdraw earned interest without a surrender charge
or Market Value Adjustment. Withdrawals of interest will be subject to income
tax and may be subject to a 10% IRS penalty tax if taken before age 59 1/2.
On the Annuity Commencement Date, we will apply your Net Account Value to
the annuity option you have selected, or you may take that amount in one lump
sum payment. The annuity payment options are (1) payments for a fixed period
from five to thirty years, (2) payments for life, or (3) life income with
payments guaranteed for ten years.
PLEASE READ THIS PROSPECTUS CAREFULLY. INVESTORS SHOULD KEEP A COPY FOR
FUTURE REFERENCE.
THE PLATINUM SERIES ANNUITY CONTRACT IS NOT A DEPOSIT OR OBLIGATION OF, OR
GUARANTEED BY, ANY BANK OR FINANCIAL INSTITUTION. IT IS NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY, AND IT IS
SUBJECT TO INVESTMENT RISK INCLUDING THE POSSIBLE LOSS OF INVESTMENT PRINCIPAL.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1999.
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TABLE OF CONTENTS
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PAGE
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SUMMARY .......................................... 3
DESCRIPTION OF THE CONTRACT ...................... 5
The Contract .................................. 5
Parties to the Contract ....................... 5
Issuing a Contract ............................ 6
Right to Cancel ............................... 6
Annuity Premiums .............................. 6
Guaranteed Periods and Sub-Accounts ........... 7
Initial Guaranteed Period ................... 7
Subsequent Guaranteed Periods ............... 7
Surrenders at the End of a Guaranteed Period. 7
Selecting a Subsequent Guaranteed Period .... 7
Automatic Subsequent Guaranteed Periods ..... 7
Guaranteed Interest Rates in Subsequent
Guaranteed Periods ....................... 7
Guaranteed Interest Rates ..................... 7
Compounding of Interest ..................... 8
Interest Withdrawals .......................... 8
Account Values ................................ 9
SURRENDERS ....................................... 9
Surrenders .................................... 9
Surrenders and Partial Surrenders ........... 9
Taxes May Apply ............................. 9
Delay of Payments ........................... 9
Surrender Value ............................... 10
Surrender Charges ............................. 10
The Market Value Adjustment ................... 10
Premium Tax ................................... 13
DEATH BENEFIT .................................... 13
Death of an Annuitant ......................... 13
Death of an Owner ............................. 13
Determining the Death Benefit ............... 13
Paying the Death Benefit .................... 13
ANNUITY BENEFITS ................................. 14
Annuity Commencement Date ..................... 14
Annuity Options ............................... 14
Annuity Payments .............................. 14
Death of an Owner or Annuitant After the
Annuity Commencement Date ................... 15
INVESTMENTS BY PROTECTIVE LIFE AND
ANNUITY INSURANCE COMPANY ..................... 15
OTHER CONTRACT PROVISIONS ........................ 16
Non-Participating ............................. 16
Notice ........................................ 16
Reports ....................................... 16
Transactions and Modification of the Contract . 16
Assignment of a Contract ...................... 16
Facility of Payment ........................... 16
Protection of Proceeds ........................ 16
Error in Age or Gender ........................ 17
DISTRIBUTION OF THE CONTRACTS .................... 17
FEDERAL TAX MATTERS .............................. 17
Introduction .................................. 17
The Company's Tax Status ...................... 17
Taxation of Annuities in General .............. 17
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PAGE
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Tax Deferral During Accumulation Period ..... 17
Taxation of Interest Withdrawals and Partial
and Full Surrenders ...................... 18
Taxation of Annuity Payments ................ 18
Taxation of Death Benefit Proceeds .......... 19
Penalty Tax on Premature Distributions ...... 19
Aggregation of Contracts .................... 19
Loss of Interest Deduction Where Contracts Are
Held by or for the Benefit of Certain
Non-natural Persons ......................... 20
Qualified Retirement Plans .................... 20
In General .................................. 20
Direct Rollover Rules ....................... 21
Federal Income Tax Withholding ................ 22
PROTECTIVE LIFE AND ANNUITY
INSURANCE COMPANY ............................. 22
Business ...................................... 22
Selected Financial Data ....................... 24
Management's Discussion and
Analysis of Financial Condition
and Results of Operations ..................... 24
Results of Operations ....................... 24
Premiums and Policy Fees ................. 24
Net Investment Income .................... 25
Realized Investment Gains ................ 25
Income Before Income Tax ................. 26
Income Tax Expense ....................... 27
Known Trends and
Uncertainties ..................................... 27
Recently Issued Accounting
Standards ......................................... 29
Liquidity and Capital Resources ............. 30
Insurance in Force ............................ 34
Underwriting .................................. 34
Investments ................................... 35
Indemnity Reinsurance ......................... 37
Policy Liabilities and Accruals ............... 37
Competition ................................... 37
Regulation .................................... 37
Employees and Properties ...................... 39
DIRECTORS AND EXECUTIVE OFFICERS ................. 40
EXECUTIVE COMPENSATION ........................... 42
Summary Compensation Table .................... 42
Aggregated FY-End Option/SAR Values ........... 42
Performance Share Plan ........................ 43
Other Plans and Arrangements .................. 44
Additional Agreements ......................... 45
Compensation Committee Interlocks and Insider
Participation ............................... 45
Management Ownership of PLC Stock ............. 45
LEGAL PROCEEDINGS ................................ 46
EXPERTS .......................................... 46
LEGAL MATTERS .................................... 46
REGISTRATION STATEMENT ........................... 46
FINANCIAL STATEMENTS ............................. F-1
</TABLE>
NO ONE IS AUTHORIZED TO MAKE ANY STATEMENT THAT CONTRADICTS THIS
PROSPECTUS. YOU MUST NOT RELY UPON ANY SUCH STATEMENT. THIS PROSPECTUS IS NOT
AN OFFER TO INQUIRE ABOUT, OR PURCHASE THE SECURITIES DESCRIBED IN ANY
JURISDICTION WHERE IT IS UNLAWFUL TO DO SO.
2
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SUMMARY
COMPANY; Protective Life and Annuity Insurance Company, also referred to as
"Company," "Protective Life," "we," "us" and "our."
WHAT IS THE PLATINUM SERIES The Platinum Series Annuity Contract is a
ANNUITY CONTRACT? group modified guaranteed annuity contract
issued by Protective Life. (See "The
Contract," page 5.)
HOW IS A CONTRACT ISSUED? We will issue the Contract when we receive
and accept your complete application
information and an initial Annuity Premium .
(See "Issuing a Contract," page 6.)
WHAT IS AN ANNUITY PREMIUM? The Annuity Premium is the premium payment
you send us to purchase or add to a
Contract. You may send us more than one
Annuity Premium provided each Annuity
Premium is at least $10,000. We may refuse
to accept any Annuity Premium and we may
limit the total Annuity Premiums we will
accept. (See "Annuity Premiums," page 6.)
CAN I CANCEL MY CONTRACT? You may cancel your Contract by returning it
to us with a written cancellation request
within thirty days after you receive it.
When we receive your returned Contract and
cancellation request, we will refund the
Account Value adjusted by the Market Value
Adjustment (except for Individual Retirement
Annuities returned within seven days of
issuance) and cancel the Contract, as though
it had never been issued. (See "Right to
Cancel," page 6.)
HOW DO MY ANNUITY PREMIUMS You allocate each Annuity Premium
EARN INTEREST? (less applicable premium taxes) to one or
more Guaranteed Periods. Each allocation to
a Guaranteed Period must be at least
$10,000. We establish a Sub-Account for each
Guaranteed Period you select. The
Sub-Account will earn interest at the
Guaranteed Interest Rate for the entire
Guaranteed Period. (See "Guaranteed Periods
and Sub-Accounts," page 7.)
WHAT HAPPENS AT THE END OF A At the end of any Guaranteed Period, a
GUARANTEED PERIOD? subsequent Guaranteed Period will begin.
Unless you instruct us otherwise, the
subsequent Guaranteed Period will generally
be the same duration as the expiring
Guaranteed Period. If we are not offering a
Guaranteed Period of the same duration, the
subsequent Guaranteed Period will be the
longest one available that is shorter than
the expiring Guaranteed Period. The
subsequent Guaranteed Period may not,
however, extend past the Annuity Commencement
Date. We will pay interest on your
Sub-Account value in the subsequent
Guaranteed Period at the Guaranteed Interest
Rate applicable to that subsequent Guaranteed
Period on the day it begins. The subsequent
Guaranteed Interest Rate may not be equal to
the initial Guaranteed Interest Rate offered
for an initial Guaranteed Period of the same
duration. (See "Guaranteed Periods and
Sub-Accounts," page 7.)
CAN I TAKE MONEY OUT OF THE Subject to certain restrictions, you may
CONTRACT? request in writing a full or partial
surrender at any time. The surrender is
subject to a surrender charge and we will
apply a Market Value Adjustment. Surrenders
from a Sub-Account at the end of its
Guaranteed Period will not incur the
surrender charge or the Market Value
Adjustment. Also, once each contract year
you may instruct us to pay you some or all
of the interest credited to the contract
during the prior contract year. We will not
charge a surrender charge nor apply the
Market Value Adjustment to these interest
withdrawals. Any surrender, including an
interest withdrawal, may have federal (and
state) income tax
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consequences. In addition, withdrawals and
surrenders from Contracts issued as
qualified contracts under the Internal
Revenue Code may not be allowed in certain
circumstances. (See "Interest Withdrawals,"
page 8, and "Surrenders," page 9.)
HOW IS THE SURRENDER CHARGE The surrender charge applies during the
CALCULATED? first seven years of each Guaranteed Period.
If the Guaranteed Period is seven years or
less, a surrender charge will apply for the
entire Guaranteed Period. We determine the
surrender charge by subtracting any amount
available as an interest withdrawal from the
surrender amount requested, adjusting the
result by the Market Value Adjustment, and
then applying the appropriate surrender
charge percentage to the adjusted result.
The maximum surrender charge percentage is
7%. (See "Surrender Charges," page 10.)
WHAT IS A MARKET VALUE ADJUSTMENT? The Market Value Adjustment is an amount we
deduct from or add to a Sub-Account value
when you request a surrender before the end
of the Sub-Account's Guaranteed Period. The
Market Value Adjustment formula in the
Contract reflects the relationship between
the Guaranteed Interest Rate associated with
the Sub-Account from which the surrender is
taken, and the current Guaranteed Interest
Rate for a Guaranteed Period equal to the
time remaining in the Guaranteed Period from
which the surrender is being made. In the
event a current Guaranteed Interest Rate is
no longer calculated by the Company, a
suitable replacement index will be used.
(See "Market Value Adjustment," page 10.)
DOES THE CONTRACT PROVIDE A If you die before the Annuity Commencement
DEATH BENEFIT? Date, we will pay a death benefit, less any
applicable premium tax, to your beneficiary.
Generally, the death benefit will be the
greater of the Account Value or the Net
Account Value as of the date we receive the
paperwork necessary to process the death
claim but there are other requirements and
conditions. The Internal Revenue Service
imposes restrictions on distribution of the
death benefit. Only one death benefit is
payable under this Contract. (See "Death
Benefit," page 13.)
WHAT ANNUITY BENEFIT DOES THE On the Annuity Commencement Date we will
CONTRACT PROVIDE? apply the Account Value, less applicable
taxes, to the annuity option you select.
Annuity options can provide periodic payments
based on the life of one or two Annuitants,
for a fixed amount of time, or both. As a
general rule, the Annuity Commencement Date
cannot extend beyond an Annuitant's 90th
birthday. (See "Annuity Benefits," page 14.)
WHEN ARE PREMIUM TAXES DEDUCTED? If your Contract is subject to a premium
tax, we will deduct it, according to
applicable law, from the Annuity Premiums
when we receive them, upon a full or partial
surrender, from the Account Value when we
apply it to an annuity option, or from the
death benefit before we pay it. Currently,
New York does not impose premium tax. (See
"Premium Tax," page 13.)
IS THE CONTRACT AVAILABLE FOR The Contract may be issued for use with
QUALIFIED RETIREMENT PLANS? retirement plans receiving special federal
income tax treatment under Sections 401,
403, 408, or 408A of the Internal Revenue
Code such as pension and profit sharing
plans (including H.R. 10 plans), individual
retirement accounts, and individual
retirement annuities. Contracts issued for
use with these qualified retirement plans
are referred to as Qualified Contracts and
these types of plans are referred to as
Qualified Plans. (See "Federal Tax Matters,"
page 17.)
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DESCRIPTION OF THE CONTRACT
THE CONTRACT
The Platinum Series Annuity Contract is a non-participating
flexible-premium, deferred, group modified guaranteed annuity contract issued
by Protective Life and Annuity Insurance Company. Generally, this prospectus
describes certificates issued under an allocated group modified guaranteed
annuity contract issued by Protective Life and Annuity to the American
Foundation Group Insurance Trust. AmSouth Bank, N.A. of Birmingham, Alabama is
the Contract Holder, as the Trustee of the American Foundation Group Insurance
Trust. Persons who are account holders of broker-dealers that have entered into
a distribution agreement to offer the Contract are eligible to be Owners of the
certificates issued under the Contract. We may also offer the Contract to
employers and other entities and organized groups acceptable to us. We reserve
the right to accept or decline a request to issue a contract.
The certificate we issue to an Owner summarizes the provisions of the
group modified guaranteed annuity contract. THE PROVISIONS OF THE GROUP
MODIFIED GUARANTEED ANNUITY CONTRACT CONTROL WHETHER OR NOT THEY ARE INCLUDED
IN THE CERTIFICATE. WE WILL PROVIDE A COPY OF THE GROUP MODIFIED GUARANTEED
ANNUITY CONTRACT TO AN OWNER UPON REQUEST. In this prospectus, we will refer to
the group contract and a certificate issued under it as a "Contract".
Contracts are either Qualified or Non-Qualified. Qualified Contracts are
used to fund pension and retirement programs that receive favorable tax
treatment under Sections 401, 403, 408 or 408A of the Internal Revenue Code.
These include H.R. 10 (Keogh) Plans, Individual Retirement Accounts or
Annuities (IRAs), Tax-Sheltered Annuity Programs or Annuities (TSAs).
Non-Qualified Contracts may also enjoy tax favored status. (See, "Federal Tax
Matters," page 17.)
PARTIES TO THE CONTRACT
COMPANY.
Protective Life and Annuity Insurance Company, also referred to as
"Company," "Protective Life," "we," "us" and "our." Prior to March 1, 1999,
Protective Life and Annuity Insurance Company was named American Foundation
Life Insurance Company.
OWNER.
The person or persons who own a group Contract certificate (sometimes
called "Participants" in our contract language and literature). An Owner is
entitled to exercise all rights and privileges provided in the Contract,
without the consent of a group Contract Holder. Individuals as well as
non-natural persons, such as corporations or trusts, may own a Contract; two
persons may own a Contract together. In this prospectus, we may refer to Owners
as "you" or "your." If an Annuitant is still alive, the Owner may transfer a
Contract to a new Owner by making a written request to our administrative
office.
BENEFICIARY.
The person or persons who may receive the benefits of a Contract upon the
death of an Owner. The surviving Owner of a jointly owned Contract is the
primary Beneficiary. If there is no surviving Owner, the primary Beneficiary is
the person or persons so designated by the Owner and named in our records. The
contingent Beneficiary is the person or persons designated by the Owner and
named in our records to be Beneficiary if no primary Beneficiary is living. In
the case of some Qualified Contracts, Treasury Department Regulations may
restrict who may be designated as a Beneficiary,
If no Beneficiary designation is in effect or if no Beneficiary is living
at the time of an Owner's death, the Beneficiary will be the estate of the
deceased Owner. If an Owner dies on or after the Annuity Commencement Date, the
Beneficiary will become the new Owner.
Unless designated irrevocably, you may change the Beneficiary by written
notice prior to any Owner's death. If a Beneficiary is designated irrevocably,
that Beneficiary's written consent is required before you can change the
Beneficiary designation or exercise certain other rights. Your request will be
effective on the day you sign it. We will not be liable for any payments made
to a former Beneficiary, however, unless we have first notified you that we
have received your written request and all necessary written consents at our
Administrative Office.
ANNUITANT.
The person on whose life annuity income payments may be based. The Owner
is the Annuitant unless the Owner designates another person as the Annuitant.
5
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You may change the Annuitant by written notice prior to the Annuity
Commencement Date. You cannot use a Guaranteed Period or an Annuity
Commencement Date that extends past an Annuitant's 90th birthday without our
approval. If changing Annuitants, you cannot select an Annuitant whose 90th
birthday comes before the end of any Guaranteed Period or the Annuity
Commencement Date without our approval. If any Owner is not a natural person,
the Annuitant may not be changed. (See "Annuity Benefits," page 14.)
PAYEE.
The person or persons who, generally at the designation of the Owner,
receive annuity income payments under the Contract.
ISSUING A CONTRACT
You may purchase a Contract by completing an application and paying an
Annuity Premium of at least $10,000. After we issue a Contract, you may pay
additional Annuity Premiums of at least $10,000 each. Regardless of how many
Annuity Premiums you pay, we will generally only issue one Contract. We have
the right to decline any application or any Annuity Premium. When we sell
Contracts to retirement plans or in connection with retirement plans, those
retirement plans may or may not qualify for special tax treatment under the
Internal Revenue Code.
If we do not receive all of the necessary application information at our
Administrative Office when we receive your Annuity Premium, we will hold your
Annuity Premium while we attempt to complete the application. If the necessary
application information is not complete after a reasonable time, we will inform
you of the reason for the delay and we will return your Annuity Premium unless
you specifically consent to our holding it until the application is complete.
Once we have all of your necessary application information, we will allocate
your Annuity Premium to the appropriate Guaranteed Periods.
The date we apply your initial Annuity Premium to the appropriate
Guaranteed Periods is the Effective Date for the Contract. You will begin to
earn interest under the Contract as of this date. The Contract Year is based on
the anniversary of your Effective Date.
RIGHT TO CANCEL
You may cancel your Contract by returning it to us with a written
cancellation request within thirty days after you receive it. You must return
the Contract and cancellation request to our Administrative Office or to the
sales representative who sold it to you. If you return the Contract by mail,
the effective date of the return will be the postmark date on your properly
addressed and postage paid envelope. Upon receiving your returned Contract and
cancellation request, we will refund the Account Value adjusted by the Market
Value Adjustment (except for Individual Retirement Annuities returned within
seven days of issuance) and cancel the Contract, as though it had never been
issued.
ANNUITY PREMIUMS
The Annuity Premium is the premium payment you send us to purchase or add
to a Contract. The Annuity Premium payments accepted by Protective Life and
Annuity Insurance Company under the Contract, will be accounted for in a
non-unitized separate account. The assets of this separate account equal to the
reserves and other contract liabilities are not chargeable with the liabilities
arising out of any other business the Company conducts.
We will only accept Annuity Premiums paid prior to the Annuitant's 90th
birthday and we have the right not to accept any Annuity Premium if we so
choose. The minimum Annuity Premium is $10,000. We also have the right to limit
the total Annuity Premiums we accept without prior approval. Currently, this
amount is $1,000,000. You can make an Annuity Premium payment in the form a
check made out to Protective Life and Annuity Insurance Company or by any other
method we deem acceptable.
You allocate Annuity Premiums, less any applicable premium tax, to one or
more of the Guaranteed Periods available when you pay the Annuity Premium. You
must allocate at least $10,000 to each Guaranteed Period you choose and you may
not select a Guaranteed Period that extends beyond the Annuity Commencement
Date.
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GUARANTEED PERIODS AND SUB-ACCOUNTS
A Guaranteed Period is the number of years we will credit the Guaranteed
Interest Rate to the Sub-Account. Currently, we offer a variety of Guaranteed
Periods up to 10 years, though all Guaranteed Periods may not be available in
all states.
INITIAL GUARANTEED PERIOD
We will establish a Sub-Account for each Guaranteed Period to which you
allocate an Annuity Premium. Each Sub-Account earns interest at the Guaranteed
Interest Rate in effect for that Guaranteed Period from the date the Annuity
Premium is credited to the Sub-Account through the end of the Guaranteed Period
or until the Sub-Account is surrendered, if earlier. The value of the Contract
at any time, sometimes referred to as the Account Value, is the total of the
Sub-Account Values under the Contract. (See "Account Values," page 9.)
SUBSEQUENT GUARANTEED PERIODS
At the end of a Guaranteed Period, you may select from the following
options:
1. Surrender your ending Sub-Account value without a surrender charge or
Market Value Adjustment;
2. Instruct us to apply the ending Sub-Account value to one or more
subsequent Guaranteed Periods that you select from the Guaranteed Periods
we are then offering; or
3. Do nothing and allow a subsequent Guaranteed Period automatically to
begin.
SURRENDERS AT THE END OF A GUARANTEED PERIOD
To surrender your ending Sub-Account value, you must request the surrender
in writing no later than 10 days after the end of the expiring Guaranteed
Period. If you surrender your ending Sub-Account value under a Non-Qualified
Contract, any surrendered amount may be subject to income taxes, and a 10% IRS
penalty tax may apply if you are not yet 59 1/2 years old.
SELECTING A SUBSEQUENT GUARANTEED PERIOD
To apply the ending Sub-Account value to one or more subsequent Guaranteed
Periods, you must give us written instructions as to the Guaranteed Periods
that you select no later than 10 days after the end of the expiring Guaranteed
Period. You may select a subsequent Guaranteed Period only from the Guaranteed
Periods we are offering at the time you make your selection. Any subsequent
Guaranteed Period may not extend past the Annuity Commencement Date for your
Contract. At least $10,000 must be allocated to any subsequent Guaranteed
Period.
AUTOMATIC SUBSEQUENT GUARANTEED PERIODS
If you do not instruct us otherwise under the first or second options
described above, a subsequent Guaranteed Period automatically begins when the
prior Guaranteed Period ends. Your ending Sub-Account value becomes the
beginning Sub-Account value for the subsequent Guaranteed Period. The
subsequent Guaranteed Period is the longest Guaranteed Period we offer that is
not longer than the Guaranteed Period that just ended, and does not extend past
the Annuity Commencement Date.
GUARANTEED INTEREST RATES IN SUBSEQUENT GUARANTEED PERIODS
Your beginning Sub-Account value for any subsequent Guaranteed Period
earns interest at the rate that is in effect for the subsequent Guaranteed
Period(s) on the date your subsequent Guaranteed Period(s) begins. Our
Guaranteed Interest Rates for subsequent Guaranteed Periods may differ from our
Guaranteed Interest Rates for initial Guaranteed Periods with the same
duration.
GUARANTEED INTEREST RATES
From time to time and at our sole discretion we set Guaranteed Interest
Rates for each available Guaranteed Period. In determining these Guaranteed
Interest Rates we consider the interest rates available on the types of
instruments in which the Company intends to invest the proceeds attributable to
the Contracts. In addition, we may also consider various other factors in
determining Guaranteed Interest Rates, including regulatory and tax
requirements; sales commissions and administrative expenses the Company incurs;
general economic trends; and competitive factors. PROTECTIVE LIFE AND
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ANNUITY INSURANCE COMPANY MAKES THE FINAL DETERMINATION AS TO GUARANTEED
INTEREST RATES IT DECLARES. WE CANNOT PREDICT NOR DO WE GUARANTEE WHAT FUTURE
INTEREST RATES WE WILL DECLARE.
Annuity Premiums of $100,000 or more are currently credited with an
interest rate in excess of that credited to an Annuity Premium of less than
$100,000. In addition, as long as your Account Value exceeds $100,000, all
additional Annuity Premiums and renewals will be credited with the increased
interest rate at our discretion. A Guaranteed Interest Rate credited to a
Sub-Account will reflect the daily compounding of interest and the rate will
not change prior to the end of the Guaranteed Period.
COMPOUNDING OF INTEREST
A Sub-Account will earn interest at the appropriate Guaranteed Interest
Rate which will be the effective interest rate for each year of the Guaranteed
Period. Interest compounds daily in the Sub-Account for the duration of the
Guaranteed Period. Below is an illustration of how interest is credited during
each year of a five-year Guaranteed Period. For the purposes of this example,
we have made assumptions as indicated.
PLEASE NOTE THAT THE FOLLOWING EXAMPLE ASSUMES NO SURRENDERS OR
WITHDRAWALS OF ANY AMOUNT AND NO PREMIUM TAXES DUE ON ISSUANCE. A MARKET VALUE
ADJUSTMENT AND SURRENDER CHARGE MAY APPLY TO ANY FULL OR PARTIAL SURRENDER YOU
MAKE PRIOR TO THE END OF A GUARANTEED PERIOD (SEE "SURRENDERS," PAGE 9). THE
HYPOTHETICAL INTEREST RATES ARE FOR PURPOSES OF ILLUSTRATION ONLY AND WE DO NOT
INTEND THEM AS A PREDICTION OF ANY FUTURE INTEREST RATES WE MAY DECLARE UNDER
THE CONTRACT. THE ACTUAL INTEREST RATES WE DECLARE FOR ANY GUARANTEED PERIOD
MAY BE MORE OR LESS THAN WHAT WE HAVE USED IN THIS ILLUSTRATION.
EXAMPLE OF COMPOUNDING AT THE GUARANTEED INTEREST RATE
<TABLE>
<S> <C>
Deposit: $100,000
Guaranteed Period: 5 Years
Guaranteed Interest Rate: 5.0%
</TABLE>
<TABLE>
<CAPTION>
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5
---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Beginning of Year 1 Account Value: $ 100,000.00
x (1 + Guaranteed Interest Rate): 1.05
= End or Year 1 Account Value: $ 105,000.00
Beginning of Year 2 Account Value: $ 105,000.00
x (1 + Guaranteed Interest Rate): 1.05
= End of Year 2 Account Value: $ 110,250.00
Beginning of Year 3 Account Value: $ 110,250.00
x (1 + Guaranteed Interest Rate): 1.05
= End of Year 3 Account Value: $ 115,762.50
Beginning of Year 4 Account Value: $ 115,762.50
x (1 + Guaranteed Interest Rate): 1.05
= End of Year 4 Account Value: $ 121,550.62
Beginning of Year 5 Account Value: $ 121,550.62
x (1 + Guaranteed Interest Rate): 1.05
= End of Year 5 Account Value: $ 127,628.16
</TABLE>
Total Interest Credited in Guaranteed Period: $127,628.16 - $100,000 =
$27,628.16
Account Value at End of Guaranteed Period: $100,000 + $27,628.16 = $127,628.16
INTEREST WITHDRAWALS
Once each Contract year, you may instruct us to send you all or a portion
of the interest credited to your Sub-Accounts during the prior Contract year.
Your instructions must be in writing. Interest withdrawals remove money from
your Sub-Account that would otherwise have been compounding even more interest
on a daily basis. Because of this interruption of interest compounding, the
more interest you withdraw, the less interest your Sub-Account will generate
over time. Larger withdrawals reduce the compounding of interest more than
smaller withdrawals; frequent withdrawals hinder the compounding process more
than infrequent withdrawals; and earlier withdrawals reduce your interest more
than later withdrawals would.
8
<PAGE>
We will not impose a surrender charge or Market Value Adjustment on
interest withdrawals but interest withdrawals may be subject to federal and
state income tax. In addition, interest withdrawals from Contracts issued as
Tax-Sheltered Annuities are prohibited in certain circumstances. (See "Federal
Tax Matters," page 17.)
ACCOUNT VALUES
The value of a Sub-Account at any time is equal to the amounts that were
allocated to that Sub-Account, plus any interest credited to it, minus any
interest withdrawals and surrenders (including any surrender charges, Market
Value Adjustment and premium taxes). The sum of the Sub-Account values in your
Contract is called the Account Value and represents the total value of your
Contract.
The Net Sub-Account Value is equal to the Sub-Account value modified by
any Market Value Adjustment, minus surrender charges, and premium taxes that
would apply in the case of a full surrender of the Sub-Account. The Net Account
Value, which is the sum of all the Net Sub-Account values under your Contract,
is the amount you would be entitled to receive if you made a full surrender of
your Contract. For this reason, the Net Account Value is sometimes called the
"Surrender Value" of a Contract.
SURRENDERS
SURRENDERS
SURRENDERS AND PARTIAL SURRENDERS
You may surrender your entire Contract at any time. You may surrender part
of the Contract if the value of each remaining Sub-Account is at least $10,000
after the surrender.
Your surrender request must be in writing and, if you request a partial
surrender, you must specify the Sub-Accounts from which the partial surrender
will be taken. If you have more than one Sub-Account with the same Guaranteed
Period, you must take the partial surrender from the Sub-Account with the
shortest time remaining until maturity.
Partial and full surrenders from Contracts issued as Tax-Sheltered
Annuities are prohibited in certain circumstances. (See "Federal Tax Matters,"
page 17.)
TAXES MAY APPLY
Amounts surrendered may be subject to federal and state income taxes. THE
TAXABLE AMOUNT OF A SURRENDER MAY, UNDER CERTAIN CIRCUMSTANCES, BE SUBJECT TO A
10% FEDERAL TAX PENALTY. In the case of Qualified Contracts, federal tax law
imposes restrictions on the form and manner in which benefits may be paid. For
example, surrenders from Qualified Contracts may require your spouse's consent
even if your spouse is not an Owner. (See "Federal Tax Matters," page 18.)
Premium taxes may also apply. (See "Premium Tax," page 13.) You should consult
your tax advisor about the effect a surrender from the Contract may have on
your taxes.
DELAY OF PAYMENTS
We may delay payment of a surrender for up to six months from the date we
receive your written request, or for the period permitted by state insurance
law, if less.
9
<PAGE>
SURRENDER VALUE
The surrender value is the amount available to you upon a surrender or
partial surrender. The surrender value is calculated as of the date we receive
your surrender request using the following formula:
Surrender Value = A - S - M - P, where
A = the amount of the surrender or partial surrender you
request;
S = the amount of the surrender charge;
M = the amount of the Market Value Adjustment;
P = the amount of any applicable premium tax.
SURRENDER CHARGES
Surrenders and partial surrenders may be subject to a surrender charge.
Generally, we will assess a surrender charge if you take a surrender during the
first seven years of any Guaranteed Period. We calculate the surrender charge
separately for each Sub-Account. We determine the amount of the surrender
charge for each Sub-Account by subtracting any amount available as an interest
withdrawal from the surrender amount requested, adjusting the result by the
Market Value Adjustment, and then applying the appropriate surrender charge
percentage, indicated in the tables below, to the adjusted result.
SURRENDER CHARGE PERCENTAGE FOR INITIAL GUARANTEED PERIODS
<TABLE>
<CAPTION>
PREMIUM YEAR DURING WHICH SURRENDER IS TAKEN
GUARANTEED ---------------------------------------------------------
PERIOD 1 2 3 4 5 6 7 8 9 10
- -------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 ............ 1%
2 ............ 2% 1%
3 ............ 3% 2% 1%
4 ............ 4% 3% 2% 1%
5 ............ 5% 4% 3% 2% 1%
6 ............ 6% 5% 4% 3% 2% 1%
7-10 ......... 7% 6% 5% 4% 3% 2% 1% 0% 0% 0%
</TABLE>
SURRENDER CHARGE PERCENTAGE FOR SUBSEQUENT GUARANTEED PERIODS
<TABLE>
<CAPTION>
PREMIUM YEAR DURING WHICH SURRENDER IS TAKEN
GUARANTEED ---------------------------------------------------------
PERIOD 1 2 3 4 5 6 7 8 9 10
- -------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 ............ 1%
2 ............ 2% 1%
3 ............ 3% 2% 1%
4 ............ 4% 3% 2% 1%
5 ............ 5% 4% 3% 2% 1%
6 ............ 5% 5% 4% 3% 2% 1%
7-10 ......... 5% 5% 5% 4% 3% 2% 1% 0% 0% 0%
</TABLE>
We do not apply surrender charge:
o after the first seven years of any initial Guaranteed Period;
o to interest withdrawals;
o to surrenders at the end of a Guaranteed Period, if we receive written
request within 10 days after the end of the Guaranteed Period.
THE MARKET VALUE ADJUSTMENT
We will apply a Market Value Adjustment if you request a full or partial
surrender before the end of a Sub-Account's Guaranteed Period. The Market Value
Adjustment reflects the general relationship between interest rates available
when a Sub-Account was established and the interest rates available at the time
of the surrender from that Sub-Account.
10
<PAGE>
The Market Value Adjustment formula contains a 0.25% set percentage factor
that compensates the company for certain expenses and losses that we may incur,
either directly or indirectly, as a result of the surrender. Another factor in
the formula decreases the effect of the Market Value Adjustment as the
Sub-Account matures by taking into consideration the number of months remaining
in the Guaranteed Period from which the surrender is taken.
Like the Surrender Charge, the Market Value Adjustment is calculated
separately for each Sub-Account. We determine the amount of the Market Value
Adjustment for each Sub-Account by subtracting any amount available as an
interest withdrawal from the surrender amount requested, and then multiplying
the result by the Market Value Adjustment percentage derived from the formula
below:
Market Value Adjustment Percentage = (C - I + 0.25%) x (N/12),
where
C = the Guaranteed Interest Rate currently in effect for a
Guaranteed Period equal to the time remaining in the Guaranteed
Period from which the surrender is being made. Linear interpolation
will be used to determine C when the time remaining is not an
integral number of whole years. When the time remaining is less
than one year, C will be the current one year rate;
I = the Guaranteed Interest Rate initially established for the
Guaranteed Period from which the surrender is being made;
N = the number of months remaining in the Guaranteed Period from
which the surrender is being made.
We will determine the Guaranteed Interest Rate in C based on the same
factors used in determining the Guaranteed Interest Rate in I, including
whether the original Guaranteed Period was an initial Guaranteed Period or a
subsequent Guaranteed Period, and whether or not I included excess rate. In the
event that we no longer calculate a current Guaranteed Intrerest Rate, we will
use a suitable replacement index.
The Market Value Adjustment may increase or decrease the Surrender Value.
If, at the time of the surrender, the interest rate determined for C is more
than 0.25% lower than the interest rate determined for I, the Market Value
Adjustment will increase the Surrender Value. Otherwise, the Market Value
Adjustment will decrease the Surrender Value.
We will include the Market Value Adjustment in the amount we deduct from
the Sub-Account to satisfy your surrender request. The total Market Value
Adjustment for your surrender is the sum of the Market Value Adjustments for
each Sub-Account from which the surrender is taken.
We do not apply the Market Value Adjustment to an interest withdrawal.
When calculating the Market Value Adjustment, we consider any amount available
as an interest withdrawal to be surrendered before amounts to which the Market
Value Adjustment applies. If we receive your written surrender request no later
than ten days after the end of a Sub-Account's Guaranteed Period, we do not
apply the Market Value Adjustment to surrenders from that Sub-Account.
PLEASE NOTE THAT THE FOLLOWING EXAMPLE ASSUMES NO INTEREST WITHDRAWALS, NO
PREMIUM TAXES DUE ON ISSUANCE, AND NO SURRENDERS OTHER THAN THOSE SHOWN IN THE
EXAMPLE. THE HYPOTHETICAL INTEREST RATES ARE FOR PURPOSES OF ILLUSTRATION ONLY
AND WE DO NOT INTEND THEM AS A PREDICTION OF ANY FUTURE INTEREST RATES WE MAY
DECLARE UNDER THE CONTRACT. THE ACTUAL INTEREST RATES WE DECLARE FOR ANY
GUARANTEED PERIOD MAY BE MORE OR LESS THAN WHAT WE HAVE USED IN THIS
ILLUSTRATION.
MARKET VALUE ADJUSTMENT AND SURRENDER CHARGE EXAMPLES
FULL SURRENDER AFTER COMPLETION OF YEAR 3
<TABLE>
<CAPTION>
GUARANTEED PERIOD (YEARS): 3 5 7 TOTAL
- ------------------------------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Initial --
Annuity Deposit: $ 10,000.00 $ 10,000.00 $ 10,000.00 $ 30,000.00
Guaranteed Interest Rate: 5.00% 5.20% 5.40%
Year 1 --
Beginning of Year Account Value: $ 10,000.00 $ 10,000.00 $ 10,000.00 $ 30,000.00
x (1 + Guaranteed Interest Rate): 1.050 1.052 1.054
= End of Year Account Value: $ 10,500.00 $ 10,520.00 $ 10,540.00 $ 31,560.00
- Beginning of Year Account Value: $ 10,000.00 $ 10,000.00 $ 10,000.00 $ 30,000.00
= Interest Earned during Year: $ 500.00 $ 520.00 $ 540.00 $ 1,560.00
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
GUARANTEED PERIOD (YEARS): 3 5 7 TOTAL
- --------------------------------------------------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Year 2 --
Beginning of Year Account Value: $ 10,500.00 $ 10,520.00 $ 10,540.00 $ 31,560.00
x (1 + Guaranteed Interest Rate): 1.050 1.052 1.054
= End of Year Account Value: $ 11,025.00 $ 11,067.04 $ 11,109.16 $ 33,201.20
Beginning of Year Account Value: $ 10,500.00 $ 10,520.00 $ 10,540.00 $ 31,560.00
= Interest Earned during Year: $ 525.00 $ 547.04 $ 569.16 $ 1,641.20
Year 3 --
Beginning of Year Account Value: $ 11,025.00 $ 11,067.04 $ 11,109.16 $ 33,201.20
x (1 + Guaranteed Interest Rate): 1.050 1.052 1.054
= End of Year Account Value: $ 11,576.25 $ 11,642.53 $ 11,709.05 $ 34,927.83
- Beginning of Year Account Value: $ 11,025.00 $ 11,067.04 $ 11,109.16 $ 33,201.20
= Interest Earned during Year: $ 551.25 $ 575.49 $ 599.89 $ 1,726.63
After Completion of Year 3 --
Account Value: $ 11,576.25 $ 11,642.53 $ 11,709.05 $ 34,927.83
- Prior Year's Interest: $ 551.25 $ 575.49 $ 599.89 $ 1,726.63
= Amount Subject to Market Value Adjustment: $ 11,025.00 $ 11,067.04 $ 11,109.16 $ 33,201.20
Number of Months Remaining in the Guaranteed Period: 0 24 48
EXAMPLE #1 -- INCREASING INTEREST RATE ENVIRONMENT
Current Remaining Interest Rate: 5.50% 5.70% 5.90%
- Initial Guaranteed Interest Rate: 5.00% 5.20% 5.40%
+ 0.25%: 0.25% 0.25% 0.25%
x Number Months Remaining / 12: 0.00 2.00 4.00
= Market Value Adjustment Percentage: 0.00% 1.50% 3.00%
x Subjected Amount: $ 11,025.00 $ 11,067.04 $ 11,109.16 $ 33,201.20
= Market Value Adjustment: $ 0.00 $ 166.01 $ 333.27 $ 499.28
Account Value: $ 11,576.25 $ 11,642.53 $ 11,709.05 $ 34,927.83
-Market Value Adjustment: $ 0.00 $ 166.01 $ 333.27 $ 499.28
= Adjusted Account Value: $ 11,576.25 $ 11,476.52 $ 11,375.76 $ 34,428.55
- Prior Year's Interest: $ 551.25 $ 575.49 $ 599.89 $ 1,726.63
= Amount Subject to Surrender Charge: $ 11,025.00 $ 10,901.03 $ 10,775.89 $ 32,701.92
x Surrender Charge Percentage: 0.00% 2.00% 4.00%
= Surrender Charge: $ 0.00 $ 218.02 $ 431.04 $ 649.06
Account Value: $ 11,576.25 $ 11,642.53 $ 11,709.05 $ 34,927.83
- Market Value Adjustment: $ 0.00 $ 166.01 $ 333.27 $ 499.28
= Surrender Charge: $ 0.00 $ 218.02 $ 431.04 $ 649.06
= Surrender Value: $ 11,576.25 $ 11,258.50 $ 10,944.74 $ 33,779.49
EXAMPLE #2 -- DECREASING INTEREST RATE ENVIRONMENT
Current Remaining Interest Rate: 4.50% 4.70% 4.90%
- Initial Interest Rate: 5.00% 5.20% 5.40%
+ 0.25%: 0.25% 0.25% 0.25%
x Number Months Remaining / 12: 0.00 2.00 4.00
= Market Value Adjustment Percentage: 0.00% -0.50% -1.00%
x Subjected Amount: $ 11,025.00 $ 11,067.04 $ 11,109.16 $ 33,201.20
= Market Value Adjustment: $ 0.00 $ (55.34) $ (111.09) $ (166.43)
Account Value: $ 11,576.25 $ 11,642.53 $ 11,709.05 $ 34,927.83
- Market Value Adjustment: $ 0.00 $ (55.34) $ (111.09) $ (166.43)
= Adjusted Account Value: $ 11,576.25 $ 11,697.86 $ 11,820.15 $ 35,094.26
- Prior Year's Interest: $ 551.25 $ 575.49 $ 599.89 $ 1,726.63
- Amount Subject to Surrender Charge: $ 11,025.00 $ 11,122.38 $ 11,220.25 $ 33,367.63
x Surrender Charge Percentage: 0.00% 2.00% 4.00%
= Surrender Charge: $ 0.00 $ 222.45 $ 448.81 $ 671.26
Account Value: $ 11,576.25 $ 11,642.53 $ 11,709.05 $ 34,927.83
- Market Value Adjustment: $ 0.00 $ (55.34) $ (111.09) $ (166.43)
- Surrender Charge: $ 0.00 $ 222.45 $ 448.81 $ 671.26
= Surrender Value: $ 11,576.25 $ 11,475.41 $ 11,371.34 $ 34,423.00
</TABLE>
12
<PAGE>
PREMIUM TAX
Premium tax (including related retaliatory taxes and fees, if any) will be
deducted when applicable. If your Contract is subject to a premium tax, we will
deduct it according to applicable law from either your Annuity Premiums when
received, upon a full or partial surrender, from the amount applied to an
annuity option, or from the death benefit. The current rate of premium tax
ranges up to 3.50%. Currently, New York does not impose premium tax.
DEATH BENEFIT
DEATH OF AN ANNUITANT
If an Annuitant who is not an Owner dies before the Annuity Commencement
Date, the first Owner named on the application will become the new Annuitant
unless the Owner had designated otherwise. If any Owner is not a natural person
the death of the Annuitant or a change in the Annuitant will be treated as the
death of an Owner.
DEATH OF AN OWNER
If any Owner dies while the Contract is in force prior to the Annuity
Commencement Date, we will pay a death benefit to the Beneficiary. If there are
joint Owner's to a Contract and one dies prior to the Annuity Commencement
Date, the surviving Owner will be the Beneficiary; if none of the joint Owners
survives prior to the Annuity Commencement Date, we will pay the death benefit
to the Beneficiary named by the Owner. If there is no Beneficiary living or
named, we will pay the death benefit to the estate of the deceased Owner.
DETERMINING THE DEATH BENEFIT
We will determine the death benefit as of the date we receive due proof of
an Owner's death. If we receive a claim for the death benefit in good order and
within 12 months of the date of the Owner's death, the death benefit will be
the greater of the Net Account Value or the Account Value less applicable
premium tax. If we receive the claim 12 months or more after the date of death,
the death benefit will be the Net Account Value. If any Owner is not a natural
person, upon the change of the Annuitant the death benefit will be the Net
Account Value.
PAYING THE DEATH BENEFIT
Only one death benefit is payable under a Contract, even though the
Contract may, under some circumstances, continue beyond the time of an Owner's
death.
The death benefit may be taken in one lump sum immediately, in which event
the Contract will terminate. If the death benefit is not taken immediately as a
lump sum, the entire interest in the Contract must be distributed under one of
the following options:
(1) the entire interest must be distributed over the life of the
Beneficiary, or over a period not extending beyond the life
expectancy of the Beneficiary, with distributions beginning within
one year of the Owner's death; or
(2) the entire interest must be distributed within five years of the
Owner's death.
If the Beneficiary is the deceased Owner's spouse, the surviving spouse
may choose, in lieu of taking the death benefit, to continue the Contract and
become the new Owner. The surviving spouse may then select a new Beneficiary.
Upon the surviving spouse's death, the death benefit will become payable to the
new Beneficiary and must then be distributed to the new Beneficiary in one sum
immediately or according to option 1 or 2, described above.
If there is more than one Beneficiary, these provisions apply to each
Beneficiary individually.
The death benefit provisions of this Contract shall be interpreted to
comply with the requirements of ss.72(s) of the Internal Revenue Code. We
reserve the right to endorse this Contract, as necessary, to conform to
regulatory requirements. We will send you a copy of any endorsement containing
such Contract modifications.
13
<PAGE>
ANNUITY BENEFITS
ANNUITY COMMENCEMENT DATE
You may select an Annuity Commencement Date when you purchase a Contract.
The Annuity Commencement Date may not be earlier than the end of any Guaranteed
Period nor later than the Annuitant's 90th birthday. If you do not select one,
the Annuity Commencement Date will be the end of the Contract year immediately
before the Annuitant's 90th birthday.
You may change the Annuity Commencement Date, subject to some general
restrictions:
o You must request the change in writing.
o We must receive the written request at least 30 days before the new
Annuity Commencement Date you requested.
o The new Annuity Commencement Date may not come before the end of any
existing Guaranteed Period.
o Unless we agree prior to the change, the new Annuity Commencement Date
may not be later than the Annuitant's 90th birthday.
Once our Administrative Office notifies you that we have received and
approved your written request for changing the Annuity Commencement Date, the
change will be made effective as of the date you signed the request.
Annuity Commencement Dates which occur after the Annuitant's 90th birthday
may have adverse income tax consequences so you should consult your tax advisor
before requesting an Annuity Commencement Date at these advanced ages. You may
be required to begin distributions from Qualified Contracts before the Annuity
Commencement Date. (See "Federal Tax Matters," page 17.)
ANNUITY OPTIONS
On the Annuity Commencement Date we will apply part or all of your Account
Value to the annuity option you have selected. If you have not selected an
annuity option, we will apply your Account Value to Option 3 -- Life Income
with Payments for a 10 Year Certain Period. You may select from the following
annuity options. For qualified Contracts, additional annuity options may apply
with certain restrictions.
o OPTION 1 -- PAYMENT FOR A FIXED PERIOD.
We will make equal payments for any period not less than five years nor
more than 30 years. The amount of each payment depends upon the total
amount applied, the period selected and the interest rate we are using
when the annuity payments are determined.
o OPTION 2 -- PAYMENTS FOR LIFE.
We will make equal payments based on the life of the named Annuitant or
Annuitants. PAYMENTS STOP WHEN THE LAST ANNUITANT DIES, NO MATTER HOW FEW
OR HOW MANY PAYMENTS HAVE BEEN MADE.
o OPTION 3 -- LIFE INCOME WITH PAYMENTS FOR A 10 YEAR CERTAIN PERIOD.
We will make equal payments based on the life of the named Annuitant or
Annuitants. Payments will continue for the lifetime of the Annuitant or
Annuitants with payments guaranteed for 10 years. Payments stop at the end
of the certain period or when the last Annuitant dies, whichever is later.
Other annuity options may be available on your Annuity Commencement Date.
ANNUITY PAYMENTS
We will use the Annuitant's age on the Annuity Commencement Date to
determine the amount of the payments under the Annuity Option you select.We
calculate the amount of each annuity payment using the Annuity Tables published
in the Contract. Those tables are based on the 1983 Individual Annuitant
Mortality Table A projected 14 years with interest credited at 3% per annum.
One year will be deducted from the attained age of the Annuitant for every
three completed years beyond the year 1997. If, at the time you select an
annuity option, we offer more favorable options or rates, the higher benefits
will apply.
Generally, we will make the first annuity payment one month after the
Annuity Commencement Date. We will make subsequent payments according to the
payment mode you select. We reserve the right to pay the Net Account Value in a
14
<PAGE>
lump sum if it is less than $5,000, and to change the frequency of your annuity
payments if at any time the annuity payment is less than our current minimum
payment amount.
As a condition for making the first annuity payment, we may require proof
of the Annuitant's age and gender. As a condition for continuing to make
annuity payments, we may at any time require proof that an Annuitant is still
living. You cannot surrender this Contract after annuity payments begin.
DEATH OF THE OWNER OR ANNUITANT AFTER THE ANNUITY COMMENCEMENT DATE
If any Owner or Annuitant dies on or after the Annuity Commencement Date
and before all the annuity payments have been made, we will distribute any
remaining payments at least as rapidly as under the annuity option in effect on
the date of death. After the death of an Annuitant, we will make any remaining
payments to the Beneficiary unless you specified otherwise before the Annuitant
died.
INVESTMENTS BY PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
Protective Life's investment philosophy is to maintain a portfolio that is
matched to its liabilities with respect to yield, risk, and cash flow
characteristics. The types of assets in which Protective Life may invest are
governed by state laws which prescribe permissible investment assets. Within
the parameters of these laws, Protective Life invests its assets giving
consideration to such factors as liquidity needs, investment quality,
investment return, matching of assets and liabilities, and the composition of
the investment portfolio by asset type and credit exposure. Because liquidity
is important, the Company continually balances maturity against yield and
quality considerations in selecting new investments.
In establishing Guaranteed Interest Rates, the Company takes into account
the yields available on the instruments in which it intends to invest the
proceeds from the Contracts. (See "Determination of Guaranteed Interest Rates"
on page 7.) Protective Life's investment strategy with respect to the proceeds
attributable to the Contracts will be to invest in investment-grade debt
instruments having durations tending to match the applicable Guaranteed
Periods. It is also anticipated that some portion of the portfolio will be
invested in commercial mortgages. Protective Life may also invest in lower than
investment-grade debt instruments.
Investment-grade debt instruments in which Protective Life intends to
invest the proceeds from the Contracts include:
Securities issued by the United States Government or its agencies or
instrumentalities, which issues may or may not be guaranteed by the United
States Government.
Mortgaged-backed and corporate debt securities which have an investment
grade, at the time of purchase, within the four highest-grades assigned by
Moody's Investors Service, Inc. (Aaa, Aa, A, Baa), Standard & Poor's
Corporation ("S&P") (AAA, AA, A, or BBB) or any other nationally recognized
rating service. Protective Life considers bonds rated Baa or higher by
Moody's or BBB or higher by S&P to be investment grade.
Debt obligations which have a Moody's or Standard & Poor's rating below
investment-grade may comprise a portion of the portfolio. Risks associated
with investments in less than investment-grade debt obligations may be
significantly higher than risks associated with investments in debt
securities rated investment-grade. Risk of loss upon default by the
borrower is significantly greater with respect to such debt obligations
than with other debt securities because these obligations may be unsecured
or subordinated to other creditors. Additionally, there is often a thinly
traded market for such securities and current market quotations are
frequently not available for some of these securities. Issuers of less than
investment-grade debt obligations usually have higher levels of
indebtedness and are more sensitive to adverse economic conditions, such as
recession or increasing interest rates, than investment-grade issuers.
Protective Life carefully selects, and closely monitors, such investments.
Fixed maturity securities rated BBB may have speculative characteristics
and changes in economic conditions or other circumstances are more likely
to lead to a weakened capacity of the issuer to make principal and interest
payments than is the case with higher rated fixed maturity securities.
Protective Life carefully selects, and closely moitors, such investments.
Annuity Premium payments accepted by the Company under the Contracts will
be allocated to and accounted for in a non-unitized separate account. The
assets of this separate account equal to the reserves and other contract
15
<PAGE>
liabilities are not chargeable with the liabilities arising out of any
other business the Company conducts. THE SEPARATE ACCOUNT IS A POOL OF
ASSETS THAT PROVIDES AN ADDITIONAL MEASURE OF ASSURANCE THAT OWNERS WILL
RECEIVE FULL PAYMENT. IT IS NOT AN INVESTMENT VEHICLE IN WHOSE PERFORMANCE
OWNERS WILL HAVE ANY INTEREST. The federal government or its
instrumentalities does not guarantee the Contracts. Protective Life backs
the guarantees associated with the Contracts.
While the foregoing generally describes our investment strategy with
respect to the proceeds attributable to the Contracts, we are not obligated
to invest the proceeds attributable to the Contracts according to any
particular strategy, except as may be required by the insurance laws of
Alabama and other states in which we operate.
OTHER CONTRACT PROVISIONS
NON-PARTICIPATING
The Contract does not share in our surplus or profits and does not pay
dividends.
NOTICE
All instructions and requests to change or assign a Contract must be in a
written form acceptable to us and signed by the Owner. The instruction, change
or assignment will relate back to and take effect on the date it was signed,
but we will not be responsible for following any instruction or making any
change or assignment before we receive it and acknowledge it through our
Administrative Office. Send correspondence to: Investment Products Services, P.
O. Box 10648, Birmingham, Alabama 35202-0648.
REPORTS
At least once each year, we will send you a report showing the current
Account Value, Sub-Account value, and any other information required by law.
TRANSACTIONS AND MODIFICATION OF THE CONTRACT
Currently, you must make any request for a change or transaction under
your Contract in writing and on a form acceptable to Protective Life. Changes
and transactions under your Contract include actions such as: paying additional
Annuity Premiums; requesting surrenders or interest withdrawals; changing the
Annuity Commencement Date; annuity option, or Annuitant; or making a death
benefit claim. No one is authorized to modify or waive any term or provision of
the Contract unless we agree and unless it is signed by our President,
Vice-President or Secretary. We reserve the right to change or modify the
provisions of the Contract to conform to any applicable laws, rules or
regulations issued by a government agency, or to assure the Contract continues
to qualify as an annuity under the Internal Revenue Code. We will send you a
copy of any endorsement that modifies your Contract and will obtain all
necessary approvals including, where required, that of the Owner.
ASSIGNMENT OF A CONTRACT
You have the right to assign a Contract if it is permitted by applicable
law. Generally, you do not have the right to assign a Qualified Contract. We do
not assume responsibility for any assignment. Any claim made under an
assignment is subject to proof of the nature and extent of the assignee's
interest before we make a payment. Assignments have federal income tax
consequences. An assignment may result in the Owner recognizing taxable income.
(See, "Federal Tax Matters," page 17.)
FACILITY OF PAYMENT
If the Annuitant or Beneficiary is incapable of giving a valid receipt for
any payment, we may make payment to whomever has legally assumed his or her
care and principal support. Any such payment shall fully discharge us to the
extent of that payment.
PROTECTION OF PROCEEDS
To the extent permitted by law, no benefits payable under a Contract will
be subject to the claims of creditors of any payee.
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ERROR IN AGE OR GENDER
When a Contract benefit depends upon any person's age or gender, we may
require proof of such. We may suspend the benefit until we receive that proof.
When we receive satisfactory proof, we will make any payments that were due
during the period of suspension. Where the use of unisex mortality rates is
required, we will not determine or adjust benefits based on gender.
If, after we receive proof of age and gender (where applicable), we
determine that the information you furnished to us was not correct, we will
adjust the benefits under your Contract to that which would have been due based
upon the correct information. If we underpaid a benefit because of the error,
we will make up the underpayment in a lump sum. If the error resulted in an
overpayment, we will deduct the amount of the overpayment from any current or
future payment due under the Contract. We will deduct up to the full amount of
any current or future payment until the overpayment has been fully repaid.
Underpayments and overpayments will bear interest at an annual effective rate
of 3%.
DISTRIBUTION OF THE CONTRACTS
Investment Distributors, Inc., ("IDI") is the principal underwriter for
the Contracts and has agreed to use its best efforts to distribute them. IDI is
registered with the Securities and Exchange Commission as a broker-dealer under
the Securities Exchange Act of 1934. It is a member of the National Association
of Securities Dealers ("NASD"). IDI is a wholly owned subsidiary of Protective
Life Corporation.
IDI enters into distribution agreements with other broker-dealers
registered under the Securities Exchange Act of 1934. These broker-dealers
offer the Contracts to individuals and groups who have established accounts
with them. IDI may also offer the Contracts to members of certain other
eligible groups or other eligible individuals.
Unless forbidden by law, we pay a commission on each Annuity Premium and
on the Sub-Account Value transferred to a subsequent Guaranteed Period. The
maximum commission we will pay is 7%.
FEDERAL TAX MATTERS
INTRODUCTION
The following discussion of the federal income tax treatment of the
Contracts is not exhaustive, does not purport to cover all situations, and is
not intended as tax advice. The federal income tax treatment of the Contracts
is unclear in certain circumstances, and a qualified tax adviser should always
be consulted with regard to the application of law to individual circumstances.
This discussion is based on the Internal Revenue Code of 1986, as amended (the
"Code"), Treasury regulations, and interpretations existing on the date of this
Prospectus. These authorities, however, are subject to change by Congress, the
Treasury Department, and judicial decisions.
This discussion does not address state or local tax consequences
associated with the purchase of the Contracts. In addition, THE COMPANY MAKES
NO GUARANTEE REGARDING ANY TAX TREATMENT -- FEDERAL, STATE OR LOCAL -- OF ANY
CONTRACT OR OF ANY TRANSACTION INVOLVING A CONTRACT.
THE COMPANY'S TAX STATUS
The Company is taxed as a life insurance company under Subchapter L of the
Code. The assets underlying the Contracts will be owned by the Company, and the
income derived from such assets will be includible in the Company's income for
federal income tax purposes.
TAXATION OF ANNUITIES IN GENERAL
TAX DEFERRAL DURING ACCUMULATION PERIOD
Under existing provisions of the Code (and except as described below), the
Contracts should be treated as annuities and any increase in an Owner's Account
Value is generally not taxable to the Owner or Annuitant until received, either
in the form of Annuity payments as contemplated by the Contracts, or in some
other form of distribution.
As a general rule, Contracts held by "non-natural persons" such as a
corporation, trust or other similar entity, as opposed to a natural person, are
not treated as annuities for federal tax purposes. The income on such Contracts
(as defined in the tax law) is taxed as ordinary income that is received or
accrued by the Owner during the taxable year. There are several exceptions to
this general rule for Contracts held by non-natural persons. First, Contracts
will generally
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be treated as held by a natural person if the nominal owner is a trust or other
entity which holds the Contract as an agent for a natural person. However, this
special exception will not apply in the case of any employer who is the nominal
owner of a Contract under a non-qualified deferred compensation arrangement for
its employees.
In addition, exceptions to the general rule for non-natural Contract
owners will apply with respect to (1) Contracts acquired by an estate of a
decedent by reason of the death of the decedent, (2) Contracts issued in
connection with certain Qualified Plans, (3) Contracts purchased by employers
upon the termination of certain Qualified Plans, (4) certain Contracts used in
connection with structured settlement agreements, and (5) Contracts purchased
with a single premium when the annuity starting date is no later than a year
from purchase of the Contract and substantially equal periodic payments are
made, not less frequently than annually, during the annuity period.
If the Contract's Annuity Commencement Date occurs (or is scheduled to
occur) at a time when the Annuitant has reached an advanced age, E.G., past age
85, it is possible that the Contract would not be treated as an annuity for
federal income tax purposes. In that event, the Owner would be taxable
currently on the annual increase in the Account Value.
The remainder of this discussion assumes that the Contract will constitute
an annuity for federal tax purposes.
TAXATION OF INTEREST WITHDRAWALS AND PARTIAL AND FULL WITHDRAWALS
In the case of an interest withdrawal or partial surrender, amounts
received generally are includable in income to the extent the Owner's Account
Value before the withdrawal or partial surrender exceeds his or her "investment
in the contract." In the case of a full surrender, amounts received are
includable in income to the extent they exceed the "investment in the
contract." For these purposes the investment in the contract at any time equals
the premiums paid under the Contract (to the extent such premium payments were
neither deductible when made nor excludable from income as, for example, in the
case of certain employer contributions to Qualified Contracts) less any amounts
previously received from the Contract which were not included in income.
Other than in the case of Qualified Contracts (which generally cannot be
assigned or pledged), any assignment or pledge (or agreement to assign or
pledge) any portion of the Account Value is treated as a withdrawal of such
amount or portion. The investment in the contract is increased by the amount
includable as income with respect to such assignment or pledge, though it is
not affected by any other aspect of the assignment or pledge (including its
release). If an Owner transfers a Contract without adequate consideration to a
person other than the Owner's spouse (or to a former spouse incident to
divorce), the Owner will be taxed on the difference between the Account Value
and the investment in the contract at the time of transfer. In such case, the
transferee's investment in the contract will be increased to reflect the
increase in the transferor's income.
There is some uncertainty regarding the treatment of the Market Value
Adjustment for purposes of determining the amount includable in income as a
result of any interest withdrawal, partial surrender, or transfer without
adequate consideration. Congress has given the Internal Revenue Service ("IRS")
regulatory authority to address this uncertainty. However, as of the date of
this Prospectus, the IRS has not issued any regulations addressing these
determinations.
TAXATION OF ANNUITY PAYMENTS
Normally, the portion of each Annuity payment taxable as ordinary income
is equal to the excess of the payment over the exclusion amount. The exclusion
amount is the amount determined by multiplying (1) the payment by (2) the ratio
of the investment in the contract, adjusted for any period certain or refund
feature, to the total expected value of Annuity payments for the term of the
Contract (determined under Treasury Department regulations).
Once the total amount of the investment in the contract is excluded using
this ratio, Annuity payments will be fully taxable. If Annuity payments cease
because of the death of the Annuitant and before the total amount of the
investment in the contract is recovered, the unrecovered amount generally will
be allowed as a deduction to the Annuitant in his last taxable year.
There may be special income tax issues present in situations where the
Owner and the Annuitant are not the same person and are not married to one
another. A tax advisor should be consulted in those situations.
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EXAMPLE OF DETERMINATION OF EXCLUDABLE AMOUNT
<TABLE>
<S> <C>
Assumptions:
Cost basis (investment) in contract: $70,000
Annuity option selected: 10 year certain period
Payment frequency: monthly, with the initial payment made immediately upon annuitization
Hypothetical payment: $ 1,000
Calculations:
Total payments = Hypothetical payment multiplied by the number of payments to be made:
$1,000 x 120 = $120,000
Exclusion ratio = Cost basis divided by the total payments:
$70,000 / $120,000 = 58.33%
Excludable amount = Exclusion ratio multiplied by the hypothetical payment:
58.33% x $1,000 = $583.33
</TABLE>
TAXATION OF DEATH BENEFIT PROCEEDS
Prior to the Annuity Commencement Date, amounts may be distributed from a
Contract because of the death of an Owner or, in certain circumstances, the
death of the Annuitant. Such death benefit proceeds are includible in income as
follows: (1) if distributed in a lump sum, they are taxed in the same manner as
a full surrender, as described above, or (2) if distributed under an Annuity
Option, they are taxed in the same manner as Annuity payments, as described
above. After the Annuity Commencement Date, where a guaranteed period exists
under an Annuity Option and the Annuitant dies before the end of that period,
payments made to the Beneficiary for the remainder of that period are
includible in income as follows: (1) if received in a lump sum, they are
includible in income to the extent that they exceed the unrecovered investment
in the Contract, at that time, or (2) if distributed in accordance with the
existing Annuity Option selected, they are fully excludable from income until
the remaining investment in the Contract is deemed to be recovered, and all
Annuity payments thereafter are fully includible in income.
Proceeds payable on death may be subject to federal income tax withholding
requirements. (See "Federal Income Tax Withholding", page 22.) In addition, in
the case of such proceeds from certain Qualified Contracts, mandatory
withholding requirements may apply, unless a "direct rollover" of such proceeds
is made. (See "Direct Rollover Rules", page 21.)
PENALTY TAX ON PREMATURE DISTRIBUTIONS
Where a Contract has not been issued in connection with a Qualified Plan,
there generally is a 10% penalty tax on the taxable amount of any payment from
the Contract unless the payment is: (a) received on or after the Owner reaches
age 59 1/2; (b) attributable to the Owner becoming disabled (as defined in the
tax law); (c) made on or after the death of the Owner, or, if an Owner is not
an individual, on or after the death of the Primary Annuitant (as defined in
the tax law); (d) made as a series of substantially equal periodic payments
(not less frequently than annually) for the life (or life expectancy) of the
Owner or the joint lives (or joint life expectancies) of the Owner and a
designated beneficiary (as defined in the tax law); or (e) made under a
Contract purchased with a single premium when the Annuity Commencement Date is
no later than a year from purchase of the Contract and substantially equal
periodic payments are made, not less frequently than annually, during the
Annuity period. (Similar rules, described below, generally apply in the case of
Qualified Contracts issued.)
AGGREGATION OF CONTRACTS
In certain circumstances, the IRS may determine the amount of an Annuity
payment or a withdrawal or surrender from a Contract that is includable in
income by combining some or all of the annuity contracts owned by an individual
which are not issued in connection with a Qualified Plan. For example, if a
person purchases a Contract offered by this Prospectus and also purchases at
approximately the same time an immediate annuity, the IRS may treat the two
contracts as one contract. In addition, if a person purchases two or more
deferred annuity contracts from the same insurance company (or its affiliates)
during any calendar year, all such contracts will be treated as one contract
for purposes of determining whether any payment not received as an annuity
(including interest withdrawals prior to the Annuity Commencement Date) is
includable in income. The effects of such aggregation are not clear; however,
it could affect the time when income is taxable and the amount which might be
subject to the 10% penalty tax described above.
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LOSS OF INTEREST DEDUCTION WHERE CONTRACTS ARE HELD BY OR FOR THE BENEFIT OF
CERTAIN NON-NATURAL PERSONS
In the case of Contracts issued after June 8, 1997 to a non-natural
taxpayer (such as a corporation or a trust), or held for the benefit of such an
entity, a portion of otherwise deductible interest may no longer be deductible
by the entity, regardless of whether the interest relates to debt used to
purchase or carry the Contract. However, this interest deduction disallowance
does not effect Contracts where the income on such Contracts is treated as
ordinary income that is received or accrued by the Owner during the taxable
year. Entities that are considering purchasing the Contract, or entities that
will be beneficiaries under a Contract, should consult a tax advisor.
QUALIFIED RETIREMENT PLANS
IN GENERAL
The Contracts are also designed for use in connection with certain types
of retirement plans which receive favorable treatment under the Code. Those who
are considering the purchase of a Contract for use in connection with a
Qualified Plan should consider, in evaluating the suitability of the Contract,
that the Contract requires an Annuity Premium of at least $10,000. Numerous
special tax rules apply to participants in Qualified Plans and to Contracts
used in connection with Qualified Plans. Therefore, no attempt is made in this
prospectus to provide more than general information about the use of the
Contracts with the various types of Qualified Plans.
The tax rules applicable to Qualified Plans vary according to the type of
plan and the terms and conditions of the plan itself. For example, both the
amount of the contribution that may be made, and the tax deduction or exclusion
that the Owner may claim for such contribution, are limited under Qualified
Plans and vary with the type of plan. Also, in the case of interest
withdrawals, full and partial surrenders, and Annuity payments under Qualified
Contracts, there may be no "investment in the contract" and the total amount
received may be taxable. Similarly, loans from Qualified Contracts, where
allowed, are subject to a variety of limitations, including restrictions as to
the amount that may be borrowed, the duration of the loan, and the manner in
which the loan must be repaid. (Owners should always consult their tax advisors
and retirement plan fiduciaries prior to exercising their loan privileges.)
If a Contract is issued in connection with a Qualified Plan, the Owner and
the Annuitant must be the same person. Additionally, for Contracts issued in
connection with Qualified Plans subject to the Employee Retirement Income
Security Act, the spouse or ex-spouse of the Owner will have rights in the
Contract. In such case, the Owner may need the consent of the spouse or
ex-spouse to change annuity options, elect an interest withdrawal, or make a
partial or full surrender of the Contract.
In addition, special rules apply to the time at which distributions must
commence and the form in which the distributions must be paid. For example, the
length of any guarantee period may be limited in some circumstances to satisfy
certain minimum distribution requirements under the Code. Furthermore, failure
to comply with minimum distribution requirements applicable to Qualified Plans
will result in the imposition of an excise tax. This excise tax generally
equals 50% of the amount by which a minimum required distribution exceeds the
actual distribution from the Qualified Plan. In the case of Individual
Retirement Accounts or Annuities ("IRAs"), distributions of minimum amounts (as
specified in the tax law) must generally commence by April 1 of the calendar
year following the calendar year in which the Owner attains age 70 1/2. In the
case of certain other Qualified Plans, distributions of such minimum amounts
generally must commence by the later of this date or April 1 of the calendar
year following the calendar year in which the employee retires.
There is also a 10% penalty tax on the taxable amount of any payment from
certain Qualified Contracts. There are exceptions to this penalty tax which
vary depending on the type of Qualified Plan. In the case of an IRA, exceptions
provide that the penalty tax does not apply to a payment (a) received on or
after the Owner reaches age 59 1/2, (b) received on or after the Owner's death
or because of the Owner's disability (as defined in the tax law), or (c) made
as a series of substantially equal periodic payments (not less frequently than
annually) for the life (or life expectancy) of the Owner or for the joint lives
(or joint life expectancies) of the Owner and the Owner's designated
Beneficiary (as defined in the tax law). These exceptions, as well as certain
others not described herein, generally apply to taxable distributions from
other Qualified Plans (although, in the case of plans qualified under sections
401 and 403, exception "c" above for substantially equal periodic payments
applies only if the Owner has separated from service). In addition, the penalty
tax does not apply to certain distributions from IRAs taken after December 31,
1997 which are used for qualified first time home purchases or for higher
education expenses. Special conditions must be met for these two exceptions to
the penalty tax. Those wishing to take a distribution from an IRA for these
purposes should consult their tax advisor.
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When issued in connection with a Qualified Plan, a Contract will be
amended as generally necessary to conform to the requirements of the plan.
However, Owners, Annuitants, and Beneficiaries are cautioned that the rights of
any person to any benefits under Qualified Plans may be subject to the terms
and conditions of the plans themselves, regardless of the terms and conditions
of the Contract. In addition, the Company shall not be bound by terms and
conditions of Qualified Plans to the extent such terms and conditions
contradict the Contract, unless the Company consents.
Following are brief descriptions of various types of Qualified Plans in
connection with which the Company will generally issue a Contract.
INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
"Individual Retirement Annuity" or "IRA." IRAs are subject to limits on the
amounts that may be contributed, the persons who may be eligible and on the
time when distributions may commence. Also, subject to the direct rollover and
mandatory withholding requirements discussed below, distributions from certain
Qualified Plans may be "rolled over" on a tax-deferred basis into an IRA. The
Contract may not, however, be used in connection with an "Education IRA" under
Section 530 of the Code, a "Simplified Employee Pension" under Section 408(k)
of the Code, or as a "SIMPLE IRA" under Section 408(p) of the Code.
CORPORATE AND SELF-EMPLOYED ("H.R.10" AND "KEOGH") PENSION AND
PROFIT-SHARING PLANS. Sections 401(a) and 403(a) of the Code permit corporate
employers to establish various types of tax-favored retirement plans for
employees. The Self-Employed Individuals' Tax Retirement Act of 1962, as
amended, commonly referred to as "H.R. 10" or "Keogh," permits self-employed
individuals also to establish such tax-favored retirement plans for themselves
and their employees. Such retirement plans may permit the purchase of the
Contract in order to provide benefits under the plans. Employers intending to
use the Contract in connection with such plans should seek competent advice.
TAX-SHELTERED ANNUITIES. Section 403(b) of the Code permits public school
employees and employees of certain types of charitable, educational and
scientific organizations specified in Section 501(c)(3) of the Code to have
their employers purchase annuity contracts for them and, subject to certain
limitations, to exclude the amount of purchase payments from gross income for
tax purposes. These annuity contracts are commonly referred to as
"tax-sheltered annuities." Purchasers of the Contracts for such purposes should
seek competent advice as to eligibility, limitations on permissible amounts of
purchase payments and other tax consequences associated with the Contracts.
Section 403(b) Policies contain restrictions on withdrawals of (i)
contributions made pursuant to a salary reduction agreement in years beginning
after December 31, 1988, (ii) earnings on those contributions, and (iii)
earnings after December 31, 1988 on amounts attributable to salary reduction
contributions held as of December 31, 1988. These amounts can be paid only if
the employee has reached age 59 1/2 separated from service, died, become
disabled, or in the case of hardship. Amounts permitted to be distributed in
the event of hardship shall be limited to actual contributions; earnings
thereon shall not be distributed on account of hardship. (These limitations on
withdrawals do not apply to the extent the Company is directed to transfer some
or all of the Amount Value to the issuer of another tax-sheltered annuity or
into a Section 403(b)(7) custodial account.)
DIRECT ROLLOVER RULES
In the case of Contracts used in connection with a pension,
profit-sharing, or annuity plan qualified under Sections 401(a) or 403(a) of
the Code, or in the case of a Section 403(b) Tax- Sheltered Annuity, any
"eligible rollover distribution" from the Contract will be subject to direct
rollover and mandatory withholding requirements. An eligible rollover
distribution generally is any taxable distribution from a qualified pension
plan under Section 401(a) of the Code, qualified annuity plan under Section
403(a) of the Code, or Section 403(b) tax sheltered annuity or custodial
account, excluding certain amounts (such as minimum distributions required
under Section 401(a)(9) of the Code and distributions which are part of a
"series of substantially equal periodic payments" made for life or a specified
period of 10 years or more or hardship distributions as defined in the tax
law).
Under these requirements, withholding at a rate of 20 percent will be
imposed on any eligible rollover distribution. In addition, the Owner in these
qualified retirement plans cannot elect out of withholding with respect to an
eligible rollover distribution. However, this 20 percent withholding will not
apply if, instead of receiving the eligible rollover distribution, the Owner
elects to have amounts directly transferred to certain Qualified Plans (such as
to an Individual Retirement Annuity). Prior to receiving an eligible rollover
distribution, you will receive a notice (from the plan administrator or the
Company) explaining generally the direct rollover and mandatory withholding
requirements and how to avoid the 20% withholding by electing a direct
transfer.
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FEDERAL INCOME TAX WITHHOLDING
The Company will withhold and remit to the U.S. government a part of the
taxable portion of each distribution made under a Contract unless the
distributee notifies the Company at or before the time of the distribution that
he or she elects not to have any amounts withheld. In certain circumstances,
Protective Life may be required to withhold tax. The withholding rates
applicable to the taxable portion of periodic Annuity payments (other than
eligible rollover distributions) are the same as the withholding rates
generally applicable to payments of wages. The withholding rate applicable to
the taxable portion of non-periodic payments (including withdrawals prior to
the Annuity Commencement Date) is 10%. Regardless of whether you elect not to
have federal income tax withheld, you are still liable for payment of federal
income tax on the taxable portion of the payment. As described above, the
withholding rate applicable to eligible rollover distributions is 20%.
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
BUSINESS
Protective Life and Annuity Insurance Company, a stock life insurance
company, was founded in 1978 as American Foundation Life Insurance Company.
Effective March 1, 1999, the Company was renamed Protective Life and Annuity
Insurance Company. All outstanding shares of the Company's common stock are
owned by Protective Life Insurance Company ("PLICO"), which is a wholly-owned
subsidiary of Protective Life Corporation ("PLC"), an insurance holding company
whose common stock is traded on the New York Stock Exchange under the symbol
"PL". All outstanding shares of the Company's preferred stock are owned by PLC.
The Company is authorized to transact insurance business, as an insurance
company or a reinsurance company, in 48 states, including New York.
PLC through its subsidiaries provides financial services through the
production, distribution, and administration of insurance and investment
products. PLC through its subsidiaries operates seven divisions whose principal
strategic focuses can be grouped into three general categories: life insurance,
specialty insurance products, and retirement savings and investment products.
The life insurance category includes the Acquisitions, Individual Life, and
West Coast Divisions. The specialty insurance products category includes the
Dental and Consumer Benefits ("Dental") and Financial Institutions Divisions.
And the retirement savings and investment products category includes the
Guaranteed Investment Contracts and Investment Products Divisions.
The Company, since it is licensed in the State of New York, is the entity
through which PLC markets, distributes, and services insurance and annuity
products in New York. As of December 31, 1998, the Company was involved in the
businesses of four of PLC's seven divisions: the Acquisitions Division, the
Dental Division, the Financial Institutions Division and the Investment
Products Division. The Company has an additional business segment which is
described herein as Corporate and Other.
PLICO has entered into an inter-company guaranty agreement, enforceable by
the Company or its successors, whereby PLICO has guaranteed the Company's
payment of claims made by the holders of Company policies according to the
terms of such policies. The guarantee will remain in force until the earlier of
(a) when the Company achieves a claims-paying rating equal to or better than
PLICO without the benefit of any inter-company guaranty agreement or (b) 90
days after the guaranty agreement is revoked by written instrument; provided,
however, even after any revocation or termination by such notice, the guarantee
shall remain effective as to policies issued during the existence of the
guaranty agreement.
ACQUISITIONS DIVISION
PLC is an active participant in the consolidation of the life and health
insurance industry. The Acquisitions Division focuses on acquiring, converting,
and servicing policies acquired from other companies. The Division's primary
focus is on life insurance policies sold to individuals. These acquisitions may
be accomplished through acquisitions of companies or through the assumption or
reinsurance of life insurance and related policies. Forty transactions have
been closed by the Division since 1970, including 13 since 1989. Some of these
transactions involved the Company. Blocks of policies acquired through the
Acquisitions Division are usually administered as "closed" blocks, I.E., no new
policies are sold. Therefore, the amount of insurance in force for a particular
acquisition is expected to decline with time due to lapses and deaths of the
insureds.
Most acquisitions closed by PLC do not include the acquisition of an
active sales force. In transactions where some marketing capacity was included,
PLC generally either ceased future marketing efforts or redirected those
efforts to
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another Division of PLC. However, in the case of the acquisition of West Coast
which was closed by PLC's Acquisitions Division, PLC elected to continue the
marketing of new policies and to operate and report West Coast as a separate
division of PLC.
PLC believes that its highly focused and disciplined approach to the
acquisition process and its extensive experience in the assimilation,
conservation, and servicing of purchased books of business give it a
significant competitive advantage over many other companies that attempt to
make similar acquisitions. PLC expects acquisition opportunities to continue to
be available as the life and health industry continues to consolidate; however,
management believes that PLC may face increased competition for future
acquisitions.
Total revenues and income before income tax from the Acquisitions Division
are expected to decline with time unless new acquisitions are made. Therefore,
the Division's revenues and earnings may fluctuate from year to year depending
upon the level of acquisition activity involving the Company.
DENTAL DIVISION
The PLC Dental Division's primary strategic emphasis is on indemnity and
prepaid dental products. The Company supports this effort by providing
indemnity dental insurance in the State of New York. Also included in this
Division of the Company is a closed block of group life insurance policies
issued in New York.
FINANCIAL INSTITUTIONS DIVISION
PLC's Financial Institutions Division specializes in marketing credit life
and disability insurance products through banks, consumer finance companies and
automobile dealers. The Division is one of the largest independent writers of
credit insurance in the United States. The majority of these policies cover
consumer loans made by financial institutions located primarily in the
southeastern United States and automobile dealers throughout the United States.
The demand for credit life and credit health insurance is related to the
general level for consumer loans.
The Division markets through employee field representatives, independent
brokers and wholly-owned subsidiaries. PLC believes it has been a beneficiary
of a "flight to quality," as financial institutions and automobile dealers
increasingly prefer to do business with insurers having quality products,
strong balance sheets and high-quality training and service capabilities.
In late 1997, the Financial Institution Division began marketing policies
through the Company in the State of New York.
INVESTMENT PRODUCTS DIVISION
The Investment Products Division of PLC manufactures, sells, and supports
fixed and variable annuity products. These products are primarily sold through
stockbrokers, but are also sold through financial institutions and PLC's
Individual Life Division's sales force. The demand for annuity products is
related to the general level of interest rates and performance of equity
markets. During 1998 the Investment Products Division began marketing certain
annuity products through the Company in the State of New York.
CORPORATE AND OTHER
The Corporate and Other segment consists of net investment income and
revenue and expenses not attributable to the business segments described above
(including net investment income on capital). The earnings of this segment may
fluctuate from year to year.
23
<PAGE>
SELECTED FINANCIAL DATA
The following Selected Financial Data for the Company should be read in
conjunction with the consolidated financial statements and notes thereto
included elsewhere in this Prospectus.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- --------------- --------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Premiums and policy fees ................... $$9,767,144 8,415,833 $ 9,458,003 $6,925,097 $ 8,252,019
Net investment income ...................... 10,678,166 6,233,845 6,611,489 5,507,867 5,500,891
Realized investment gains (losses) ......... 127,769 (59,889) (28,070) 838,977 801,587
Other income ............................... (598) 8,718 2,406 (8) 3
----------- --------- ----------- ------------- -----------
Total revenues .......................... $20,572,481 $14,598,507 $16,043,828 $13,271,933 $14,554,500
=========== =========== =========== ============ ===========
Benefits and expenses ...................... $17,218,957 $11,802,364 $12,383,026 $9,088,603 $10,032,858
Income tax expense ......................... $ 938,986 $ 950,689 $ 1,244,673 $1,422,332 $ 1,446,926
Net income ................................. $ 2,414,538 $ 1,845,454 $ 2,416,129 $2,760,998 $ 3,074,716
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------- --------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total assets .................................. $604,629,566 $106,147,458 $110,954,096 $119,052,638 $94,249,702
Redeemable preferred stock .................... -- -- -- $ 2,000,000 $ 2,000,000
Stockholders' equity .......................... $131,238,617 $ 25,450,141 $ 22,547,113 $ 22,602,564 $21,986,464
Stockholders' equity excluding net unrealized
gains and losses on investments .............. $122,430,008 $ 24,740,954 $ 22,995,500 $ 21,679,371 $25,680,107
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This report includes "forward looking statements" which express
expectations of future events and/or results. All statements based on future
expectations rather than on historical facts are forward-looking statements
that involve a number of risks and uncertainties, and the Company cannot give
assurance that such statements will prove to be correct. Please refer to Known
Trends and Uncertainties herein for more information about factors which could
affect future results.
RESULTS OF OPERATIONS
PREMIUMS AND POLICY FEES
The following table sets forth for the periods shown the amount of
premiums and policy fees and the percentage change from the prior period:
PREMIUMS AND POLICY FEES
<TABLE>
<CAPTION>
PERCENTAGE
YEAR ENDED INCREASE
DECEMBER 31 AMOUNT (DECREASE)
- ---------------- ------------- -----------
<S> <C> <C>
1996 ............................................. $9,458,003 36.6%
1997 ............................................. 8,415,833 (11.0)
1998 ............................................. 9,767,144 16.1
</TABLE>
24
<PAGE>
Premiums and policy fees decreased $1.0 million or 11.0% in 1997 as
compared to 1996. Decreases in the Dental and Acquisitions Divisions were $0.8
million and $0.3 million, respectively. Premiums and policy fees increased $1.4
million or 16.1% in 1998 as compared to 1997. The coinsurance by the
Acquisitions Division of a block of policies from Lincoln National Corporation
in October 1998 resulted in a $3.6 million increase in premiums and policy fees
in 1998 as compared to 1997. The Dental Division's loss of a large customer at
December 31, 1997 resulted in a $2.8 million decrease in premiums and policy
fees in 1998 as compared to 1997. The Financial Institution Division began
operating through the Company in late 1997. Premiums and policy fees from the
Financial Institutions Division were $0.8 million higher in 1998 as compared to
1997 reflecting a full year of operations in 1998 as compared to a partial year
in 1997.
NET INVESTMENT INCOME
The following table shows the amount of net investment income for the
stated period, the percentage change from the prior period, and the percentage
earned on average cash and investments:
NET INVESTMENT INCOME
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE EARNED ON
YEAR ENDED INCREASE AVERAGE CASH AND
DECEMBER 31 AMOUNT (DECREASE) INVESTMENTS
- ------------------ ------------- ------------ ---------------------
<S> <C> <C> <C>
1996 ........... $ 6,611,489 20.0% 7.5%
1997 ........... 6,233,845 (5.7) 6.5
1998 ........... 10,678,166 71.3 6.4
</TABLE>
Net investment income for 1997 was $6.2 million, 5.7% lower, and for 1998
was $10.7 million, 71.3% higher, than for the preceding year. The decline from
1996 to 1997 was caused by a shift in the make-up of the Company's invested
assets from higher yielding commercial mortgage loans to somewhat lower
yielding corporate bonds. The increase from 1997 to 1998 was primarily due to
increases in the average amount of invested assets associated with the
coinsurance transaction described above.
The percentage earned on average cash and investments was 6.5% in 1997 and
6.4% in 1998.
REALIZED INVESTMENT GAINS (LOSSES)
The Company generally purchases its investments with the intent to hold
them to maturity by purchasing investments that match future cash flow needs.
However, the Company may sell any of its investments to maintain proper
matching of assets and liabilities. Accordingly, the Company has classified its
fixed maturities and certain other securities as "available for sale." The
sales of investments that have occurred generally result from portfolio
management decisions to maintain proper matching of assets and liabilities. The
following table sets forth realized investment gains for the periods shown:
REALIZED INVESTMENT GAINS (LOSSES)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31 AMOUNT
- ---------------- -------------
<S> <C>
1996 ......................................................... $(28,070)
1997 ......................................................... (59,889)
1998 ......................................................... 127,769
</TABLE>
Realized investment losses in 1997 of $69.9 thousand were offset by
realized investment gains of $10.0 thousand. In 1998, the Company established
an allowance for uncollectible amounts on investments totaling $500.0 thousand
at December 31, 1998. Realized investment gains in 1998 of $627.8 thousand were
largely offset by the realized investment loss of $500.0 thousand to establish
the above-mentioned investment allowance.
25
<PAGE>
INCOME BEFORE INCOME TAX
The following table sets forth operating income or loss and income or loss
before income tax by business segment for the periods shown:
INCOME (LOSS) BEFORE INCOME TAX
<TABLE>
<CAPTION>
OPERATING INCOME (LOSS) AND INCOME (LOSS)
BEFORE
INCOME TAX YEAR ENDED DECEMBER 31
-------------------------------------------
1998 1997 1996
--------------- ------------- -------------
<S> <C> <C> <C>
OPERATING INCOME (LOSS)(1)
LIFE INSURANCE
Acquisitions ........................ $ 3,408,955 $1,621,102 $3,096,645
SPECIALTY INSURANCE PRODUCTS
Dental .............................. 736,761 609,843 599,964
Financial Institutions .............. 387,194 7,946
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
Investment Products ................. (58,991)
Corporate and Other .................. (1,248,164) 617,141 (7,737)
------------ ---------- ----------
Total Operating income ............... 3,225,755 2,856,032 3,688,872
------------ ---------- ----------
REALIZED INVESTMENT GAINS (LOSSES)
Corporate and Other .................. 127,769 (59,889) (28,070)
------------ ---------- ----------
Total net ............................ 127,769 (59,889) (28,070)
------------ ---------- ----------
INCOME (LOSS) BEFORE INCOME TAX
LIFE INSURANCE
Acquisitions ........................ 3,408,955 1,621,102 3,096,645
SPECIALTY INSURANCE PRODUCTS
Dental .............................. 736,761 609,843 599,964
Financial Institutions .............. 387,194 7,946
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
Investment Products ................. (58,991)
Corporate and Other .................. (1,120,395) 557,252 (35,807)
------------ ---------- ----------
Total income before income tax ....... $ 3,353,524 $2,796,143 $3,660,802
============ ========== ==========
(1) Income before income tax excluding realized investment gains and losses.
</TABLE>
Pretax earnings from the Acquisitions Division decreased $1.5 million in
1997 as compared to 1996. The Division's 1998 pretax earnings increased $1.8
million when compared to 1997. 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. In October 1998, the Division acquired approximately
260,000 policies from Lincoln National Corporation. The policies represent the
payroll deduction business originally marketed and underwritten by Aetna. This
acquisition resulted in a $1.6 million increase in pretax earnings in 1998. The
Division's mortality experience was approximately $0.3 million less favorable
in 1998 than in 1997.
The Dental Division's 1997 pretax earnings of $0.6 million were even with
1996. The Division's 1998 pretax earnings increased $0.1 million as compared to
1997. A decrease in earnings related to the loss of a large customer at
December 31, 1997 was more than offset by increases in other areas.
The Financial Institutions Division began operating through the Company in
late 1997. The Division's 1998 pretax earnings were $0.4 million as compared to
the Division's earnings from the latter part of 1997 which were insignificant.
The Investment Products Division began marketing certain annuity products
in the state of New York in the latter part of 1998, resulting in a pretax
operating loss of approximately $0.1 million primarily related to start-up
expenses.
26
<PAGE>
The Corporate and Other segment consists of net investment income and
realized investment gains not identified with the preceding business segments.
Pretax earnings for this segment were $0.6 million higher in 1997 as compared
to 1996. Pretax losses for this segment were $1.1 million in 1998 as compared
to pretax gains of $0.6 million in 1997 primarily due to decreased net
investment income on capital.
INCOME TAX EXPENSE
The following table sets forth the effective income tax rates for the
periods shown:
INCOME TAX EXPENSE
<TABLE>
<CAPTION>
YEAR ENDED EFFECTIVE
DECEMBER 31 INCOME TAX RATES
- ---------------- -----------------
<S> <C>
1996 ........................................ 34.0%
1997 ........................................ 34.0
1998 ........................................ 28.0
</TABLE>
Management's current estimate of the effective income tax rate for 1999 is
28%.
NET INCOME
The following table sets forth net income for the periods shown:
NET INCOME
<TABLE>
<CAPTION>
PERCENTAGE
YEAR ENDED INCREASE
DECEMBER 31 AMOUNT (DECREASE)
- ---------------- ------------- -------------
<S> <C> <C>
1996 ........................................ $2,416,129 (12.5)%
1997 ........................................ 1,845,454 (23.6)
1998 ........................................ 2,414,538 30.8
</TABLE>
Compared to 1996, net income in 1997 decreased 23.6% reflecting declining
earnings in the Acquisitions Division and an increase in realized investment
losses which were partially offset by improved earnings in the Dental Division
and the Corporate and Other segment. Compared to 1997, net income in 1998
increased 30.8% reflecting improved earnings in the Acquisitions, Dental and
Financial Institutions Divisions which were partially offset by losses in the
Investment Products Division and the Corporate and Other Segment.
KNOWN TRENDS AND UNCERTAINTIES
The operating results of companies in the insurance industry have
historically been subject to significant fluctuations due to competition,
economic conditions, interest rates, investment performance, maintenance of
insurance ratings, and other factors. Certain known trends and uncertainties
which may affect future results of the Company are discussed more fully below.
Please also refer to Other Developments herein.
MATURE INDUSTRY/COMPETITION. Life and health insurance is a mature
industry. In recent years, the industry has experienced little growth in life
insurance sales, though the aging population has increased the demand for
retirement savings products. Insurance is a highly competitive industry, and
the Company encounters significant competition in all lines of business from
other insurance companies, many of which have greater financial resources than
the Company and PLC, as well as competition from other providers of financial
services.
The life and health insurance industry is consolidating with larger, more
efficient organizations emerging from consolidation. Also, mutual insurance
companies are converting to stock ownership which will give them greater access
to capital markets.
Management believes that the Company's ability to compete is dependent
upon, among other things, its ability to attract and retain distribution
channels to market its insurance and investment products, its ability to
develop competitive and profitable products, its ability to maintain low unit
costs, and its maintenance of strong financial strength ratings from rating
agencies.
The Company competes against other insurance companies and financial
institutions in the origination of commercial mortgage loans.
27
<PAGE>
RATINGS. Ratings are an important factor in the competitive position of
insurance companies. Rating organizations periodically review the financial
performance and condition of insurers, including the Company and its
affiliates. A downgrade in the ratings of the Company and its affiliates could
adversely affect its ability to sell its products and retain existing business
and its ability to compete for attractive acquisition opportunities.
Rating organizations assign ratings based upon several factors. While most
of the considered factors relate to the rated company, some of the factors
relate to general economic conditions and circumstances outside the rated
company's control. For the past several years, rating downgrades in the
industry have exceeded upgrades.
The Company's current ratings by Standard & Poors and Duff and Phelps are
based on an inter-company guaranty agreement, enforceable by the Company or its
successors, whereby PLICO has guaranteed the Company's payment of claims made
by the holders of Company policies according to the terms of such policies. The
guarantee will remain in force until the earlier of (a) when the Company
achieves a claims-paying rating equal to or better than Protective without the
benefit of any inter-company guaranty agreement, or (b) 90 days after the
guaranty agreement is revoked by written instrument; provided, however, even
after any revocation or termination by such notice, the guarantee shall remain
effective as to policies issued during the existence of the guaranty agreement.
POLICY CLAIMS FLUCTUATIONS. The Company's results may fluctuate from year
to year on account of fluctuations in policy claims received by the Company.
LIQUIDITY AND INVESTMENT PORTFOLIO. Many of the products offered by PLC's
insurance subsidiaries (including the Company) allow policyholders and
contractholders to withdraw their funds under defined circumstances. The
Company and its affiliates design products and configure investment portfolios
to provide and maintain sufficient liquidity to support anticipated withdrawal
demands and contract benefits and maturities. Formal asset/liability management
programs and procedures are used to monitor the relative duration of PLC's
assets and liabilities. While PLC owns a significant amount of liquid assets,
many of its assets are relatively illiquid. Significant unanticipated
withdrawal or surrender activity could, under some circumstances, compel PLC to
dispose of illiquid assets on unfavorable terms, which could have a material
adverse effect on the Company.
INTEREST RATE FLUCTUATIONS. Significant changes in interest rates expose
insurance companies to the risk of not earning anticipated spreads between the
interest rate earned on investments and the credited rates paid on outstanding
policies. Both rising and declining interest rates can negatively affect the
Company's spread income. For example, certain of the Company's insurance and
investment products guarantee a minimum credited rate. While the Company
develops and maintains asset/liability management programs and procedures
designed to preserve spread income in rising or falling interest rate
environments, no assurance can be given that significant changes in interest
rates will not materially affect such spreads.
Lower interest rates may result in lower sales of the Company's insurance
and investment products.
REGULATION AND TAXATION. The Company and its affilitates are subject to
government regulation in each of the states in which they conduct business.
Such regulation is vested in state agencies having broad administrative power
over all aspects of the insurance business which may include premium rates,
marketing practices, advertising, policy forms, and capital adequacy, and is
concerned primarily with the protection of policyholders rather than
share-owners. The Company cannot predict the form of any future regulatory
initiatives.
Under the Internal Revenue Code of 1986, as amended (the Code), income tax
payable by policyholders on investment earnings is deferred during the
accumulation period of certain life insurance and annuity products. This
favorable tax treatment may give certain of the Company's products a
competitive advantage over other non-insurance products. To the extent that the
Code is revised to reduce the tax-deferred status of life insurance and annuity
products, or to increase the tax-deferred status of competing products, all
life insurance companies, including the Company and its affiliates, would be
adversely affected with respect to their ability to sell such products, and,
depending on grandfathering provisions, the surrenders of existing annuity
contracts and life insurance policies. The Company cannot predict what future
initiatives the President or Congress may propose that may affect the Company.
LITIGATION. A number of civil jury verdicts have been returned against
insurers in the jurisdictions in which the Company does business involving the
insurers' sales practices, alleged agent misconduct, failure to properly
supervise agents, and other matters. Increasingly these lawsuits have resulted
in the award of substantial judgments against the insurer that are
disproportionate to the actual damages, including material amounts of punitive
damages. In some states (including Alabama), juries have substantial discretion
in awarding punitive damages which creates the potential for unpredictable
material adverse judgments in any given punitive damages suit. The Company and
its affiliates, like other insurers, in the
28
<PAGE>
ordinary course of business, are involved in such litigation or alternatively
in arbitration. The outcome of any such litigation or arbitration cannot be
predicted with certainty. In addition, in some class action and other lawsuits
involving insurers' sales practices, insurers have made material settlement
payments.
INVESTMENT RISKS. The Company's invested assets are subject to customary
risks of credit defaults and changes in market values. The value of the
Company's commercial mortgage portfolio depends in part on the financial
condition of the tenants occupying the properties which the Company has
financed. Factors that may affect the overall default rate on, and market value
of, the Company's invested assets include interest rate levels, financial
market performance, and general economic conditions, as well as particular
circumstances affecting the businesses of individual borrowers and tenants.
CONTINUING SUCCESS OF ACQUISITION STRATEGY. PLC has actively pursued a
strategy of acquiring blocks of insurance policies and companies of which some
transactions may from time-to-time involve the Company. This acquisition
strategy has increased the earnings of PLC and its affiliates in part by
allowing PLC and its affiliates to position themselves to realize certain
operating efficiencies associated with economies of scale. There can be no
assurance, however, that suitable acquisitions, presenting opportunities for
continued growth and operating efficiencies, will continue to be available to
PLC, or that PLC will realize the anticipated financial results from its
acquisitions.
RELIANCE ON THE PERFORMANCE OF OTHERS. The Company's results may be
affected by the performance of others because the Company has entered into
various ventures involving other parties. Examples include, but are not limited
to: many of the Company's products are sold through independent distribution
channels and the Investment Products Division's variable annuity deposits are
invested in funds managed by unaffiliated investment managers.
YEAR 2000. Computer hardware and software often denote the year using two
digits rather than four; for example, the year 1998 often is denoted by such
hardware and software as "98." It is probable that such hardware and software
will malfunction when calculations involving the year 2000 are attempted
because the hardware and/or software will interpret "00" as representing the
year 1900 rather than the year 2000. This "Year 2000" issue potentially affects
all individuals and companies (including the Company, its customers, business
partners, suppliers, banks, custodians and administrators). The problem is most
prevalent in older mainframe systems, but personal computers and equipment
containing computer chips could also be affected.
Due to the fact that the Company does not control all of the factors that
could impact its Year 2000 readiness, there can be no assurances that the
Company's Year 2000 efforts will be successful, that interactions with other
service providers with Year 2000 issues will not impair the Company's
operations, or that the Year 2000 issue will not otherwise adversely affect the
Company.
Should some of the Company's systems not be available due to the Year 2000
problems, in a reasonably likely worst case scenario, the Company may
experience significant delays in its ability to perform certain functions, but
does not expect to be unable to perform critical functions or to otherwise
conduct business. However, other worst case scenarios, depending upon their
duration, could have a material adverse effect on the Company and its
operations.
REINSURANCE. The Company cedes insurance to other insurance companies.
However, the Company remains liable with respect to ceded insurance should any
reinsurer fail to meet the obligations ceded to it. The cost of reinsurance is,
in some cases, reflected in the premium rates charged by the Company. Under
certain reinsurance agreements, the reinsurer may increase the rate it charges
the Company for the reinsurance, though the Company does not anticipate
increases to occur. Therefore, if the cost of reinsurance were to increase with
respect to policies where the rates have been guaranteed by the Company, the
Company could be adversely affected.
Additionally, the Company assumes policies of other insurers. Any
regulatory or other development affecting the ceding insurer could also have an
effect on the Company.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 will require the Company to
report derivative financial instruments on the balance sheet and to carry such
derivatives at fair value. The fair values of derivatives increase or decrease
as interest rates change. Under SFAS No. 133, changes in fair value are
reported as a component of net income or as a change to share-owners' equity,
depending upon the nature of the derivative. SFAS No. 133 is effective January
1, 2000. Since the Company has no derivative financial instruments this
standard is not expected to have a material effect on the Company.
29
<PAGE>
The FASB has also issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise," and the American Institute of Certified Public
Accountants has issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." The adoption of
these accounting standards in 1999 is not expected to have a material effect on
the Company's financial condition.
LIQUIDITY AND CAPITAL RESOURCES
Funds necessary to meet the capital requirements of all states in which
the Company does business, and to support the Company's operations, have been
provided principally by capital contributions from Protective Life Insurance
Company, and from investment income.
Furthermore, PLICO has entered into an inter-company guaranty agreement,
enforceable by the Company or its successors, whereby PLICO has guaranteed the
Company's payment of policy claims made by the holders of Company policies
according to the terms of such policies. The guarantee will remain in force
until the earlier of (a) when the Company achieves a claims-paying rating equal
to or better than PLICO without the benefit of any inter-company guaranty
agreement, or (b) 90 days after the guaranty agreement is revoked by written
instrument; provided, however, even after any revocation or termination by such
notice, the guarantee shall remain effective as to policies issued during the
existence of the guaranty agreement.
INVESTMENTS
The Company generally purchases its investments with the intent to hold to
maturity by purchasing investments that match future cash flow needs. However,
the Company may sell any of its investments to maintain proper matching of
assets and liabilities. Accordingly, the Company has classified its fixed
maturities and certain other securities as "available for sale."
The Company's investments in debt and equity securities are reported at
market value, and investments in mortgage loans are reported at amortized cost.
At December 31, 1998, the fixed maturity investments (bonds) had a market value
of $360.1 million, which is 3.9% above amortized cost of $346.6 million. The
Company had $7.9 million in mortgage loans at December 31, 1998. While the
Company's mortgage loans do not have quoted market values, at December 31,
1998, the Company estimates the market value of its mortgage loans to be $8.5
million (using discounted cash flows from the next call date) which is 7.6%
above amortized cost. Most of the Company's mortgage loans have significant
prepayment penalties. These assets are invested for terms approximately
corresponding to anticipated future benefit payments. Thus, market fluctuations
should not adversely affect liquidity.
The following table sets forth the estimated market values of the
Company's fixed maturity investments and mortgage loans resulting from a
hypothetical immediate 1 percentage point increase in interest rates from
levels prevailing at December 31, 1998, and the percent change in market value
the following estimated market values would represent.
ESTIMATED MARKET VALUES RESULTING FROM AN
IMMEDIATE 1 PERCENTAGE POINT INCREASE IN INTEREST RATES
<TABLE>
<CAPTION>
PERCENTAGE
AMOUNT CHANGE
--------------- -----------
<S> <C> <C>
Fixed maturities ........................ $343,151,942 (4.7)%
Mortgage loans .......................... 8,335,585 (2.1)
</TABLE>
Estimated market values were derived from the durations of the Company's
fixed maturities and mortgage loans. Duration measures the relationship between
changes in market value to changes in interest rates. While these estimated
market values generally provide an indication of how sensitive the market
values of the Company's fixed maturities and mortgage loans are to changes in
interest rates, they do not represent management's view of future market
changes, and actual market results may differ from these estimates.
At December 31, 1998, the Company had no problem mortgage loans or
foreclosed properties. Bonds rated less than investment grade were 1.3% of
assets. The Company does not expect these investments to adversely affect its
liquidity or ability to maintain proper matching of assets and liabilities. The
Company's allowance for uncollectible amounts on investments was $0.5 million
at December 31, 1998.
30
<PAGE>
Policy loans at December 31, 1998, were $54.1 million, a decrease of $1.3
million from December 31, 1997 (after excluding the $43.8 million of policy
loans obtained through acquisitions). Policy loan rates are generally in the
4.5% to 8.0% range. Such rates at least equal the assumed interest rates used
for future policy benefits.
LIABILITIES
Many of the Company's products contain surrender charges and other
features that reward persistency and penalize the early withdrawal of funds.
Surrender charges for these products generally are sufficient to cover the
Company's unamortized deferred policy acquisition costs with respect to the
policy being surrendered. Certain annuity contracts have market-value
adjustments that protect the Company against investment losses if interest
rates are higher at the time of surrender than at the time of issue.
At December 31, 1998, the Company had policy liabilities and accruals of
$442.3 million. The Company's life insurance products have a weighted average
minimum credited interest rate of approximately 4.3%.
At December 31, 1998, the Company had $3.4 million of annuity account
balance having an estimated fair value of $3.4 million (using surrender value).
The following tables sets forth the estimated fair values of the Company's
annuity account balances resulting from a hypothetical immediate 1 percentage
point decrease in interest rates from levels prevailing at December 31, 1998,
and the percent change in fair value the following estimated fair values would
represent.
ESTIMATED FAIR VALUES RESULTING FROM AN
IMMEDIATE 1 PERCENTAGE POINT DECREASE IN INTEREST RATES
<TABLE>
<CAPTION>
PERCENTAGE
AMOUNT CHANGE
------------- -----------
<S> <C> <C>
Annuity account balances ........................ $3,503,160 3.4%
</TABLE>
Estimated fair values were derived from the durations of the Company's
annuity account balances. While these estimated fair values generally provide
an indication of how sensitive the fair values of the Company's annuity account
balances are to change in interest rates, they do not represent management's
view of future market changes, and actual market results may differ from these
estimates.
ASSET/LIABILITY MANAGEMENT
The Company believes certain product features and its asset/liability
management programs and procedures provide significant protection for the
Company against the effects of changes in interest rates. Additionally, the
Company believes its asset/liability management programs and procedures provide
sufficient liquidity to enable it to fulfill its obligation to pay benefits
under its various insurance and deposit contracts.
The Company's asset/liability management programs and procedures involve
the monitoring of asset and liability durations for various product lines; cash
flow testing under various interest rate scenarios; and the continuous
rebalancing of assets and liabilities with respect to duration, yield, risk,
and cash flow characteristics. It is the Company's policy to generally maintain
asset and liability durations within one-half year of one another, although
from time to time a broader interval may be allowed.
CAPITAL
As disclosed in the Notes to the Financial Statements, at December 31,
1998, $101.3 million of share-owners' equity, excluding net unrealized
investment gains and losses, represented net assets of the Company that cannot
be transferred to Protective Life Insurance Company in the form of dividends,
loans, or advances.
A life insurance company's statutory capital is computed according to
rules prescribed by the National Association of Insurance Commissioners
("NAIC"), as modified by the insurance company's state of domicile. Statutory
accounting rules are different from generally accepted accounting principles
and are intended to reflect a more conservative view by, for example, requiring
immediate expensing of policy acquisition costs. The NAIC's risk-based capital
requirements require insurance companies to calculate and report information
under a risk-based capital formula. The achievement of long-term growth will
require growth in the statutory capital of the Company. The Company may secure
additional statutory capital through various sources, such as retained
statutory earnings or equity contributions by Protective Life Insurance
Company.
31
<PAGE>
OTHER DEVELOPMENTS
The NAIC has adopted the Codification of Statutory Accounting Principles
(Codification). The Codification changes current statutory accounting rules in
several areas. The Company has not estimated the potential effect the
Codification will have on its statutory capital. The Codification has been
proposed to become effective January 1, 2001.
The NAIC is considering a new reserving standard, commonly referred to as
"Triple X" (i.e., roman numeral XXX), for universal life and level premium
term-like insurance products. The Company is currently assessing the impact of
Triple X on its products and what changes to the products might be necessary in
response to Triple X.
Under insurance guaranty fund laws in most states, insurance companies
doing business in a participating state can be assessed up to prescribed limits
for policyholder losses incurred by insolvent companies. The Company does not
believe that any such assessments will be materially different from amounts
already reflected in the financial statements.
The Company believes that at the present time there are no pending or
threatened lawsuits that are reasonably likely to have a material adverse
effect on the financial position, results of operations, or liquidity of the
Company.
The Company is not aware of any material pending or threatened regulatory
action with respect to the Company or any of its affiliates.
The President's Fiscal Year 2000 Budget contains proposals that, if
enacted, would adversely affect the life insurance industry. The first proposal
would require insurers to include in taxable income over 10 years the balances
accumulated in a tax memorandum account designated as Policyholders' Surplus.
The Company had no amount in this account at December 31, 1998. A second
proposal would require insurers to capitalize higher percentages of acquisition
expenses for tax purposes, resulting in the earlier payment of tax. A third
proposal would reduce the attractiveness of corporate-owned life insurance (or
COLI) products.
Life insurance products are often used to fund estate tax obligations.
Recently a report issued by the Congressional Joint Economic Committee
recommended the elimination of the estate tax. If the estate tax were
eliminated, the demand for certain life insurance products would be adversely
affected.
YEAR 2000 DISCLOSURE
Computer hardware and software often denote the year using two digits
rather than four; for example, the year 1998 often is denoted by such hardware
and software as "98." It is probable that such hardware and software will
malfunction when calculations involving the year 2000 are attempted because the
hardware and/or software will interpret "00" as representing the year 1900
rather than the year 2000. This "Year 2000" issue potentially affects all
individuals and companies (including the Company, its customers, business
partners, suppliers, banks, custodians and administrators). The problem is most
prevalent in older mainframe systems, but personal computers and equipment
containing computer chips could also be affected.
The Company shares computer hardware and software with PLC. PLC began work
on the Year 2000 problem in 1995. At that time, PLC identified and assessed
PLC's critical mainframe systems, and prioritized the remediation efforts that
were to follow. During 1998 all other hardware and software, including
non-information technology (non-IT) related hardware and software, were
included in the process. PLC's Year 2000 plan includes all subsidiaries.
PLC estimates that Year 2000 remediation is complete for most of its
insurance administration and general administration systems. Of the general
administration systems that are not yet remediated, the majority are new
systems that were implemented during 1998 and are scheduled to be upgraded to
the current release of the system during the second quarter of 1999. All
remediated systems are currently in production. Personal computer network
hardware and software have been reviewed, with upgrades implemented where
necessary. A review of personal computer desktop software is in progress, but
not complete. All Year 2000 personal computer preparations are expected to be
completed by June 30, 1999. With respect to non-IT equipment and processes, the
assessment and remediation is progressing on schedule and all known issues are
expected to be remediated before December 31, 1999.
Two insurance administration systems identified as mission critical are
not yet fully remediated. A personal computer database system that processes
member information for one subsidiary is currently being remediated. This
effort is on schedule and targeted to be complete by June 30, 1999. Also,
another personal computer application, which processes policy information for
one line of business, is being re-written and is currently in test. This system
is targeted to be in production by April 30, 1999.
32
<PAGE>
Future date tests are used to verify a system's ability to process
transactions dated up to and beyond January 1, 2000. Future date tests are
complete or in-progress for the majority of PLC's mission-critical systems. A
large portion of the testing is conducted by a contract programming staff
dedicated full time to Year 2000 preparations. These resources have been part
of PLC's Year 2000 project since 1995.
Integrated tests involve multiple system testing and are used to verify
the Year 2000 readiness of interfaces and connectivity across multiple systems.
PLC is using its mainframe computer to simulate a Year 2000 production
environment and to facilitate integrated testing. Integrated testing will
continue throughout 1999.
Business partners and suppliers that provide products or services critical
to PLC's operations are being reviewed and in some cases their Year 2000
preparations are being monitored by the Company. To date, no partners or
suppliers have reported that they expect to be unable to continue supplying
products and services after January 1, 2000. Initial reviews are targeted to be
completed in the first quarter of 1999. Monitoring and testing of critical
partners and suppliers will continue throughout 1999. Formal contingency
planning will begin in March 1999 and continue throughout the year. These plans
will augment PLC's existing disaster recovery plans.
PLC cannot specifically identify all of the costs to develop and implement
its Year 2000 plan. The cost of new systems to replace non-compliant systems
have been capitalized in the ordinary course of business. Other costs have been
expensed as incurred. Through December 31, 1998, costs that have been
specifically identified as relating to the Year 2000 problem total $3.9
million, with an additional $1.3 million estimated to be required to support
continued testing activity. PLC's Year 2000 efforts have not adversely affected
its normal procurement and development of information technology.
Although PLC believes that a process is in place to successfully address
Year 2000 issues, there can be no assurances that PLC's efforts will be
successful, that interactions with other service providers with Year 2000
issues will not impair the Company's operations, or that the Year 2000 issue
will not otherwise adversely affect the Company.
Should some of PLC's systems not be available due to Year 2000 problems,
in a reasonably likely worst case scenario, the Company may experience
significant delays in its ability to perform certain functions, but does not
expect to be unable to perform critical functions or to otherwise conduct
business.
IMPACT OF INFLATION
Inflation increases the need for life insurance. Many policyholders who
once had adequate insurance programs may increase their life insurance coverage
to provide the same relative financial benefits and protection.
The higher interest rates that have traditionally accompanied inflation
may also affect the Company's investment operation. Policy loans increase as
policy loan interest rates become relatively more attractive. As interest rates
increase, disintermediation of annuity deposits and individual life policy cash
values may increase. In addition, the market value of the Company's fixed-rate,
long-term investments may decrease, and the Company may be unable to implement
fully the interest rate reset and call provisions of its mortgage loans and the
Company's ability to make attractive mortgage loans may decrease. The
difference between the interest rate earned on investments and the interest
rate credited to life insurance and investment products may also be adversely
affected by rising interest rates.
Inflation also increases the level of claims of the Company's health
insurance products.
33
<PAGE>
INSURANCE IN FORCE
The Company's total consolidated life insurance in force at December 31,
1998 was $8,196.8 million. The following table shows sales by face amount and
insurance in force for the Company's business segments.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------
1998 1997 1996 1995
------------- ---------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
New Business Written
Acquisitions ....................... $ 88,625 $ 0 $ 95 $ 70
Dental ............................. 0 1,508 984 1,333
Financial Institutions ............. 0 9,485 0 0
---------- -------- -------- --------
Total ............................ $ 88,625 $ 10,993 $ 1,079 $ 1,403
========== ======== ======== ========
Business Acquired
Acquisitions ....................... $7,787,284 $428,849
---------- --------
Total ............................ $7,787,284 $428,849
========== ========
Insurance in Force at End of Year (1)
Acquisitions ....................... $8,116,240 $387,427 $446,823 $490,380
Dental ............................. 691 200,410 349,808 300,993
Financial Institutions ............. 79,824 9,056 0 0
---------- -------- -------- --------
Total ............................ $8,196,755 $596,893 $796,631 $791,373
========== ======== ======== ========
</TABLE>
- ---------
(1) Reinsurance assumed has been included; reinsurance ceded (1998-$7,575,418;
1997-$133,080; 1996-$169,330; 1995-$42,165) has not been deducted.
The ratio of voluntary terminations of individual life insurance to mean
individual life insurance in force, which is determined by dividing the amount
of insurance terminated due to lapses during the year by the mean of the
insurance in force at the beginning and end of the year, adjusted for the
timing of major acquisitions and assumptions was:
<TABLE>
<CAPTION>
RATIO OF
YEAR ENDED VOLUNTARY
DECEMBER 31 TERMINATIONS
- ---------------- -------------
<S> <C>
1995 ...................................... 4.1%
1996 ...................................... 6.5
1997 ...................................... 9.2
1998 ...................................... 3.9
</TABLE>
Net terminations reflect voluntary lapses and cash surrenders, some of
which may be due to the replacement of the Company's products with competitors'
products. Also, a higher percentage of voluntary lapses typically occurs in the
first 15 months of a policy, and accordingly, lapses will tend to increase or
decrease in proportion to the change in new insurance written during the
immediately preceding periods.
The amount of investment products in force is measured by account
balances. The following table shows the annuity account balances.
<TABLE>
<CAPTION>
YEAR ENDED FIXED VARIABLE
DECEMBER 31 ANNUITIES ANNUITIES
- ---------------- ----------- ----------
<S> <C> <C>
1994 ................................... 892,628
1995 ................................... 960,056
1996 ................................... 973,155
1997 ................................... 929,124
1998 ................................... 2,902,840 769,067
</TABLE>
UNDERWRITING
The underwriting policies of the Company are established by management.
With respect to individual insurance, the Company uses information from the
application and, in some cases, inspection reports, attending physician
statements, or
34
<PAGE>
medical examinations to determine whether a policy should be issued as applied
for, rated, or rejected. Medical examinations of applicants are required for
individual life insurance in excess of certain prescribed amounts (which vary
based on the type of insurance) and for most ordinary insurance applied for by
applicants over age 50. Medical examinations are requested of any applicant,
regardless of age and amount of requested coverage, if an examination is deemed
necessary to underwrite the risk. Substandard risks may be referred to
reinsurers for full or partial reinsurance of the substandard risk.
The Company requires blood samples to be drawn with individual insurance
applications for coverage at age 16 and above, except in the payroll deduction
market where the face amount must be $100,000 or more before blood testing is
required. Blood samples are tested for a wide range of chemical values and are
screened for antibodies to the HIV virus. Applications also contain questions
permitted by law regarding the HIV virus which must be answered by the proposed
insureds.
Group insurance underwriting policies are administered by experienced
group underwriters. The underwriting policies are designed for single employer
groups. Initial premium rates are based on prior claim experience and manual
premium rates with relative weights depending on the size of the group and
nature of the benefits.
INVESTMENTS
The types of assets in which the Company may invest are influenced by
various state laws which prescribe qualified investment assets. Within the
parameters of these laws, the Company invests its assets giving consideration
to such factors as liquidity needs, investment quality, investment return,
matching of assets and liabilities, and the overall composition of the
investment portfolio by asset type and credit exposure.
A portion of the Company's bond portfolio is invested in mortgage-backed
securities. Mortgage-backed securities are constructed from pools of
residential mortgages, and may have cash flow volatility as a result of changes
in the rate at which prepayments of principal occur with respect to the
underlying loans. Prepayments of principal on the underlying residential loans
can be expected to accelerate with decreases in interest rates and diminish
with increases in interest rates. Due to the potential cash flow volatility of
mortgage-backed securities, the Company has focused on sequential, planned
amortization class, and targeted amortization class securities. These types
have less volatility than other types of mortgage-backed securities. The
Company does not invest in the riskiest tranches of mortgage-backed securities.
The Company obtains ratings of its fixed maturities from Moody's Investor
Service, Inc. ("Moody's") and Standard & Poor's Corporation ("S&P"). If a bond
is not rated by Moody's or S&P, the Company uses ratings from the Securities
Valuation Office of the National Association of Insurance Commissioners
("NAIC"), or the Company rates the bond based upon a comparison of the unrated
issue to rated issues of the same issuer or rated issues of other issuers with
similar risk characteristics. At December 31, 1998, 100% of bonds were rated by
Moody's, S&P, or the NAIC.
At December 31, 1998, approximately $352.4 million of the Company's $360.1
million bond portfolio was invested in U.S. Government or agency-backed
securities or investment grade corporate bonds and only approximately $7.7
million of its bond portfolio was rated less than investment grade.
Risks associated with investments in less than investment grade debt
obligations may be significantly higher than risks associated with investments
in debt securities rated investment grade. Risk of loss upon default by the
borrower is significantly greater with respect to such debt obligations than
with other debt securities because these obligations may be unsecured or
subordinated to other creditors. Additionally, there is often a thinly traded
market for such securities and current market quotations are frequently not
available for some of these securities. Issuers of less than investment grade
debt obligations usually have higher levels of indebtedness and are more
sensitive to adverse economic conditions, such as recession or increasing
interest rates, than investment-grade issuers.
The Company also invests a portion of its portfolio in mortgage loans.
Results for these investments have been excellent due to careful management and
a focus on a specialized segment of the market. The Company generally does not
lend on speculative properties and has specialized in making loans on either
credit-oriented commercial properties, or credit-anchored strip shopping
centers. There were no new loans made during 1998. The average size mortgage
loan in the Company's portfolio is approximately $0.5 million. The largest
single loan amount is $1.9 million.
35
<PAGE>
The following table shows a breakdown of the Company's mortgage loan portfolio
by property type:
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
PROPERTY TYPE ON REAL ESTATE
- --------------------------------- ---------------
<S> <C>
Retail ............................................. 51%
Office Building .................................... 48
Multi-Family ....................................... 1
--
Total .............................................. 100%
===
</TABLE>
Retail loans are generally on strip shopping centers located in smaller
towns and anchored by one or more strong regional or national retail stores.
The anchor tenants enter into long-term leases with the Company's borrowers.
These centers provide the basic necessities of life, such as food,
pharmaceuticals, and clothing, and have been relatively insensitive to changes
in economic conditions. The following is the largest anchor tenant (measured by
the Company's exposure) in the strip shopping centers at December 31, 1998:
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
ANCHOR TENANTS ON REAL ESTATE
- -------------------------------------- ---------------
<S> <C>
Rite Aid Corporation ......................... 3.1%
</TABLE>
Office building loans are generally on professional offices where the
owner may be a tenant. The loans may be further secured with personal
guarantees of the owner.
The Company's mortgage lending criteria generally require that the
loan-to-value ratio on each mortgage be at or under 75% at the time of
origination. Projected rental payments from credit anchors (I.E., excluding
rental payments from smaller local tenants) generally exceed 70% of the
property's projected operating expenses and debt service.
Many of the Company's mortgage loans have call or interest rate reset
provisions between 3 and 10 years. However, if interest rates were to
significantly increase, the Company may be unable to call the loans or increase
the interest rates on its existing mortgage loans commensurate with the
significantly increased market rates.
At December 31, 1998, the Company had no problem mortgage loans or
foreclosed properties. It is the Company's policy to cease to carry accrued
interest on loans that are over 90 days delinquent. For loans less than 90 days
delinquent, interest is accrued unless it is determined that the accrued
interest is not collectible. If a loan becomes over 90 days delinquent, it is
the Company's general policy to initiate foreclosure proceedings unless a
workout arrangement to bring the loan current is in place.
As a general rule, the Company does not invest directly in real estate.
The investment real estate held by the Company consists largely of properties
obtained through foreclosures or the acquisition of other insurance companies.
In the Company's experience, the appraised value of foreclosed properties often
approximates the mortgage loan balance on the property plus costs of
foreclosure. Also, foreclosed properties often generate a positive cash flow
enabling the Company to hold and manage the property until the property can be
profitably sold.
For further information regarding the Company's investment, the maturity
of and the concentration of risk among the Company's invested assets and
liquidity, see Note C to the Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" included herein for certain
information relating to the Company's investments and liquidity.
The following table shows the investment results of the Company for the
years 1996 through 1998:
<TABLE>
<CAPTION>
PERCENTAGE
CASH, ACCRUED EARNED ON
INVESTMENT INCOME, NET AVERAGE OF REALIZED
YEAR ENDED AND INVESTMENTS AT INVESTMENT CASH AND INVESTMENT
DECEMBER 31 DECEMBER 31 INCOME INVESTMENTS GAINS (LOSSES)
- --------------- -------------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
1996 ......... $ 97,968,992 $ 6,611,489 7.5% $ (28,070)
1997 ......... 95,470,119 6,233,845 6.5 (59,889)
1998 ......... 447,981,278 10,678,166 6.4 127,769
</TABLE>
36
<PAGE>
INDEMNITY REINSURANCE
As is customary in the insurance industry, the Company cedes insurance to
other insurance companies. The ceding insurance company remains liable with
respect to ceded insurance should any reinsurer fail to meet the obligations
assumed by it. The Company sets a limit on the amount of insurance retained on
the life of any one person. In the individual lines it will not retain more
than $500,000, including accidental death benefits, on any one life. For group
insurance, the maximum amount retained on any one life is generally $100,000.
In many cases the retention is less. At December 31, 1998, the Company had
insurance in force of $8,196.8 billion of which approximately $7,575.4 billion
was ceded to reinsurers.
POLICY LIABILITIES AND ACCRUALS
The applicable insurance laws under which the Company operates require
that each insurance company report policy liabilities to meet future
obligations on the outstanding policies. These liabilities are the amounts
which, with the additional premiums to be received and interest thereon
compounded annually at certain assumed rates, are calculated in accordance with
applicable law to be sufficient to meet the various policy and contract
obligations as they mature. These laws specify that the liabilities shall not
be less than liabilities calculated using certain named mortality tables and
interest rates.
The policy liabilities and accruals carried in the Company's financial
reports (presented on the basis of generally accepted accounting principles)
differ from those specified by the laws of the various states and carried in
the Company's statutory financial statements (presented on the basis of
statutory accounting principles mandated by state insurance regulation). For
policy liabilities other than those for universal life policies and annuity
contracts, these differences arise from the use of mortality and morbidity
tables and interest rate assumptions which are deemed under generally accepted
accounting principles to be more appropriate for financial reporting purposes
than those required for statutory accounting purposes; from the introduction of
lapse assumptions into the reserve calculation; and from the use of the net
level premium method on all business. Policy liabilities for universal life
policies and annuity contracts are carried in the Company's financial reports
at the account value of the policy or contract.
COMPETITION
Life and health insurance is a mature industry. In recent years, the
industry has experienced little no growth in life insurance sales, though the
aging population has increased the demand for retirement savings products. Life
and health insurance is a highly competitive industry and the Company's
divisions encounter significant competition in all their respective lines of
business from other insurance companies, many of which have greater financial
resources than the Company, as well as competition from other providers of
financial services.
The life and health insurance industry is consolidating with larger, more
efficient organizations emerging from consolidation. Also, mutual insurance
companies are converting to stock ownership which will give them greater access
to capital markets.
Management believes that the Company's ability to compete is dependent
upon, among other things, its ability to attract and retain distribution
channels to market its insurance and investment products, its ability to
develop competitive and profitable products, its ability to maintain low unit
costs, and its maintenance of strong claims-paying and financial strength
ratings from rating agencies.
The Company competes against other insurance companies and financial
institutions in the origination of commercial mortgage loans.
REGULATION
The Company is subject to government regulation in each of the states in
which it conducts business. Such regulation is vested in state agencies having
broad administrative power dealing with all aspects of the insurance business,
including premium rates, marketing practices, advertising, policy forms and
capital adequacy, and is concerned primarily with the protection of
policyholders rather than share-owners. The Company cannot predict the form of
any future proposals or regulation.
A life insurance company's statutory capital is computed according to
rules prescribed by the National Association of Insurance Commissioners
("NAIC") as modified by the insurance company's state of domicile. Statutory
accounting rules are different from generally accepted accounting principles
and are intended to reflect a more conservative view, for
37
<PAGE>
example, by requiring immediate expensing of policy acquisition costs and more
conservative computations of policy liabilities. The NAIC's risk-based capital
requirements require insurance companies to calculate and report information
under a risk-based capital formula. These requirements are intended to allow
insurance regulators to identify inadequately capitalized insurance companies
based upon the types and mixtures of risks inherent in the insurer's
operations. The formula includes components for asset risk, liability risk,
interest rate exposure, and other factors. Based upon the December 31, 1998
statutory financial reports, the Company is adequately capitalized under the
formula.
The Company is required to file detailed annual reports with the
supervisory agencies in each of the jurisdictions in which it does business and
its business and accounts are subject to examination by such agencies at any
time. Under the rules of the NAIC, insurance companies are examined
periodically (generally every three to five years) by one or more of the
supervisory agencies on behalf of the states in which they do business. To
date, no such insurance department examinations have produced any significant
adverse findings regarding the Company.
Under insurance guaranty fund laws in most states, insurance companies
doing business in such a state can be assessed up to prescribed limits for
policyholder losses incurred by insolvent or failed insurance companies.
Although the Company cannot predict the amount of any future assessments; most
insurance guaranty fund laws currently provide that an assessment may be
excused or deferred if it would threaten an insurer's financial strength. The
Company was assessed immaterial amounts in 1998, which will be partially offset
by credits against future state premium taxes.
In addition, many states, including the state in which the Company is
domiciled, have enacted legislation or adopted regulations regarding insurance
holding company systems. These laws require registration of and periodic
reporting by insurance companies domiciled within the jurisdiction which
control or are controlled by other corporations or persons so as to constitute
an insurance holding company system. These laws also affect the acquisition of
control of insurance companies as well as transactions between insurance
companies and companies controlling them. Most states, including Alabama, where
the Company is domiciled, require administrative approval of the acquisition of
control of an insurance company domiciled in the state or the acquisition of
control of an insurance holding company whose insurance subsidiary is
incorporated in the state.
The Company is subject to various state statutory and regulatory
restrictions on its ability to pay dividends to Protective Life Insurance
Company. In general, dividends up to specified levels are considered ordinary
and may be paid without prior approval. Dividends in larger amounts are subject
to approval by the insurance commissioner of the state of domicile. The maximum
amount that would qualify as ordinary dividends to Protective Life Insurance
Company by the Company in 1999 is estimated to be $5.1 million. No assurance
can be given that more stringent restrictions will not be adopted from time to
time by the state in which the Company is domiciled, which restrictions could
have the effect, under certain circumstances, of significantly reducing
dividends or other amounts payable by the Company without affirmative prior
approval by state regulatory authorities.
Existing federal laws and regulations affect the taxation of the Company's
products. Income tax payable by policyholders on investment earnings is
deferred during the accumulation period of certain life insurance and annuity
products. Congress has from time to time considered proposals that, if enacted,
would have had an adverse impact on the federal income tax treatment of such
products, or would increase the tax-deferred status of competing products.
The Federal Government has advocated the repeal the Glass-Steagall Act and
certain other legislative changes, which would allow banks to diversify into
securities and other businesses, including possibly insurance. The ultimate
scope and effective date of any proposals are unknown at this time and are
likely to be modified as they are considered for enactment. It is anticipated
that these proposals may increase competition and, therefore, may adversely
affect the Company.
Additional issues related to regulation of the Company are discussed in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" included herein.
RECENT DEVELOPMENTS
The NAIC has adopted the Codification of Statutory Accounting Principles
("Codification"). The Codification changes current statutory accounting rules
in several areas. The Company has not estimated the potential effect the
Codification will have on the statutory capital of the Company and its
affiliates.
The NAIC is considering a new reserving standard, commonly referred to as
"Triple X" (i.e., roman numeral XXX), for universal life and level premium
term-like insurance products. Protective is currently assessing the impact of
Triple X on its products and what changes to the products might be necessary in
response to Triple X.
38
<PAGE>
The President's Fiscal Year 2000 Budget contains proposals that, if
enacted, would adversely affect the life insurance industry. The first proposal
would require insurers to include in taxable income over 10 years the balance
accumulated in a tax memorandum account designated as Policyholders' Surplus.
The Company had no amounts in this account at December 31, 1998. A second
proposal would require insurers to capitalize higher percentages of acquisition
expense for tax purposes, resulting in the earlier payment of tax. A third
proposal would reduce the attractiveness of corporate-owned life insurance (or
COLI) products.
Life insurance products are often used to fund estate tax obligations.
Recently a report issued by the Congressional Joint Economic Committee
recommended the elimination of the estate tax. If the estate tax were
eliminated, the demand for certain life insurance products would be adversely
affected.
EMPLOYEES AND PROPERTIES
The Company has no employees or properties. The Company has contracts with
PLC and PLICO under which it receives investment, legal and data processing on
a fee basis and other managerial and administrative services on a shared cost
basis. In addition, the Company and its affiliates have a joint contract
relating to allocation of costs for services performed by employees of one
affiliate for another.
39
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of Protective Life are as follows:
<TABLE>
<S> <C> <C>
Wayne E. Stuenkel 45 President, Chief Actuary and a Director
R. Stephen Briggs 49 Executive Vice President and a Director
Jim E. Masssengale 56 Executive Vice President, Acquisitions and a Director
A.S. Williams, III 62 Executive Vice President, Investments and Treasurer, and a Director
Danny L. Bentley 41 Senior Vice President, Group and a Director
Richard J. Bielen 38 Senior Vice President, Investments and a Director
Carolyn King 48 Senior Vice President, Investment Products and a Director
Deborah J. Long 45 Senior Vice President, General Counsel, Secretary and a Director
Steven A. Schultz 45 Senior Vice President, Financial Institutions and a Director
Jerry W. DeFoor 46 Vice President and Controller
John D. Johns 47 Director
Drayton Nabers, Jr. 58 Director
</TABLE>
All executive officers and directors are elected annually. Executive
officers serve at the pleasure of the Board of Directors and directors are
elected by PLICO at the annual meeting of shareholders of Protective Life. None
of the individuals listed above is related to any other director of PLC or
PLICO or to any other executive officer.
Mr. Stuenkel has been President and Chief Actuary of Protective Life since
June 1996. He was Senior Vice President and Chief Actuary of Protective Life
from May 1989 to June 1996 and PLC since March 1987. Mr. Stuenkel is a Fellow
in the Society of Actuaries.
Mr. Briggs has been Executive Vice President of PLC and Protective Life
since October 1993. From January 1993 to October 1993, he was Senior Vice
President, Life Insurance and Investment Products of Protective Life and PLC.
Mr. Briggs had been Senior Vice President, Ordinary Marketing of PLC since
August 1988 and of Protective Life since May 1986.
Mr. Massengale has been Executive Vice President, Acquisitions of
Protective Life and PLC since August 1996. From May 1992 to August 1996, he
served as Senior Vice President of Protective Life and PLC. From May 1989 to
May 1992, Mr. Massengale was Senior Vice President, Operations and Systems of
Protective Life and PLC.
Mr. Williams has been Executive Vice President, Investments and Treasurer
of Protective Life and PLC since August 1996. From July 1981 to August 1996, he
was Senior Vice President, Investments and Treasurer of PLC and from October
1993 to August 1996, he was Senior Vice President, Investments of Protective
Life.
Mr. Bentley has been Senior Vice President, Group of Protective Life and
PLC since August 1996. From December 1993 to August 1996, he was Vice
President, Group Marketing of Protective Life.
Mr. Bielen has been Senior Vice President, Investments of PLC and
Protective Life since August 1996. From August 1991 to August 1996, he was Vice
President, Investments of Protective Life.
Ms. King has been Senior Vice President, Investment Products Division of
PLC and Protective Life since April 1995. From August 1994 to March 1995, she
served as Senior Vice President and Chief Investment Officer of Provident Life
and Accident Insurance Company and of its parent company, Provident Life and
Accident Insurance Company of America. She served as President of Provident
National Assurance Company from November 1987 to March 1995. From November 1986
to August 1994, she served as Vice President of Provident Life and Accident
Insurance Company of America.
Ms. Long has been Senior Vice President, Secretary and General Counsel of
PLC since November 1996 and of Protective Life since September 1996. Ms. Long
was Senior Vice President and General Counsel of PLC from February 1994 to
November 1996 and of Protective Life from February 1994 to September 1996. From
August 1993 to January 1994, Ms. Long served as General Counsel of PLC and from
February 1984 to January 1994, she practiced law with the law firm of Maynard,
Cooper & Gale, P.C.
Mr. Schultz has been Senior Vice President, Financial Institutions of
Protective Life and PLC since March 1993. Mr. Schultz served as Vice President,
Financial Institutions of Protective Life from February 1989 to March 1993 and
of PLC from February 1993 to March 1993.
40
<PAGE>
Mr. DeFoor has been Vice President and Controller, and Chief Accounting
Officer of PLC since April 1989. Mr. DeFoor has been Vice President and
Controller of Protective Life since May 1989. Mr. DeFoor is a certified public
accountant.
Mr. Johns has been President and Chief Operating Officer of PLC since
August 1996 and a Director of Protective Life since June 1996. He was Executive
Vice President and Chief Financial Officer of PLC from October 1993 to August
1996. He was Executive Vice President and Chief Financial Officer of Protective
Life from October 1993 to June 1996. From August 1988 to October 1993, he
served as Vice President and General Counsel of Sonat Inc. He is a director of
National Bank of Commerce of Birmingham and Alabama National Bancorporation.
Mr. Nabers has been a Director of Protective Life since June 1996. Mr.
Nabers has been Chairman of the Board and Chief Executive Officer of PLC and a
Director since August 1996. From May 1994 to August 1996, Mr. Nabers was
Chairman of the Board, President and Chief Executive Officer and a Director of
PLC. From May 1992 to May 1994, he was President and Chief Executive Officer
and a Director of PLC. Mr. Nabers was President and Chief Executive Officer and
a Director of PLC from August 1982 until May 1992. He is also a director of
Energen Corporation, National Bank of Commerce of Birmingham, and Alabama
National Bancorporation.
41
<PAGE>
EXECUTIVE COMPENSATION
Executive officers of the Company also serve as executive officers and/or
directors of one or more affiliate companies of PLC. Compensation allocations
are made as to each individual's time devoted to duties as an executive officer
of the Company and its affiliates. The following table shows the total
compensation paid to the chief executive officer of the Company by the Company
or any of its affiliates including PLC. No other officer of the Company
received total annual salary and bonus attributable to the Company during the
last fiscal year. Directors of the Company who are also employees receive no
compensation in addition to their compensation as employees of the Company.
PLC has established a Deferred Compensation Plan for Officers of PLC (the
"Officers' Plan") whereby eligible officers may voluntarily elect to defer to a
specified date receipt of all or any portion of their Annual Incentive Plan and
Performance Share Plan bonuses. The bonuses so deferred are credited to the
officers in cash or PLC stock equivalents or a combination thereof. The cash
portion earns interest at approximately PLC's short-term borrowing rate. The
stock equivalent portion is credited with dividends in the form of additional
stock equivalents. Deferred bonuses will be distributed in stock or cash as
specified by the officers in accordance with the Officers' Plan unless
distribution is accelerated under certain provisions, including upon a change
in control of PLC.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------
AWARDS PAYOUTS
------------ ----------
SECURITIES LONG-TERM
ANNUAL COMPENSATION UNDERLYING INCENTIVE
----------------------- OPTIONS/ PLAN
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS SARS(#) PAYOUTS COMPENSATION
(A) (B) (1)(C) (1)(2)(D) (G) (2)(3)(H) (4)(I)
- ----------------------------- ------ ----------- ----------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
WAYNE E. STUENKEL ........... 1998 $187,000 $112,800 -0- $328,440 $4,800
President and Chief 1997 180,833 86,000 -0- 321,871 4,800
Actuary 1996 174,167 65,600 7,500 204,605 4,500
</TABLE>
- ---------
(1) Includes amounts that the named executives may have voluntarily elected to
contribute to PLC's 401(k) and Stock Ownership Plan.
(2) Includes amounts that the named executives may have voluntarily deferred
under PLC's Deferred Compensation Plan for Officers.
(3) For further information, see the "Long-Term Incentive Plan -- Awards In
Last Fiscal Year" table.
(4) Matching contributions to PLC's 401(k) and Stock Ownership Plan.
The above table sets forth certain information for the three years ended
December 31, 1998 relating to the Chief Executive Officer.
AGGREGATED FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT FY-END(#) OPTIONS/SARS AT FY-END($)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
(A) (D) (E)
- --------------------------- --------------------------- --------------------------
<S> <C> <C>
Wayne E. Stuenkel ......... 0/15,000 $0/$335,625
</TABLE>
42
<PAGE>
PERFORMANCE SHARE PLAN
LONG-TERM INCENTIVE PLAN -- AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS UNDER
NON-STOCK PRICE-BASED PLANS
NUMBER OF SHARES, PERFORMANCE OR OTHER (IN SHARES)
UNITS OR OTHER PERIOD UNTIL -----------------------------
NAME RIGHTS(#)(1) MATURATION OR PAYOUT THRESHOLD TARGET MAXIMUM
(A) (B) (C) (D) (E) (F)
- --------------------------- ------------------- --------------------- ----------- -------- --------
<S> <C> <C> <C> <C> <C>
Wayne E. Stuenkel ......... 2,180 December 31, 2001 1,090 2,725 3,706
</TABLE>
In 1998, the Compensation and Management Succession Committee of PLC's
Board of Directors awarded performance shares, as indicated, to the above named
executive, which are not payable, if at all, until the results of the
comparison group of companies for the four-year period ending December 31, 2001
are known.
With respect to 1998 awards awarded to the named executive officer, 125%
of the award is earned if either PLC's average return on average equity or
total rate of return for the four-year period ranks at the top 25% of the
comparison group. If PLC ranks at the top 10% of the comparison group, 170% of
the award is earned. If PLC ranks at the median of the comparison group, 50% of
the award is earned and if PLC's results are below the median of the comparison
group, no portion of the award is earned. The Performance Share Plan provides
for interpolation between thresholds to determine the exact percentage to be
paid.
43
<PAGE>
OTHER PLANS AND ARRANGEMENTS
RETIREMENT BENEFITS. The table below illustrates the annual pension
benefits payable to executive officers under the Protective Life Corporation
Pension Plan. The table also reflects the Excess Benefit Plan that we have
established to provide retirement benefits over the Internal Revenue Code
limitations. Benefits in the table are not reduced by social security or other
offset amounts. Since the benefits shown in the table reflect a straight life
form of annuity benefit, if the payment is made in the form of a joint and
survivor annuity, the annual amounts of benefit could be substantially below
those illustrated.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
------------------------------------------------------------
REMUNERATION 15 20 25 30 35
- -------------- --------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
$ 150,000 33,521 44,694 55,868 67,041 78,215
200,000 45,521 60,694 75,868 91,041 106,215
250,000 57,521 76,694 95,868 115,041 134,215
300,000 69,521 92,694 115,868 139,041 162,215
400,000 93,521 124,694 155,868 187,041 218,215
500,000 117,521 156,694 195,868 235,041 274,215
750,000 177,521 236,694 295,868 355,041 414,215
1,000,000 237,521 316,694 395,868 475,041 554,215
1,250,000 297,521 396,694 495,868 595,041 694,215
1,500,000 357,521 476,694 595,868 715,041 834,215
1,750,000 417,521 556,694 695,868 835,041 974,215
2,000,000 477,521 636,694 795,868 955,041 1,114,215
</TABLE>
Compensation covered by the Pension Plan (for purposes of pension
benefits) excludes commissions and performance share awards and generally
corresponds to that shown under the heading "Annual Compensation" in the
Summary Compensation Table. Compensation is calculated based on the average of
the highest level of compensation paid during a period of 36 consecutive whole
months. Only three Annual Incentive Plan bonuses (whether paid or deferred) may
be included in obtaining the average compensation.
The named executive and his estimated length of service as of December 31,
1998 are provided in the following table.
<TABLE>
<CAPTION>
NAME YEARS OF SERVICE
- ------------------------------ -----------------
<S> <C>
Wayne E. Stuenkel .......... 20
</TABLE>
44
<PAGE>
ADDITIONAL AGREEMENTS
PLC has entered into an Employment Continuation Agreement with the named
executive which provides for certain benefits in the event such executive's
employment is actually or constructively (by means of a reduction in duties or
compensation) terminated following certain events constituting a "change in
control". Such benefits include (i) a payment equal to three times the sum of
the annual base salary in effect at the time of the change in control and the
average annual incentive plan bonus for the three years preceding the change in
control; (ii) continuation (for twenty-four months) in PLC's hospital, medical,
accident, disability, and life insurance plans as provided to the executive
immediately prior to the date of his termination of employment; (iii) delivery
of an annuity to equal increased benefits under the Pension Plan and the Excess
Benefit Plan resulting from an additional three years of credited service
(subject to the Pension Plan's maximum on crediting service); and (iv) an
additional payment, if necessary, to reimburse the executive for any additional
tax (other than normal Federal, state and local income taxes) incurred as a
result of any benefits received in connection with the change in control.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of PLC's Compensation and Management Succession Committee
("Committee") are Messrs. McMahon (Chairman), Woods, Dahlberg, Kuehn, and
Sklenar. No member of the Committee has ever been an officer or employee of PLC
or any of its subsidiaries.
MANAGEMENT OWNERSHIP OF PLC STOCK
No director or named executive officer of the Company owns any stock of
the Company or of any affiliated corporation except for the shares of PLC
common stock which are shown as owned as of March 5, 1999:
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP(1)
------------------------------------------ PERCENT OF
NAME AND BENEFICIAL OWNER SOLE POWER SHARED POWER(2) CLASS(1)
- ------------------------------------ ------------------------ ----------------- -----------
<S> <C> <C> <C>
Drayton Nabers, Jr. 325,486(3) 9,638 *
R. Stephen Briggs 132,511(3) 1,428 *
John D. Johns 61,520(3) 4,200 *
Deborah J. Long 22,561(3) -0- *
Jim E. Massengale 135,819(3) 700 *
Danny L. Bentley 45,835(3) -0- *
Richard J. Bielen 27,085(3) -0- *
Wayne E. Stuenkel 79,404(3) -0- *
A.S. Williams III 103,006(3) -0- *
Steven A. Schultz 42,791(3) -0- *
Carolyn King 8,693(3) -0- *
Jerry W. DeFoor 31,792(3) -0- *
All directors and executive
officers as a group (12 persons) 1,016,503(3)(4) 15,966(2) 1.60%
</TABLE>
- ---------
* less than one percent
(1) The number of shares reflected are shares which under applicable
regulations of the Securities and Exchange Commission are deemed to be
beneficially owned. Shares deemed to be beneficially owned, under such
regulations, include shares as to which, directly or indirectly, through
any contract, relationship, understanding or otherwise, either voting
power or investment power is held or shared. The total number of shares
beneficially owned is subdivided, where applicable, into two categories:
shares as to which voting/investment power is held solely and shares as to
which voting/investment power is shared. Unless otherwise indicated in the
following notes, if a beneficial owner has sole power, he has sole voting
and investment power, and if a beneficial owner has shared power, he has
shared voting and investment power. The percentage calculation is based on
the aggregate number of shares beneficially owned.
(2) This column may include shares held in the name of a spouse, minor
children, or certain other relatives sharing the same home as the director
or officer, or held by the director or officer, or the spouse of the
director or officer, as a trustee or as a custodian for children, as to
all of which beneficial ownership is disclaimed by the respective
directors and officers except as otherwise noted below.
45
<PAGE>
(3) The amounts reported include shares allocated to accounts under the
Company's 401(k) and Stock Ownership Plan as follows: Mr. Nabers, 12,773
shares; Mr. Johns, 3,553 shares; Mr. Briggs, 27,669 shares; Mr.
Massengale, 30,540 shares; Mr. Williams, 25,796 shares; Ms. Long, 1,348
shares; Mr. Bentley, 9,066 shares; Mr. Bielen, 8,990 shares; Mr. Stuenkel,
6,614 shares; Mr. Schultz, 5,884 shares; Ms. King, 1,238 shares; Mr.
DeFoor, 253 shares; and all directors and executive officers as a group,
150,128.
The amounts reported also include stock equivalents held by certain
officers under the Company's Deferred Compensation Plan for Officers,
entitling each such officer to receive upon distribution a share of Common
Stock or each stock equivalent. The number of stock equivalents included
are as follows: Mr. Nabers, 252,490; Mr. Johns, 53,567; Mr. Briggs, 89,173;
Mr. Massengale, 57,084; Mr. Williams, 62,246; Ms. Long, 16,176; Mr. Bielen,
10,619; Mr. Stuenkel, 63,254; Mr. Schultz, 34,478; Ms. King, 7,455; Mr.
DeFoor, 20,539; Mr. Bentley, 31,715; and all directors and executive
officers as a group 698,796.
The reported amounts do not include stock appreciation rights ("SARs")
awarded under the Company's 1996 Stock Incentive Plan as follows: Mr.
Nabers, 300,000 SARs; Mr. Johns, 150,000 SARs; Mr. Briggs, 40,000 SARs; Mr.
Massengale, 400,000 SARs; Mr. Williams, 40,000 SARs; Mr. Stuenkel, 15,000
SARs; and all directors and executive officers as a group, 675,000 SATs.
(4) No officer or director owns any stock of any affiliate of the Company.
LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to the business of PLC and the Company, to which
PLC or the Company is a party or of which any of PLC or the Company's
properties is the subject.
EXPERTS
The consolidated balance sheets of the Company as of December 31, 1998 and
1997 and the consolidated statements of income, stockholder's equity, and cash
flows for each of the three years in the period ended December 31, 1998 and the
related financial statement schedules, in this Prospectus, have been included
herein in reliance on the report of PricewaterhouseCoopers L.L.P., independent
certified public accountants, given on the authority of that firm as experts in
auditing and accounting.
LEGAL MATTERS
Sutherland, Asbill & Brennan LLP of Washington, D.C. has provided advice
on certain matters relating to federal securities laws.
REGISTRATION STATEMENT
A Registration Statement has been filed with the Securities and Exchange
Commission under the Securities Act of 1933 as amended with respect to the
Contracts. This Prospectus does not contain all information set forth in the
Registration Statement, its amendments and exhibits, to all of which reference
is made for further information concerning the Company and the Contracts.
Statements contained in this Prospectus as to the content of the Contracts and
other legal instruments are summaries. For a complete statement of the terms
thereof, reference is made to the instruments as filed in the Registration
Statement.
46
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants ....................................................... F-2
Statements of Income for the years ended December 31, 1998, 1997, and 1996 .............. F-3
Balance Sheets as of December 31, 1998 and 1997 ......................................... F-4
Statements of Share-Owners' Equity for the years ended December 31, 1998, 1997, and 1996 F-5
Statements of Cash Flows for the years ended December 31, 1998, 1997, and 1996 .......... F-6
Notes to Financial Statements ........................................................... F-7
Financial Statement Schedules:
Schedule III -- Supplementary Insurance Information ................................... S-1
Schedule IV -- Reinsurance ............................................................ S-2
</TABLE>
All other schedules to the 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.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Share Owners
Protective Life and Annuity Insurance Company
(formerly American Foundation Life Insurance Company)
Birmingham, Alabama
In our opinion, the financial statements and financial statement schedules
listed in the index on page F-1 of this Form S-1 present fairly, in all
material respects, the financial position of Protective Life and Annuity
Insurance Company (formerly American Foundation Life Insurance Company) at
December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements and financial statement schedules are the responsibility of the
company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
February 11, 1999
Birmingham, Alabama
F-2
<PAGE>
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------
1998 1997 1996
---------------- -------------- --------------
<S> <C> <C> <C>
REVENUES
Premiums and policy fees ............................................. $ 23,242,432 $ 11,420,914 $ 12,226,202
Reinsurance ceded .................................................... (13,475,288) (3,005,081) (2,768,199)
------------- ------------ ------------
Net of reinsurance ceded ........................................... 9,767,144 8,415,833 9,458,003
Net investment income ................................................ 10,678,166 6,233,845 6,611,489
Realized investment gains ............................................ 127,769 (59,889) (28,070)
Other income ......................................................... (598) 8,718 2,406
------------- ------------ ------------
20,572,481 14,598,507 16,043,828
------------- ------------ ------------
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance ceded:
1998-$18,523,397; 1997-$4,430,527; 1996-$4,031,931) ................ 9,261,000 9,075,762 9,675,240
Amortization of deferred policy acquisition costs .................... 1,711,138 320,288 346,710
Other operating expenses (net of reinsurance ceded: 1998-$247,095;
1997-$60,900; 1996-$75,843) ........................................ 6,246,819 2,406,314 2,361,076
------------- ------------ ------------
17,218,957 11,802,364 12,383,026
------------- ------------ ------------
INCOME BEFORE INCOME TAX .............................................. 3,353,524 2,796,143 3,660,802
------------- ------------ ------------
INCOME TAX EXPENSE (BENEFIT)
Current ............................................................ 548,581 1,743,864
Deferred ........................................................... 938,986 402,108 (499,191)
------------- ------------ ------------
938,986 950,689 1,244,673
------------- ------------ ------------
NET INCOME ............................................................ 2,414,538 1,845,454 2,416,129
PREFERRED STOCK DIVIDENDS ............................................. 100,000 100,000 100,000
------------- ------------ ------------
INCOME AVAILABLE TO COMMON SHARE OWNER ................................ $ 2,314,538 $ 1,745,454 $ 2,316,129
============= ============ ============
</TABLE>
See notes to financial statements.
F-3
<PAGE>
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, at market (amortized cost: 1998-$346,561,571;
1997-$67,110,502) ................................................................ $360,113,277 $ 68,201,559
Mortgage loans on real estate ..................................................... 7,900,221 10,902,986
Investment real estate, net of accumulated depreciation (1997-$93,376) ............ 407,624
Policy loans ...................................................................... 54,103,044 11,635,376
Short-term investments ............................................................ 18,267,431 873,844
------------ ------------
Total investments ................................................................ 440,383,973 92,021,389
Cash ................................................................................ 2,218,201
Accrued investment income ........................................................... 7,597,305 1,230,529
Accounts and premiums receivable, net of allowance for uncollectible amounts
(1998-$7,000; 1997-$7,000) ........................................................ 673,967 1,233,659
Reinsurance receivables ............................................................. 22,405,337 7,680,586
Deferred policy acquisition costs ................................................... 133,275,451 1,692,285
Other assets ........................................................................ 55,968 70,809
Assets related to separate accounts
Variable annuity .................................................................. 237,565
------------ ------------
$604,629,566 $106,147,458
============ ============
LIABILITIES
Policy liabilities and accruals:
Future policy benefits and claims ................................................. $439,842,102 $ 56,254,682
Unearned premiums ................................................................. 2,487,277 463,232
------------ ------------
442,329,379 56,717,914
Annuity deposits .................................................................... 3,434,342 929,124
Other policyholders' funds .......................................................... 12,143,006 12,080,458
Other liabilities ................................................................... 7,941,276 8,964,653
Deferred income taxes ............................................................... 7,305,381 2,005,168
Liabilities related to separate accounts
Variable annuity .................................................................. 237,565
------------ ------------
Total liabilities ................................................................ 473,390,949 80,697,317
------------ ------------
COMMITMENTS AND CONTINGENT LIABILITIES -- NOTE F
SHARE-OWNERS' EQUITY
Preferred Stock, $1.00 par value, shares authorized, issued and outstanding: 2,000 .. 2,000 2,000
Common Stock, $10.00 par value
Shares authorized: 1998-500,000; 1997-200,000
Shares issued and outstanding: 1998-250,000; 1997-200,000 ......................... 2,500,000 2,000,000
Additional paid-in capital .......................................................... 101,574,516 6,200,000
Retained earnings ................................................................... 18,353,492 16,538,954
Accumulated other comprehensive income
Net unrealized gains on investments (net of income tax: 1998-$4,743,097;
1997-$381,870) ................................................................... 8,808,609 709,187
------------ ------------
Total share-owners' equity ....................................................... 131,238,617 25,450,141
------------ ------------
$604,629,566 $106,147,458
============ ============
</TABLE>
See notes to financial statements.
F-4
<PAGE>
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
STATEMENTS OF SHARE-OWNERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED COMMON PAID-IN
STOCK STOCK CAPITAL
----------- ------------- --------------
<S> <C> <C> <C>
Balance, December 31, 1995 .............. $2,000,000 $ 4,202,000
Net income for 1996 ....................
Decrease in net unrealized gains
on investments (net of income
tax: ($748,368)) .....................
Reclassification adjustment for
amounts included in net income
(net of income tax: $9,824) ..........
Comprehensive income for 1996 ..........
Redemption feature of preferred
stock removed -- Note H .............. $2,000 1,998,000
Common dividends ($15 per share)
Preferred dividends ($50 per share) ------- --------- ---------
Balance, December 31, 1996 .............. 2,000 2,000,000 6,200,000
Net income for 1997 ....................
Increase in net unrealized gains on
investments (net of income tax:
$602,348) ............................
Reclassification adjustment for
amounts included in net income
(net of income tax: $20,961) .........
Comprehensive income for 1997 ..........
Preferred dividends ($50 per share) ------- --------- ---------
Balance, December 31, 1997 .............. 2,000 2,000,000 6,200,000
Net income for 1998 ....................
Increase in net unrealized gains on
investments (net of income
tax -- $4,405,946) ...................
Reclassification adjustment for
amounts included in net income
(net of income tax: ($44,719)) .......
Comprehensive income for 1998 ..........
Common stock dividend (50,000
shares) .............................. 500,000
Preferred dividends ($50 per share)
Capital contribution from
Protective ........................... 95,374,516
------ ---------- ------------
Balance, December 31, 1998 .............. $2,000 $2,500,000 $101,574,516
====== ========== ============
<CAPTION>
NET
UNREALIZED TOTAL
GAINS (LOSSES) RETAINED SHARE-OWNERS'
ON INVESTMENTS EARNINGS EQUITY
---------------- -------------- ----------------
<S> <C> <C> <C>
Balance, December 31, 1995 .............. $ 923,193 $ 15,477,371 $ 22,602,564
------------
Net income for 1996 .................... 2,416,129 2,416,129
Decrease in net unrealized gains
on investments (net of income
tax: ($748,368)) ..................... (1,389,826) (1,389,826)
Reclassification adjustment for
amounts included in net income
(net of income tax: $9,824) .......... 18,246 18,246
------------
Comprehensive income for 1996 .......... 1,044,549
------------
Redemption feature of preferred
stock removed -- Note H .............. 2,000,000
Common dividends ($15 per share) (3,000,000) (3,000,000)
Preferred dividends ($50 per share) (100,000) (100,000)
------------- ------------ ------------
Balance, December 31, 1996 .............. (448,387) 14,793,500 22,547,113
------------
Net income for 1997 .................... 1,845,454 1,845,454
Increase in net unrealized gains on
investments (net of income tax:
$602,348) ............................ 1,118,646 1,118,646
Reclassification adjustment for
amounts included in net income
(net of income tax: $20,961) ......... 38,928 38,928
------------
Comprehensive income for 1997 .......... 3,003,028
------------
Preferred dividends ($50 per share) (100,000) (100,000)
------------ ------------
Balance, December 31, 1997 .............. 709,187 16,538,954 25,450,141
------------
Net income for 1998 .................... 2,414,538 2,414,538
Increase in net unrealized gains on
investments (net of income
tax -- $4,405,946) ................... 8,182,472 8,182,472
Reclassification adjustment for
amounts included in net income
(net of income tax: ($44,719)) ....... (83,050) (83,050)
------------
Comprehensive income for 1998 .......... 10,513,960
------------
Common stock dividend (50,000
shares) .............................. (500,000)
Preferred dividends ($50 per share) (100,000) (100,000)
Capital contribution from
Protective ........................... 95,374,516
------------- ------------ ------------
Balance, December 31, 1998 .............. $ 8,808,609 $ 18,353,492 $131,238,617
============= ============ ============
</TABLE>
See notes to financial statements.
F-5
<PAGE>
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------------------------
1998 1997 1996
------------------- ----------------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ............................................................ $ 2,414,538 $ 1,845,454 $ 2,416,129
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of deferred policy acquisition costs ................... 1,711,138 320,288 346,710
Capitalization of deferred policy acquisition costs ................. (783,304)
Deferred income taxes ............................................... 938,986 1,025,417 (499,191)
Interest credited to universal life and investment products ......... 2,422,680 1,059,710 1,111,034
Policy fees assessed on universal life and investment products ...... (1,004,958) (1,048,883) (1,179,765)
Change in accrued investment income and other receivables ........... (19,671,587) 2,020,726 (6,955)
Change in policy liabilities and other policyholder funds of
traditional life and health products ............................... 84,738,359 (8,576,735) (1,612,231)
Change in receivable from Protective Life Insurance Company ......... 24,817,851
Change in other liabilities ......................................... (1,023,377) 200,205 (2,294,791)
Other (net) ......................................................... 14,841 (79,787) (326,038)
---------------- -------------- --------------
Net cash provided by (used in) operating activities .................... 69,757,316 (3,233,605) 22,772,753
---------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reduction of investments:
Investments available for sale ...................................... 1,164,896,631 135,907,273 98,454,653
Other ............................................................... 3,018,788 3,661,121 1,545,594
Sale of investments:
Investment available for sale ....................................... 210,129,485 4,386,839 46,567,425
Other ............................................................... 435,000 400,000
Cost of investments acquired:
Investments available for sale ...................................... (1,371,973,391) (139,609,229) (165,042,338)
Other ............................................................... (310,000)
--------------
Net cash provided by (used in) investing activities .................... 6,506,513 4,346,004 (18,384,666)
---------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends to share owners ............................................. (100,000) (100,000) (3,100,000)
Investment product deposits and change in universal life deposits ..... (78,382,030) (368,379) (723,167)
---------------- -------------- --------------
Net cash used in financing activities .................................. (78,482,030) (468,379) (3,823,167)
---------------- -------------- --------------
INCREASE (DECREASE) IN CASH ............................................ (2,218,201) 644,020 564,920
CASH AT BEGINNING OF YEAR .............................................. 2,218,201 1,574,181 1,009,261
---------------- -------------- --------------
CASH AT END OF YEAR .................................................... $ 0 $ 2,218,201 $ 1,574,181
================ ============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the year:
Income taxes ........................................................ $ 350,000 $ 548,581 $ 1,830,301
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Acquisitions and bulk reinsurance assumptions
Assets acquired ..................................................... $ 247,894,180
Liabilities assumed ................................................. (380,405,180)
----------------
Net ................................................................. $ (132,511,000)
================
</TABLE>
See notes to financial statements.
F-6
<PAGE>
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements of Protective Life and Annuity
Insurance Company ("the Company") 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 Company was founded in 1978 as American Foundation Life Insurance
Company. Effective March 1, 1999, the Company's name was changed to Protective
Life and Annuity Insurance Company. Since 1983, all outstanding shares of the
Company's common stock have been owned by Protective Life Insurance Company
("Protective"), which is a wholly-owned subsidiary of Protective Life
Corporation ("PLC"), an insurance holding company domiciled in the state of
Delaware. All outstanding shares of the Company's preferred stock are owned by
PLC.
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.
NATURE OF OPERATIONS
The Company, since it is licensed in the State of New York, is the entity
through which PLC markets, distributes, and services insurance and annuity
products in New York. The operating results of companies in the insurance
industry have historically been subject to significant fluctuations due to
competition, economic conditions, interest rates, investment performance,
maintenance of insurance ratings, and other factors.
RECENTLY ISSUED ACCOUNTING STANDARDS
In 1997, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities;" SFAS No. 130, "Reporting Comprehensive
Income;" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information."
The adoption of these accounting standards did not have a material effect
on the Company's financial statements.
INVESTMENTS
The Company has classified all of its investments in fixed maturities and
short-term investments as "available for sale."
Investments are reported on the following bases less allowances for
uncollectible amounts on investments, if applicable:
o Fixed maturities (bonds and redeemable preferred stocks) -- at current
market value.
o Mortgage loans on real estate -- at unpaid balances, adjusted for loan
origination costs, net of fees, and amortization of premium or discount.
o Investment real estate -- at cost, less allowances for depreciation
computed on the straight-line method. With respect to real estate
acquired through foreclosure, cost is the lesser of the loan balance plus
foreclosure costs or appraised value.
o Policy loans -- at unpaid balances.
o 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.
As prescribed by SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," certain investments are recorded at their market values
with the resulting unrealized gains and losses, net of income tax, reported as
a component of share-owners' 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 the Company's operations, its reported
share-owners' equity will fluctuate significantly as interest rates change.
F-7
<PAGE>
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company's balance sheets at December 31, prepared on the basis of
reporting investments at amortized cost rather than at market values, are as
follows:
<TABLE>
<CAPTION>
1998 1997
--------------- --------------
<S> <C> <C>
Total investments .......................... $426,832,267 $ 90,930,332
Deferred policy acquisition costs .......... 133,275,451 1,692,285
All other assets ........................... 30,970,142 12,433,784
------------ ------------
$591,077,860 $105,056,401
============ ============
Deferred income taxes ...................... $ 2,562,284 $ 1,623,298
All other liabilities ...................... 466,085,568 78,692,149
------------ ------------
468,647,852 80,315,447
Share-owners' equity ....................... 122,430,008 24,740,954
------------ ------------
$591,077,860 $105,056,401
============ ============
</TABLE>
Realized gains and losses on sales of investments are recognized in net
income using the specific identification basis.
CASH
Cash includes all demand deposits reduced by the amount of outstanding
checks and drafts.
SEPARATE ACCOUNTS
The assets and liabilities related to separate accounts in which the
Company does not bear the investment risk are valued at market and reported
separately in the accompanying financial statements.
REVENUES AND BENEFITS EXPENSE
o Traditional Life and Health Insurance Products -- Traditional life
insurance products consist principally of those products with fixed and
guaranteed premiums and benefits and include whole life insurance
policies, term and term-like life insurance policies, limited-payment life
insurance policies, and certain annuities with life contingencies. Life
insurance and immediate annuity premiums are recognized as revenue when
due. Health insurance premiums are recognized as revenue over the terms of
the policies. Benefits and expenses are associated with earned premiums so
that profits are recognized over the life of the contracts. This is
accomplished by means of the provision for liabilities for future policy
benefits and the amortization of deferred policy acquisition costs.
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 the Company'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 the Company and claims incurred but not
yet reported. Policy claims are charged to expense in the period that the
claims are incurred.
F-8
<PAGE>
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Activity in the liability for unpaid claims is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Balance beginning of year .............. $3,724,904 $5,008,998 $3,862,708
Less reinsurance ...................... 203,199 801,709 370,612
---------- ---------- ----------
Net balance beginning of year .......... 3,521,705 4,207,289 3,492,096
---------- ---------- ----------
Incurred related to:
Current year ........................... 7,178,869 5,947,439 6,293,400
Prior year ............................. (173,472) (331,984) (153,466)
---------- ---------- ----------
Total incurred ........................ 7,005,397 5,615,455 6,139,934
---------- ---------- ----------
Paid related to:
Current year ........................... 5,904,526 4,913,958 4,883,873
Prior year ............................. 1,026,981 1,387,081 540,868
---------- ---------- ----------
Total paid ............................ 6,931,507 6,301,039 5,424,741
---------- ---------- ----------
Net balance end of year ................ 3,595,595 3,521,705 4,207,289
Plus reinsurance ...................... 494,064 203,199 801,709
---------- ---------- ----------
Balance end of year .................... $4,089,659 $3,724,904 $5,008,998
========== ========== ==========
</TABLE>
o Universal Life and Investment Products -- Universal life and investment
products include universal life insurance, deferred annuities, and
annuities without life contingencies. Revenues for universal life and
investment products consist of policy fees that have been assessed against
policy account balances for the costs of insurance, policy administration,
and surrenders. That is, universal life and investment product deposits
are not considered revenues in accordance with generally accepted
accounting principles. Benefit reserves for universal life and investment
products represent policy account balances before applicable surrender
charges plus certain deferred policy initiation fees that are recognized
in income over the term of the policies. Policy benefits and claims that
are charged to expense include benefit claims incurred in the period in
excess of related policy account balances and interest credited to policy
account balances. Interest credit rates for universal life and investment
products ranged from 3.4% to 9.4% in 1998.
The Company's accounting policies with respect to variable annuities are
identical except that policy account balances (excluding account balances
that earn a fixed rate) are valued at market and reported as components of
assets and liabilities related to separate accounts.
DEFERRED POLICY ACQUISITION COSTS
Commissions and other costs of acquiring traditional life and health
insurance, universal life insurance, and investment products that vary with and
are primarily related to the production of new business have been deferred.
Traditional life and health insurance acquisition costs are being 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 amortized over the lives
of the policies in relation to the present value of estimated gross profits
before amortization. Under SFAS No. 97, "Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized Gains and
Losses from the Sale of Investments," the Company makes certain assumptions
regarding the mortality, persistency, expenses, and interest rates it expects
to experience in future periods. These assumptions are to be best estimates and
are to be periodically updated whenever actual experience and/or expectations
for the future change from that assumed.
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. The Company amortizes the present value of future
profits over the premium payment period, including accrued interest of
approximately 5.75%. The unamortized present value of future
F-9
<PAGE>
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
profits was approximately $131.2 million at December 31, 1998. During 1998,
$132.5 million of present value of future profits on acquisitions made during
the year was capitalized and $1.3 million was amortized.
INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes. Income tax provisions are generally based on income reported for
financial statement purposes. Deferred federal income taxes arise from the
recognition of temporary differences between the bases of assets and
liabilities determined for financial reporting purposes and the bases
determined for income tax purposes. Such temporary differences are principally
related to the deferral of policy acquisition costs and the provision for
future policy benefits and expenses.
RECLASSIFICATIONS
Certain reclassifications have been made in the previously reported
financial statements and accompanying notes to make the prior year amounts
comparable to those of the current year. Such reclassifications had no effect
on net income, total assets, or share-owners' equity.
NOTE B -- RECONCILIATION WITH STATUTORY REPORTING PRACTICES
Financial statements prepared in conformity with generally accepted
accounting principles ("GAAP") differ in some respects from the statutory
accounting practices prescribed or permitted by insurance regulatory
authorities. The most significant differences are: (a) acquisition costs of
obtaining new business are deferred and amortized over the approximate life of
the policies rather than charged to operations as incurred, (b) benefit
liabilities are computed using a net level method and are based on realistic
estimates of expected mortality, interest, and withdrawals as adjusted to
provide for possible unfavorable deviation from such assumptions, (c) deferred
income taxes are provided for temporary differences between financial and
taxable earnings, (d) the Asset Valuation Reserve and Interest Maintenance
Reserve are restored to share-owners' equity, (e) 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.
The reconciliations of net income and share-owners' equity prepared in
conformity with statutory reporting practices to that reported in the
accompanying consolidated financial statements are as follows:
<TABLE>
<CAPTION>
NET INCOME SHARE-OWNERS' EQUITY
------------------------------------------- ----------------------------------------------
1998 1997 1996 1998 1997 1996
--------------- ------------- ------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
In conformity with statutory
reporting practices: .............. $ 5,365,091 $2,794,015 $2,558,227 $ 26,256,416 $ 20,467,722 $18,031,163
Additions (deductions) by
adjustment:
Deferred policy acquisition
costs, net of amortization (1,711,138) (320,288) (346,710) 133,275,451 1,692,285 1,919,471
Deferred income tax .............. (938,986) 402,108 499,191 (7,305,381) (2,005,168) (979,751)
Asset Valuation Reserve .......... 1,334,584 730,240 560,732
Interest Maintenance
Reserve ......................... (82,982) (85,826) (89,611) 460,059 161,051 285,805
Nonadmitted items ................ 15,671 10,431 7,090
Other timing and valuation
adjustments ..................... (217,447) (944,555) (204,968) (22,798,183) 4,393,580 2,722,603
------------ ---------- ---------- ------------- ------------ -----------
In conformity with generally
accepted accounting principles $ 2,414,538 $1,845,454 $2,416,129 $ 131,238,617 $ 25,450,141 $22,547,113
============ ========== ========== ============= ============ ===========
</TABLE>
F-10
<PAGE>
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C -- INVESTMENT OPERATIONS
Major categories of net investment income for the years ended December 31
are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------- ------------- -------------
<S> <C> <C> <C>
Fixed maturities .............................. $ 7,525,336 $4,701,611 $4,708,490
Mortgage loans on real estate ................. 952,437 1,146,325 1,431,687
Investment real estate ........................ 72,318 65,584 73,756
Policy loans .................................. 656,623 643,653 752,828
Other, principally short-term investments ..... 2,083,693 112,127 160,644
----------- ---------- ----------
11,290,407 6,669,300 7,127,405
Investment expenses ........................... (612,241) (435,455) (515,916)
----------- ---------- ----------
$10,678,166 $6,233,845 $6,611,489
=========== ========== ==========
</TABLE>
Realized investment gains (losses) for the years ended December 31 are
summarized as follows:
<TABLE>
<S> <C> <C> <C>
Fixed maturities .................... $ 87,677 $ (59,889) $ 22,247
Mortgage loans and other investments 40,092 0 (50,317)
-------- --------- ---------
$127,769 $ (59,889) $ (28,070)
======== ========= =========
</TABLE>
In 1998, the Company established an allowance for uncollectible amounts on
investments totaling $500,000 at December 31, 1998. Additions and reductions to
the allowance are included in realized investment gains (losses). Without such
additions/reductions, the Company had net realized investment gains of $627,769
in 1998.
In 1998, gross gains on the sale of investments available for sale (fixed
maturities and short-term investments) were approximately $600,000 and gross
losses were approximately $500,000. In 1997, gross gains were approximately
$10,000 and gross losses were approximately $70,000. In 1996, gross gains were
approximately $20,000.
The amortized cost and estimated market values of the Company's
investments classified as available for sale at December 31 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
1998 COST GAINS LOSSES VALUES
- ---- -------------- -------------- ------------ ---------------
<S> <C> <C> <C> <C>
Fixed maturities:
Bonds:
Mortgage-backed .............................. $ 6,488,768 $ 204,235 $ 6,693,003
United States Government and authorities ..... 8,731,486 474,109 9,205,595
States, municipalities, and political
subdivisions ................................ 3,075,631 105,159 3,180,790
Public utilities ............................. 54,040,814 1,380,112 $ 12,869 55,408,057
Convertibles and bonds with warrants ......... 694,723 179,348 515,375
All other corporate bonds .................... 273,530,149 12,673,749 1,093,441 285,110,457
------------ ----------- ---------- ------------
346,561,571 14,837,364 1,285,658 360,113,277
Short-term investments .......................... 18,267,431 18,267,431
------------ ------------
$364,829,002 $14,837,364 $1,285,658 $378,380,708
============ =========== ========== ============
</TABLE>
F-11
<PAGE>
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C -- INVESTMENT OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
1997 COST GAINS LOSSES VALUES
- ---- -------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Fixed maturities:
Bonds:
Mortgage-backed .............................. $11,348,224 $ 348,395 $11,696,619
United States Government and authorities ..... 8,746,050 242,265 $ 4,982 8,983,333
Public utilities ............................. 9,228,405 198,255 5,441 9,421,219
Convertibles and bonds with warrants ......... 694,485 0 168,610 525,875
All other corporate bonds .................... 37,093,338 572,155 90,980 37,574,513
----------- ---------- -------- -----------
67,110,502 1,361,070 270,013 68,201,559
Short-term investments .......................... 873,844 0 0 873,844
----------- ---------- -------- -----------
$67,984,346 $1,361,070 $270,013 $69,075,403
=========== ========== ======== ===========
</TABLE>
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.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
1998 COST VALUES
- ---- -------------- --------------
<S> <C> <C>
Due in one year or less ........................ $ 28,436,528 $ 28,618,945
Due after one year through five years .......... 178,463,434 185,885,380
Due after five years through ten years ......... 78,858,516 83,976,562
Due after ten years ............................ 60,803,093 61,632,390
------------ ------------
$346,561,571 $360,113,277
============ ============
</TABLE>
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
1997 COST VALUES
- ---- -------------- --------------
<S> <C> <C>
Due in one year or less ........................ $ 2,171,455 $ 2,177,160
Due after one year through five years .......... 27,762,163 28,202,077
Due after five years through ten years ......... 34,516,587 35,136,758
Due after ten years ............................ 2,660,297 2,685,564
----------- -----------
$67,110,502 $68,201,559
=========== ===========
</TABLE>
The approximate percentage distribution of the Company's fixed maturity
investments by quality rating at December 31 is as follows:
<TABLE>
<CAPTION>
RATING 1998 1997
- ------ --------- ----------
<S> <C> <C>
AAA ......................... 4.4% 26.8%
AA .......................... 6.7 1.7
A ........................... 43.7 24.3
BBB ......................... 43.1 37.4
BB or Less .................. 2.1 9.8
----- -----
100.0% 100.0%
===== =====
</TABLE>
At December 31, 1998 and 1997, the Company had bonds which were rated less
than investment grade of $7.7 million and $6.7 million, respectively, having an
amortized cost of $7.8 million and $6.8 million, respectively.
F-12
<PAGE>
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C -- INVESTMENT OPERATIONS (CONTINUED)
The change in unrealized gains (losses), net of income tax on fixed
maturities for the years ended December 31 is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- ----------------
<S> <C> <C> <C>
Fixed maturities .......... $8,099,422 $1,157,574 $ (1,371,579)
</TABLE>
At December 31, 1998, approximately 99% of the Company's mortgage loans
were commercial loans of which 51% were retail, and 48% were office buildings.
The Company specializes in making mortgage loans on either credit-oriented or
credit-anchored commercial properties, most of which are strip shopping centers
in smaller towns and cities. No single tenant's leased space represents more
than 10% of mortgage loans. All of the mortgage loans are on properties located
in the following states listed in decreasing order of significance: Alabama,
Tennessee, Florida, Colorado, Georgia, Texas and Arkansas.
Many of the mortgage loans have call provisions after three to ten years.
Assuming the loans are called at their next call dates, approximately $0.5
million would become due in 2000 to 2003.
At December 31, 1998, the average mortgage loan was $0.5 million, and the
weighted average interest rate was 9.2%. The largest single mortgage loan was
$1.9 million.
At December 31, 1998, the Company had no problem mortgage loans or
foreclosed properties. At December 31, 1997, the Company's problem mortgage
loans and foreclosed properties totaled $0.4 million. Since the Company'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 the
Company's evaluation of its mortgage loan portfolio, the Company does not
expect any material losses on its mortgage loans.
Policy loan interest rates generally range from 4.5% to 8.0%.
NOTE D -- FEDERAL INCOME TAXES
The Company's effective income tax rate varied from the maximum federal
income tax rate as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Statutory federal income tax rate applied to pretax income 35.00% 35.00% 35.00%
Tax-exempt interest ....................................... (3.98) (7.20) (7.33)
Other adjustments ......................................... (3.02) 6.20 6.33
----- ----- -----
Effective income tax rate ................................. 28.00% 34.00% 34.00%
===== ===== =====
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
---------------- -------------- --------------
<S> <C> <C> <C>
Deferred policy acquisition costs ............ $ 14,616,912 $ (100,971) $ (530,008)
Benefit and other policy liability changes ... (11,991,104) (72,878) 1,698,144
Temporary differences of investment income ... 398,620 (199,660) (208,432)
Other items .................................. (2,085,442) 775,617 (1,458,895)
------------- ---------- ------------
$ 938,986 $ 402,108 $ (499,191)
============= ========== ============
</TABLE>
F-13
<PAGE>
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE D -- FEDERAL INCOME TAXES (CONTINUED)
The components of the Company's net deferred income tax liability as of
December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997
-------------- -------------
<S> <C> <C>
Deferred income tax assets:
Policy and policyholder liability reserves ..... $12,392,740 $ 401,636
Deferred policy acquisition costs .............. 195,580
----------- ----------
12,392,740 597,216
----------- ----------
Deferred income tax liabilities:
Unrealized gain on investments ................. 5,276,789 516,942
Other .......................................... 2,085,442
Deferred policy acquisition costs .............. 14,421,332
-----------
19,698,121 2,602,384
----------- ----------
Net deferred income tax liability .............. $ 7,305,381 $2,005,168
=========== ==========
</TABLE>
The Company'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. At December 31, 1998 and
1997 no amounts were payable to PLC for income tax liabilities.
NOTE E -- RECENT ACQUISITIONS
In October 1998, the Company coinsured a block of life insurance policies
from Lincoln National Corporation. The policies represent the payroll deduction
business originally marketed and underwritten by Aetna.
This transaction has been accounted for as a purchase, and the result of
this transaction has been included in the accompanying financial statements
since the effective date of the agreement.
NOTE F -- 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. The Company does not believe such
assessments will be materially different from amounts already provided for in
the financial statements. Most of these laws do provide, however, that an
assessment may be excused or deferred if it would threaten an insurer's own
financial strength.
A number of civil jury verdicts have been returned against insurers in the
jurisdictions in which the Company does business involving the insurers' sales
practices, alleged agent misconduct, failure to properly supervise agents, and
other matters. Increasingly these lawsuits have resulted in the award of
substantial judgments against the insurer that are disproportionate to the
actual damages, including material amounts of punitive damages. In addition, in
some class action and other lawsuits involving insurers' sales practices,
insurers have made material settlement payments. In some states (including
Alabama), juries have substantial discretion in awarding punitive damages which
creates the potential for unpredictable material adverse judgments in any given
punitive damage suit. The Company, like other insurers, in the ordinary course
of business, are involved in such litigation or alternatively in arbitration.
Although the outcome of any litigation or arbitration cannot be predicted with
certainty, the Company believes that at the present time there are no pending
or threatened lawsuits that are reasonably likely to have a material adverse
effect on the financial position, results of operations, or liquidity of the
Company.
NOTE G -- SHARE-OWNERS' EQUITY AND RESTRICTIONS
Dividends on common stock are noncumulative and are paid as determined by
the Board of Directors. At December 31, 1998, approximately $101.3 million of
share-owners' equity excluding net unrealized gains and losses represented
F-14
<PAGE>
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE G -- SHARE-OWNERS' EQUITY AND RESTRICTIONS (CONTINUED)
net assets of the Company that cannot be transferred in the form of dividends,
loans, or advances to Protective. 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 Protective by the Company in 1999 is estimated to be $5.1
million.
During 1998 Protective made a capital contribution of $95,374,516
consisting of corporate bonds.
NOTE H -- PREFERRED STOCK
Prior to November 1998, the Company's preferred stock had a provision for
an annual minimum cumulative dividend, when and if declared, of $50.00 per
share, and additional dividends to the extent the Company's statutory earnings
for the immediately preceding year exceeded $1.0 million. The minimum dividend
and any accumulation was to be paid before any dividend on any other class of
capital stock was paid. The additional dividends were noncumulative and were in
preference to any other dividend on any other class of capital stock. Dividends
of $100,000 were declared and paid in each of 1998, 1997 and 1996 on the
preferred stock. As of December 31, 1998, all cumulative preferred dividends
have been paid. Effective November 3, 1998, the Company's articles of
incorporation were amended such that the provision for an annual minimum
cumulative dividend was removed.
During 1996, the Company's articles of incorporation were amended such
that the preferred stock is redeemable at $1,000 per share solely at the
Company's discretion. At December 31, 1995, the preferred stock was reported as
"Redeemable Preferred Stock", whereas at December 31, 1996, it is reported as a
component of share-owners' equity.
NOTE I -- RELATED PARTY MATTERS
The Company has no employees; therefore, the Company purchases data
processing, legal, investment, and other management services from PLC and other
affiliates. The cost of such services was $1.2 million in 1998, $1.2 million in
1997, and $1.4 million in 1996.
Receivables from related parties consisted of receivables from affiliates
under control of PLC in the amount of $287,629 at December 31, 1998 and
$183,009 at December 31, 1997. The Company 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.
NOTE J -- OPERATING SEGMENTS
PLC, through its subsidiaries, operates seven divisions whose principal
strategic focuses can be grouped into three general categories: Life Insurance,
Specialty Insurance Products, and Retirement Savings and Investment Products.
Each division has a senior officer of Protective responsible for its
operations. A division is generally distinguished by products and/or channels
of distribution. A brief description of each division the Company operates in
follows.
LIFE INSURANCE
ACQUISITIONS DIVISION. The Acquisitions Division focuses solely on
acquiring, converting, and servicing policies acquired from other companies.
These acquisitions may be accomplished through acquisitions of companies or
through the assumption or reinsurance of life insurance and related policies.
SPECIALTY INSURANCE PRODUCTS
DENTAL AND CONSUMER BENEFITS DIVISION. The Division's primary focus is on
indemnity and prepaid dental products. In 1997, the Division exited from the
traditional group major medical business, fulfilling the Division's strategy to
focus primarily on dental and related products.
F-15
<PAGE>
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J -- OPERATING SEGMENTS (CONTINUED)
FINANCIAL INSTITUTIONS DIVISION. The Financial Institutions Division
specializes in marketing credit life and disability insurance products through
banks, consumer finance companies and automobile dealers. The Division also
includes a small property casualty insurer that sells automobile service
contracts.
RETIREMENT SAVINGS AND INVESTMENT PRODUCTS
INVESTMENT PRODUCTS DIVISION. The Investment Products Division
manufactures, sells, and supports fixed and variable annuity products. These
products are primarily sold through stockbrokers, but are also sold through
financial institutions and the Individual Life Division's agency sales force.
CORPORATE AND OTHER
The Company has an additional business segment herein referred to as
Corporate and Other. The Corporate and Other segment primarily consists of net
investment income and expenses not attributable to the Divisions above
(including net investment income on capital).
The Company uses the same accounting policies and procedures to measure
operating segment income and assets as it uses to measure its consolidated net
income and assets. Operating segment income is generally income before income
tax. Premiums and policy fees, other income, benefits and settlement expenses,
and amortization of deferred policy acquisition costs are attributed directly
to each operating segment. Net investment income is allocated based on directly
related assets required for transacting the business of that segment. Realized
investment gains (losses) and other operating expenses are allocated to the
segments in a manner which most appropriately reflects the operations of that
segment. Unallocated realized investment gains (losses) are deemed not to be
associated with any specific segment.
Assets are allocated based on policy liabilities and deferred policy
acquisition costs directly attributable to each segment.
There are no significant intersegment transactions.
F-16
<PAGE>
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J -- OPERATING SEGMENTS (CONTINUED)
Operating segment income and assets for the years ended December 31 are as
follows:
<TABLE>
<CAPTION>
DENTAL AND
CONSUMER FINANCIAL
OPERATING SEGMENT INCOME ACQUISITIONS BENEFITS INSTITUTIONS
- ----------------------------------- -------------- ------------ --------------
<S> <C> <C> <C>
1998
Premiums and policy fees .......... $ 7,414,597 $1,503,364 $848,682
Net investment income ............. 11,071,366 718,492 136,472
Realized investment gains
(losses) .........................
Other income ......................
----------- ---------- --------
Total revenues ................... 18,485,963 2,221,856 985,154
----------- ---------- --------
Benefits and settlement
expenses ......................... 7,594,508 1,340,838 316,900
Amortization of deferred policy
acquisition costs ................ 1,535,385 175,753
Other operating expenses .......... 5,947,115 144,257 105,307
----------- ---------- --------
Total benefits and expenses ...... 15,077,008 1,485,095 597,960
----------- ---------- --------
Income before income tax .......... 3,408,955 736,761 387,194
Income tax expense ................
----------- ---------- --------
Net income ........................
=========== ========== ========
1997
Premiums and policy fees .......... $ 4,231,380 $4,158,505 $ 25,948
Net investment income ............. 4,590,650 1,026,054
Realized investment gains
(losses) .........................
Other income ...................... 8,718
----------- ---------- --------
Total revenues ................... 8,830,748 5,184,559 25,948
----------- ---------- --------
Benefits and settlement
expenses ......................... 5,984,374 3,080,800 10,588
Amortization of deferred policy
acquisition costs ................ 312,874 7,414
Other operating expenses .......... 912,398 1,493,916
----------- ---------- --------
Total benefits and expenses ...... 7,209,646 4,574,716 18,002
----------- ---------- --------
Income before income tax .......... 1,621,102 609,843 7,946
Income tax expense ................
----------- ---------- --------
Net income ........................
=========== ========== ========
1996
Premiums and policy fees .......... $ 4,540,107 $4,917,896
Net investment income ............. 5,569,799 1,049,427
Realized investment gains
(losses) .........................
Other income ...................... 2,406
----------- ---------- --------
Total revenues ................... 10,112,312 5,967,323
----------- ---------- --------
Benefits and settlement
expenses ......................... 5,813,515 3,861,725
Amortization of deferred policy
acquisition costs ................ 346,710
Other operating expenses .......... 855,442 1,505,634
----------- ---------- --------
Total benefits and expenses ...... 7,015,667 5,367,359
----------- ---------- --------
Income before income tax .......... 3,096,645 599,964
Income tax expense ................
----------- ---------- --------
Net income ........................
=========== ========== ========
<CAPTION>
TOTAL
INVESTMENT CORPORATE NET
OPERATING SEGMENT INCOME PRODUCTS & OTHER ADJUSTMENTS(1) INCOME
- ----------------------------------- ------------ ---------------- ---------------- -------------
<S> <C> <C> <C> <C>
1998
Premiums and policy fees .......... $ 501 $ 9,767,144
Net investment income ............. $ (1,248,164) 10,678,166
Realized investment gains
(losses) ......................... 127,769 127,769
Other income ...................... (598) (598)
---------- ------------ ---------- -----------
Total revenues ................... (97) (1,120,395) 20,572,481
---------- ------------ ---------- -----------
Benefits and settlement
expenses ......................... 8,754 9,261,000
Amortization of deferred policy
acquisition costs ................ 1,711,138
Other operating expenses .......... 50,140 6,246,819
---------- ------------ ---------- -----------
Total benefits and expenses ...... 58,894 17,218,957
---------- ------------ ---------- -----------
Income before income tax .......... (58,991) (1,120,395) 3,353,524
Income tax expense ................ $ 938,986 938,986
---------- ------------ ----------- -----------
Net income ........................ $ 2,414,538
========== ============ =========== ===========
1997
Premiums and policy fees .......... $ 8,415,833
Net investment income ............. $ 617,141 6,233,845
Realized investment gains
(losses) ......................... (59,889) (59,889)
Other income ...................... 8,718
---------- ------------ ---------- -----------
Total revenues ................... 557,252 14,598,507
---------- ------------ ---------- -----------
Benefits and settlement
expenses ......................... 9,075,762
Amortization of deferred policy
acquisition costs ................ 320,288
Other operating expenses .......... 2,406,314
---------- ------------ ---------- -----------
Total benefits and expenses ...... 11,802,364
---------- ------------ ---------- -----------
Income before income tax .......... 557,252 2,796,143
Income tax expense ................ $ 950,689 950,689
---------- ------------ ----------- -----------
Net income ........................ $ 1,845,454
========== ============ =========== ===========
1996
Premiums and policy fees .......... $ 9,458,003
Net investment income ............. $ (7,737) 6,611,489
Realized investment gains
(losses) ......................... (28,070) (28,070)
Other income ...................... 2,406
---------- ------------ ---------- -----------
Total revenues ................... (35,807) 16,043,828
---------- ------------ ---------- -----------
Benefits and settlement
expenses ......................... 9,675,240
Amortization of deferred policy
acquisition costs ................ 346,710
Other operating expenses .......... 2,361,076
---------- ------------ ---------- -----------
Total benefits and expenses ...... 12,383,026
---------- ------------ ---------- -----------
Income before income tax .......... (35,807) 3,660,802
Income tax expense ................ $1,244,673 1,244,673
---------- ------------ ----------- -----------
Net income ........................ $ 2,416,129
========== ============ =========== ===========
</TABLE>
- ---------
(1) Adjustments represent the recognition of income tax expense. There are no
asset adjustments.
F-17
<PAGE>
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J -- OPERATING SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
DENTAL AND
CONSUMER FINANCIAL INVESTMENT CORPORATE TOTAL
ACQUISITIONS BENEFITS INSTITUTIONS PRODUCTS & OTHER ASSETS
-------------- ------------- -------------- ------------ -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING SEGMENT ASSETS
1998
Investments and other assets ........ $434,928,613 $ 6,642,241 $2,658,668 $774,504 $26,350,089 $471,354,115
Deferred policy acquisition costs 132,582,526 692,925 133,275,451
------------ ----------- ---------- -------- ----------- ------------
Total assets ........................ $567,511,139 $ 6,642,241 $3,351,593 $774,504 $26,350,089 $604,629,566
============ =========== ========== ======== =========== ============
1997
Investments and other assets ........ $ 76,644,539 $ 7,111,880 $20,698,754 $104,455,173
Deferred policy acquisition costs 1,606,596 $ 85,689 1,692,285
------------ ----------- ---------- --------- ----------- ------------
Total assets ........................ $ 78,251,137 $ 7,111,880 $ 85,689 $20,698,754 $106,147,458
============ =========== ========== ========= =========== ============
1996
Investments and other assets ........ $ 78,189,386 $12,870,675 $17,974,564 $109,034,625
Deferred policy acquisition costs 1,919,471 1,919,471
------------ ----------- ---------- ---------- ----------- ------------
Total assets ........................ $ 80,108,857 $12,870,675 $17,974,564 $110,954,096
============ =========== ========== ========== =========== ============
</TABLE>
NOTE K -- REINSURANCE
The Company 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.
The Company has reinsured approximately $7.6 billion, $133 million, and
$163 million in face amount of life insurance risks with other insurers
representing $12.6 million, $0.7 million, and $0.9 million of premium income
for 1998, 1997, and 1996, respectively. The Company has also reinsured accident
and health risks representing $0.9 million, $2.3 million, and $1.9 million of
premium income for 1998, 1997, and 1996, respectively. In 1998 and 1997, policy
and claim reserves relating to insurance ceded of $21.9 million and $7.5
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 the Company. At December 31,
1998 and 1997, the Company had paid $0.5 million and $0.2 million,
respectively, of ceded benefits which are recoverable from reinsurers.
F-18
<PAGE>
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE L -- ESTIMATED MARKET VALUES OF FINANCIAL INSTRUMENTS
The carrying amount and estimated market values of the Company's financial
instruments at December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------- -----------------------------
ESTIMATED ESTIMATED
CARRYING MARKET CARRYING MARKET
AMOUNT VALUES AMOUNT VALUES
--------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Assets (see Notes A and C):
Investments:
Fixed maturities ................. $360,113,277 $360,113,277 $67,110,502 $68,201,559
Mortgage loans on real estate .... 7,900,221 8,511,779 10,902,986 11,649,144
Short-term investments ........... 18,267,431 18,267,431 873,844 873,844
Cash .............................. 0 0 2,218,201 2,218,201
Liabilities (see Notes A):
Annuity deposits ................. 3,434,342 3,406,010 929,124 929,124
</TABLE>
Except as noted below, fair values were estimated using quoted market
prices.
The Company estimates the fair value of its mortgage loans using
discounted cash flows from the next call date. The Company believes the fair
value of its short-term investments approximates book value due to being
short-term. The Company estimates the fair value of its annuities using
surrender values. The Company 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.
F-19
<PAGE>
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
- --------------------------------- --------------- --------------- ------------ ----------------
FUTURE ANNUITY
DEFERRED POLICY DEPOSITS
POLICY BENEFITS AND OTHER
ACQUISITION AND UNEARNED POLICYHOLDERS'
SEGMENT COSTS CLAIMS PREMIUMS FUNDS
- --------------------------------- --------------- --------------- ------------ ----------------
<S> <C> <C> <C> <C>
Year Ended
December 31,1998:
Life Insurance Acquisitions ..... $132,582,526 $439,215,364 $ 54,170 $ 8,600,060
Specialty Insurance Products
Dental and Consumer
Benefits ...................... 172,903 189 6,445,537
Financial Institutions ......... 692,925 213,835 2,432,918
Retirement Savings and
Investment Products
Investment Products ............ 240,000 531,751
Corporate and Other ............. ------------ ------------ ---------- -----------
TOTAL ........................ $133,275,451 $439,842,102 $2,487,277 $15,577,348
============ ============ ========== ===========
Year Ended
December 31,1997:
Life Insurance Acquisitions ..... $ 1,606,596 $ 56,177,703 $ 463,232 $ 6,048,563
Specialty Insurance Products
Dental and Consumer
Benefits ...................... 0 76,979 0 6,961,019
Financial Institutions ......... 85,689
Corporate and Other ............. 0 0 0 0
------------ ------------ ---------- -----------
TOTAL ........................ $ 1,692,285 $ 56,254,682 $ 463,232 $13,009,582
============ ============ ========== ===========
Year Ended
December 31,1996:
Life Insurance Acquisitions ..... $ 1,919,471 $ 59,483,455 $ 182,499 $ 6,028,180
Specialty Insurance Products
Dental and Consumer
Benefits ...................... 0 76,979 0 12,891,670
Corporate and Other ............. 0 0 0 0
------------ ------------ ---------- -----------
TOTAL ........................ $ 1,919,471 $ 59,560,434 $ 182,499 $18,919,850
============ ============ ========== ===========
<CAPTION>
COL. A COL. F COL. G COL. H COL. I COL. J
- --------------------------------- ------------- --------------- ------------ ------------- -------------
AMORTIZATION
PREMIUMS BENEFITS OF DEFERRED
AND NET AND POLICY OTHER
POLICY INVESTMENT SETTLEMENT ACQUISITION OPERATING
SEGMENT FEES INCOME (1) EXPENSES COSTS EXPENSES (1)
- --------------------------------- ------------- --------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Year Ended
December 31,1998:
Life Insurance Acquisitions ..... $7,414,597 $11,071,366 $7,594,508 $1,535,385 $5,947,115
Specialty Insurance Products
Dental and Consumer
Benefits ...................... 1,503,364 718,492 1,340,838 144,257
Financial Institutions ......... 848,682 136,472 316,900 175,753 105,307
Retirement Savings and
Investment Products
Investment Products ............ 501 8,754 50,140
Corporate and Other ............. (1,248,164)
---------- ------------ ---------- ---------- ----------
TOTAL ........................ $9,767,144 $10,678,166 $9,261,000 $1,711,138 $6,246,819
========== ============ ========== ========== ==========
Year Ended
December 31,1997:
Life Insurance Acquisitions ..... $4,231,380 $ 4,590,650 $5,984,374 $ 312,874 $ 912,398
Specialty Insurance Products
Dental and Consumer
Benefits ...................... 4,158,505 1,026,054 3,080,800 0 1,493,916
Financial Institutions ......... 25,948 10,588 7,414
Corporate and Other ............. 0 617,141 0 0 0
---------- ------------ ---------- ---------- ----------
TOTAL ........................ $8,415,833 $ 6,233,845 $9,075,762 $ 320,288 $2,406,314
========== ============ ========== ========== ==========
Year Ended
December 31,1996:
Life Insurance Acquisitions ..... $4,540,107 $ 5,569,799 $5,813,515 $ 346,710 $ 855,442
Specialty Insurance Products
Dental and Consumer
Benefits ...................... 4,917,896 1,049,427 3,861,725 0 1,505,634
Corporate and Other ............. 0 (7,737) 0 0 0
---------- ------------ ---------- ---------- ----------
TOTAL ........................ $9,458,003 $ 6,611,489 $9,675,240 $ 346,710 $2,361,076
========== ============ ========== ========== ==========
</TABLE>
- ---------
(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.
S-1
<PAGE>
SCHEDULE IV -- REINSURANCE
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
<TABLE>
<CAPTION>
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
------------ -------------- -------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31,1998:
Life insurance in force(1) ........ $ 282,231 $ 7,575,418 $ 7,914,524 $ 621,337 1,273.8%
========== =========== =========== ========== =======
Premiums and policy fees:
Life insurance .................... $4,195,074 $12,616,610 $17,462,742 $9,041,206 193.1%
Accident and health insurance ..... 1,542,679 858,678 41,937 725,938 5.8%
---------- ----------- ----------- ----------
TOTAL ........................... $5,737,753 $13,475,288 $17,504,679 $9,767,144
========== =========== =========== ==========
Year Ended December 31,1997:
Life insurance in force(1) ........ $ 229,717 $ 133,080 $ 367,176 $ 463,813 79.2%
========== =========== =========== ========== =======
Premiums and policy fees:
Life insurance .................... $2,926,434 $ 752,253 $ 2,124,374 $4,298,555 49.4%
Accident and health insurance ..... 6,325,182 2,252,828 44,924 4,117,278 1.2%
---------- ----------- ----------- ----------
TOTAL ........................... $9,251,616 $ 3,005,081 $ 2,169,298 $8,415,833
========== =========== =========== ==========
Year Ended December 31,1996:
Life insurance in force(1) ........ $ 247,048 $ 169,330 $ 549,583 $ 627,301 87.6%
========== =========== =========== ========== =======
Premiums and policy fees:
Life insurance .................... $3,222,836 $ 910,593 $ 2,698,743 $5,010,986 53.9%
Accident and health insurance ..... 6,245,784 1,857,606 58,839 4,447,017 1.3%
---------- ----------- ----------- ----------
TOTAL ........................... $9,468,620 $ 2,768,199 $ 2,757,582 $9,458,003
========== =========== =========== ==========
</TABLE>
- ---------
(1) Dollars in thousands
S-2
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.*
The expenses of the issuance and distribution of the Contracts, other than
any underwriting discounts and commissions, are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fees $ 34,483.00
Printing and Engraving .............................. 48,000.00
Accounting fees and expenses ........................ 25,000.00
Legal fees and expenses ............................. 65,000.00
Miscellaneous ....................................... 0.00
------------
TOTAL EXPENSES ...................................... $ 172,483.00
============
</TABLE>
- ---------
* Estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article XI of the By-laws of the Company provides, in substance, that any
of the Company's directors and officers, who is a party or is threatened to be
made a party to any action, suit or proceeding, other than an action by or in
the right of the Company, by reason of the fact that he is or was an officer or
director, shall be indemnified by the Company against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such claim, action, suit
or proceeding if he acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the Company and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. If the claim, action or suit is or was by or in the right
of the Company to procure a judgment in its favor, such person shall be
indemnified by the Company against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Company except that no indemnification shall be made in respect of any claim,
issue or matter as to which such person shall have been adjudged to be liable
for negligence or misconduct in the performance of his duty to the Company
unless and only to the extent that the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all circumstances of the case, such person is fairly
and reasonably entitled to indemnity for such expenses which such court shall
deem proper. To the extent that a director or officer has been successful on
the merits or otherwise in defense of any such action, suit or proceeding, or
in defense of any claim, issue or matter therein, he shall be indemnified by
the Company against expenses (including attornys' fees) actually and reasonably
incurred by him in connection therewith, not withstanding that he has not been
successful on any other claim issue or matter in any such action, suit or
proceeding. Unless ordered by a court, indemnification shall be made by the
Company only as authorized in the specific case upon a determination that
indemnification of the officer or director is proper in the circumstances
because he has met the applicable standard of conduct. Such determination shall
be made (a) by the Board of Directors by a majority vote of a quorum consisting
of directors who were not parties to, or who have been successful on the merits
or otherwise with respect to, such claim action, suit or proceeding, or (b) if
such a quorum is not obtainable, or, even if obtainable a quorum of
disinterested directors so directs, by independent legal counsel in a written
opinion or (c) by the shareholders.
In addition, the executive officers and directors are insured by PLC's
Directors' and Officers' Liability Insurance Policy including Company
Reimbursement and are indemnified by a written contract with PLC which
supplements such coverage.
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Not applicable.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------- -----------------------------------------------------------
<S> <C>
****1(a) Underwriting Agreement
***1(b) Form of Distribution Agreement
**3(a) Articles of Incorporation
**3(b) By-laws
****4(a) Group Modified Guaranteed Annuity Contract
****4(b) Application for Group Modified Guaranteed Annuity Contract
****4(c) Individual Modified Guaranteed Annuity Certificate
****5 Opinion re legality
23(a) Consent of PricewaterhouseCoopers L.L.P.
23(b) Consent of Sutherland, Asbill & Brennan LLP
24 Powers of Attorney
</TABLE>
- ---------
* Previously filed in Registrant's Form S-1 Registration Statement,
Registration No. 333-42425, on December 17, 1997.
** Incorporated herein by reference to the Registrant's Form N-4 Registration
Statement Registration No. 333-41577, initial filing on December 5, 1997.
*** Incorporated herein by reference to the Registrant's Pre-Effective
Amendment No. 1 to Form N-4 Registration Statement No. 333-41577, filed on
April 15, 1998.
**** Previously filed in Registrant's Pre-Effective Amendment No. 1 to Form S-1
Registration Statement, Registration No. 333-42425, filed on April 16,
1998.
FINANCIAL STATEMENTS SCHEDULES
Schedules other than those referred to above are not required or are
inapplicable and therefore have been omitted.
ITEM 17. UNDERTAKINGS.
(A) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information
set forth in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement, including (but not limited to) any addition or deletion
of a managing underwriter;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-2
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, the Registrant has duly caused
this pre-effective amendment to its registration statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Birmingham, State of Alabama, on this 19th day of April, 1999.
AMERICAN FOUNDATION LIFE INSURANCE
COMPANY
By: /s/ WAYNE E. STUENKEL
-------------------------------------
WAYNE E. STUENKEL
PRESIDENT
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
As required by the Securities Act of 1933, this amendment to the
registration statement on Form S-1 has been signed by the following persons in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------- ------------------------------------- ---------------
<S> <C> <C>
/s/ WAYNE E. STUENKEL Principal and Director (Principal April 19, 1999
---------------------------------- Executive Officer)
WAYNE E. STUENKEL
/s/ JERRY W. DEFOOR Vice President (Principal Financial April 19, 1999
---------------------------------- Officer and Principal Accounting
JERRY W. DEFOOR Officer
* Director April 19, 1999
----------------------------------
R. STEPHEN BRIGGS
* Director April 19, 1999
----------------------------------
JIM E. MASSENGALE
/s/ WAYNE E. STUENKEL Director April 19, 1999
----------------------------------
WAYNE E. STUENKEL
* Director April 19, 1999
----------------------------------
A.S. WILLIAMS, III
* Director April 19, 1999
----------------------------------
STEVEN A. SCHULTZ
* Director April 19, 1999
----------------------------------
DEBORAH J. LONG
* Director April 19, 1999
----------------------------------
CAROLYN KING
* Director April 19, 1999
----------------------------------
RICHARD J. BIELEN
* Director April 19, 1999
----------------------------------
DANNY L. BENTLEY
</TABLE>
*By: /s/ STEVE M. CALLAWAY
------------------------------
STEVE M. CALLAWAY
ATTORNEY-IN-FACT
II-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGE TO SEQUENTIAL
NUMBERING SYSTEM
NUMBER DESCRIPTION WHERE EXHIBIT LOCATED
- ------------ ------------------- ----------------------
<S> <C> <C>
23(a) Consent of PricewaterhouseCoopers L.L.P.
23(b) Consent of Sutherland, Asbill & Brennan LLP
24 Powers of Attorney
</TABLE>
EXHIBIT 23(A)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of our
report dated February 11, 1999, on our audits of the financial statements and
financial statement schedules of Protective Life and Annuity Insurance Company
(formerly American Foundation Life Insurance Company). We also consent to the
reference to our firm under the caption "Experts."
/s/ PRICEWATERHOUSECOOPERS L.L.P.
- --------------------------------
PRICEWATERHOUSECOOPERS L.L.P.
Birmingham, Alabama
April 15, 1999
EXHIBIT 23(B)
CONSENT OF SUTHERLAND, ASBILL & BRENNAN LLP
We consent to the reference to our firm under the heading "Legal Matters"
in the prospectus included in the Registration Statement on Form S-1 (File No.
333-42425) for certain modified guaranteed annuity contracts issued by
Protective Life Insurance Company. In giving this consent, we do not admit that
we are in the category of persons whose consent is required under Section 7 of
the Securities Act of 1933.
/s/ SUTHERLAND, ASBILL & BRENNAN LLP
------------------------------------
SUTHERLAND, ASBILL & BRENNAN LLP
WASHINGTON, D.C.
April 15, 1999
EXHIBIT 24
DIRECTORS' POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned Directors of
Protective Life and Annuity Insurance Company, an Alabama corporation,
("Company") by his execution hereof or upon an identical counterpart hereof,
does hereby constitute and appoint John D. Johns, Steve Callaway or Jerry W.
DeFoor, and each or any of them, his true and lawful attorney-in-fact and
agent, for him and in his name, place and stead, to execute and sign the
Registration Statement on Form S-1 to be filed by the Company with respect to
the Platinum Series Annuity modified guaranteed annuity products with the
Securities and Exchange Commission, pursuant to the provisions of the
Securities Act of 1933 and, further, to execute and sign any and all
pre-effective and post-effective amendments to such Registration Statement, and
to file same, with all exhibits and schedules thereto and all other documents
in connection therewith, with the Securities and Exchange Commission and with
such state securities authorities as may be appropriate, granting unto said
attorney-in-fact and agent, 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 of the undersigned
might or could do in person, hereby ratifying and confirming all the acts of
said attorney-in-fact and agent 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 19th day of April, 1999.
WITNESS TO ALL SIGNATURES:
<TABLE>
<S> <C>
/s/ DEBORAH J. LONG
- -------------------------------------
DEBORAH J. LONG
/s/ WAYNE E. STUENKEL /s/ DANNY L. BENTLEY
- ------------------------------------- -------------------------------------
WAYNE E. STUENKEL DANNY L. BENTLEY
/s/ JERRY W. DEFOOR /s/ RICHARD J. BIELEN
- ------------------------------------- -------------------------------------
JERRY W. DEFOOR RICHARD J. BIELEN
/s/ R. STEPHEN BRIGGS /s/ CAROLYN KING
- ------------------------------------- -------------------------------------
R. STEPHEN BRIGGS CAROLYN KING
/s/ DEBORAH J. LONG /s/ JIM E. MASSENGALE
- ------------------------------------- -------------------------------------
DEBORAH J. LONG JIM E. MASSENGALE
/s/ STEVEN A. SCHULTZ /s/ A. S. WILLIAMS III
- ------------------------------------- -------------------------------------
STEVEN A. SCHULTZ A. S. WILLIAMS III
WITNESS TO DEBORAH J. LONG's SIGNATURE
/s/ JERRY M. HYCHE
-------------------------------------
JERRY M. HYCHE
</TABLE>
