<PAGE>
P R O S P E C T U S
PROSAVER-R- MGA
MODIFIED GUARANTEED
ANNUITY CONTRACTS
Protective Life Insurance Company
P.O. Box 2606
Birmingham, Alabama 35202
(205) 879-9230
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This Prospectus describes interests in a Group Modified Guaranteed Annuity
Contract and an Individual Modified Guaranteed Annuity Contract. Both are
designed and offered to provide annuity payments in connection with retirement
programs that may or may not qualify for special income tax treatment under the
Internal Revenue Code. With respect to the Group Contract, eligible individuals
include persons who have established accounts with certain broker-dealers which
have entered into distribution agreements to offer interests in the Group
Modified Guaranteed Annuity Contract, and members of other eligible groups. (See
"Distribution of Contracts," page 12.) An Individual Modified Guaranteed Annuity
Contract is offered in certain states.
Participation in a Group Contract will be separately accounted for by the
issuance of a Certificate evidencing your interest under the Group Contract.
Participation in an Individual Contract is evidenced by the issuance of an
Individual Modified Guaranteed Annuity Contract. The Group Contract, Certificate
and Individual Modified Guaranteed Annuity Contract are hereafter referred to
collectively as the "Contract".
An Annuity Deposit of at least $5,000 is required in order to purchase a
Contract. Additional Annuity Deposit(s) can be made to the Contract, except for
Contracts issued in the States of California, Minnesota, South Carolina and
Michigan. However, regardless of the number of Annuity Deposit(s) made, only one
Contract will be issued. Protective Life Insurance Company ("Protective")
reserves the right to limit the amount of your Annuity Deposit(s).
Each Annuity Deposit (less applicable Premium Taxes, if any) will be allocated
at your direction to one or more Sub-Accounts corresponding to the Guaranteed
Periods chosen by you and accumulate at the Guaranteed Interest Rate or Rates
applicable to such Guaranteed Periods established by Protective. A Sub-Account
is established for each specified Guaranteed Interest Rate and Guaranteed Period
selected. Guaranteed Periods currently range from one to fifteen years. Other
Guaranteed Periods may be offered at the Company's discretion. PARTIAL AND FULL
SURRENDERS MADE PRIOR TO THE END OF A GUARANTEED PERIOD WILL BE SUBJECT TO A
MARKET VALUE ADJUSTMENT, WHICH COULD EITHER INCREASE OR DECREASE YOUR ACCOUNT
VALUE.
AN INVESTMENT IN THE CONTRACT IS NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED
OR ENDORSED BY, ANY BANK, NOR IS THE CONTRACT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN
THE CONTRACT INVOLVES CERTAIN RISKS, INCLUDING THE LOSS OF ANNUITY DEPOSITS
(PRINCIPAL).
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is May 1, 1994
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CAPSULE SUMMARY OF THE CONTRACT
This Prospectus describes the ProSaver Group and Individual Modified
Guaranteed Annuity Contracts issued by Protective Life Insurance Company. These
Contracts may be issued to any eligible employer, entity or other organized
group acceptable to us or to an individual in certain states.
The Contract may be issued pursuant to nonqualified retirement plans or
plans qualifying for special tax treatment such as Individual Retirement
Annuities or Accounts, H.R. 10 plans, corporate pension or profit-sharing plans,
Tax-Sheltered Annuities or Section 457 Deferred Compensation ("Section 457")
plans.
You must submit properly completed application information along with an
Annuity Deposit to receive a Contract. Your initial Annuity Deposit must be at
least $5,000 unless approved by the Company. Additional Annuity Deposits can be
made to the Contract, except for Contracts issued in the States of California,
Minnesota, South Carolina, and Michigan. However, regardless of the number of
Annuity Deposits made, only one Contract will be issued. We reserve the right to
limit the amount of your Annuity Deposit(s). Each Annuity Deposit will be
allocated to one or more Sub-Accounts which correspond to the Guaranteed Periods
that you specify. The minimum allocation to a Sub-Account is $5,000. You select
Initial Guaranteed Period(s) from among those offered by Protective. A
Guaranteed Period is the period of years for which a rate of interest is
guaranteed. Currently, you may select Guaranteed Periods of from one to fifteen
years. During an Initial Guaranteed Period, the portion of your Annuity Deposit
allocated to a Sub-Account and any initial interest credited thereon will earn
interest at the applicable Initial Guaranteed Interest Rate as established by
Protective, as an effective interest rate after daily compounding of interest
has been taken into account.
Unless you elect a different duration from among those then offered by us
within twenty days prior to the end of an Initial Guaranteed Period, the
corresponding Sub-Account Value will be automatically transferred to a
Subsequent Guaranteed Period of either (i) the same duration as the Initial
Guaranteed Period if then offered by us; or (ii) the shortest duration then
offered by us which is closest to the same duration as the Initial Guaranteed
Period. The Sub-Account Value as of the first day of each Subsequent Guaranteed
Period will earn interest at the Subsequent Guaranteed Interest Rate.
PROTECTIVE'S MANAGEMENT WILL MAKE THE FINAL DETERMINATION AS TO GUARANTEED RATES
TO BE DECLARED. WE CANNOT PREDICT NOR DO WE GUARANTEE FUTURE GUARANTEED RATES.
(See "Establishment of Guaranteed Interest Rates", page 6).
We make no charges to your Annuity Deposit when it is received by us (except
deduction for premium taxes, where applicable). Full and partial surrenders from
each Sub-Account are permitted subject to certain restrictions. A full or
partial surrender made prior to the end of a Guaranteed Period will be subject
to a Market Value Adjustment and may be subject to a Surrender Charge, which
could result in the receipt of less than your Annuity Deposit(s). A Surrender
Charge will apply during the first seven years of each Initial and each
Subsequent Guaranteed Period. For each Initial or Subsequent Guaranteed Period
with durations longer than seven years, a Surrender Charge will only apply
during the first seven years. The Surrender Charge is equal to six months of
interest on the amount withdrawn from the Sub-Account Value. The Surrender
Charge for all full and partial surrenders made during an Initial or Subsequent
Guaranteed Period shall not exceed, in the aggregate, a total of six months'
interest on the amount of the Annuity Deposit or Sub-Account Value(s) originally
allocated in the case of an Initial Guaranteed Period, or transferred, in the
case of a Subsequent Guaranteed Period from which the full or partial surrender
is made. (See "Surrender Charges", page 6).
You may withdraw all or a portion of the interest that has been credited
during the prior Contract Year at any time during the current Contract Year if
you so request in a form and manner acceptable to Protective.
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You may only make one such withdrawal from your Account Value per Contract Year.
No Surrender Charge or Market Value Adjustment will be imposed on such interest
payments. Any such withdrawal may, however, be subject to tax, including the 10%
penalty tax under the Internal Revenue Code.
A Market Value Adjustment is applied when you request a full or partial
surrender from a Sub-Account prior to the end of the Sub-Account's Guaranteed
Period. The Market Value Adjustment reflects the relationship between (i) the
current Guaranteed Interest Rate that we are crediting for a Guaranteed Period
equal to the time remaining in the Guaranteed Period at the time you request a
full or partial surrender, and (ii) the then applicable Guaranteed Interest Rate
being applied to the Sub-Account from which you select to make a full or partial
surrender. Since our current guaranteed rates are based in part upon the
investment yields available to Protective, the effect of the Market Value
Adjustment will be related to the levels of such yields. It is possible,
therefore, that, should such yields increase from the time you purchased your
Contract, the amount you would receive upon a full or partial surrender of your
Contract may be less than the portion of your original Annuity Deposit allocated
to each Sub-Account plus any interest credited thereon. If such yields should
decrease, the amount you would receive upon a full or partial surrender may be
more than the portion of your original Annuity Deposit allocated to each
Sub-Account plus any interest credited thereon. (See "Market Value Adjustment",
page 8).
Partial or full surrenders may be subject to a 10% penalty tax under the
Internal Revenue Code (See the discussion on page 14). We may defer payment of
any full or partial surrender for a period not exceeding 6 months from the date
of our receipt of your notice of surrender or the period permitted by state
insurance law, if less.
On the Annuity Commencement Date specified by you, Protective will make a
lump-sum payment or start to pay a series of payments based on the Annuity
Option selected by you. Because Initial and Subsequent Guaranteed Periods may
not extend beyond the Annuity Commencement Date then in effect, no Surrender
Charge or Market Value Adjustment will be deducted upon the application of your
Net Account Value to purchase an Annuity on the Annuity Commencement Date. To
elect an Annuity Option you must notify us of the Annuity Option you are
electing, within 30 days before the Annuity Commencement Date. (See "Annuity
Benefits", page 9).
This Contract provides for a guaranteed Death Benefit. If any Participant
dies before the Annuity Commencement Date the guaranteed Death Benefit will be
payable to the surviving Participant, if any. If there is no surviving
Participant, the Death Benefit will be paid to the Beneficiary named by the
Participant. If no Beneficiary designation is in effect or if there is no
designated Beneficiary living, the Death Benefit will be paid to the estate of
the deceased Participant. If any Participant is not an individual, the death or
change of Annuitant will be treated as the death of a Participant.
The guaranteed Death Benefit will equal the Account Value. The guaranteed
Death Benefit is calculated as of the date of death.
If applicable, the guaranteed Death Benefit for all Guaranteed Periods will
be totalled to obtain the guaranteed Death Benefit payable. The guaranteed Death
Benefit may be taken in one sum immediately or the entire Account Value must be
distributed within five years of the date of death unless: (a) it is payable
over the life of the designated Beneficiary with distributions beginning within
one year of the date of death; or (b) it is payable over a period not extending
beyond the life expectancy of the designated Beneficiary with distributions
beginning within one year of the date of death; or (c) if the deceased
Participant's spouse is the designated Beneficiary, that spouse may elect to
continue the Certificate and become the new Participant.
The Beneficiary will have sixty (60) days from the date of death to exercise
their right to the guaranteed Death Benefit. If this right is not exercised
within the 60-day period, any payments will be treated as a surrender request,
and will be subject to the surrender charge and a market value adjustment. See
"Surrender Charges", page 6, and "Market Value Adjustment", page 8.
<PAGE>
On any Contract subject to Premium Tax, the Premium Tax will be deducted, as
provided under applicable law, from the Annuity Deposit when received, upon full
or partial surrender, or from the amount applied to effect an Annuity at the
time Annuity payments commence.
We will furnish you with a report annually showing your Account Value,
Sub-Account Values and interest credited. The report will not include our
financial statements.
You may cancel your Contract within twenty days after receipt by returning
or mailing it to us or our Agent. We will refund your Annuity Deposit, and the
Contract will be as though it had never been issued.
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TABLE OF CONTENTS
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GLOSSARY OF SPECIAL TERMS..................................................................................... 1
DESCRIPTION OF CONTRACTS...................................................................................... 3
A. General............................................................................................. 3
B. Application Information, Annuity Deposit, and Annuitant............................................. 3
C. Initial and Subsequent Guaranteed Periods........................................................... 4
D. Establishment of Guaranteed Interest Rates.......................................................... 6
E. Surrenders.......................................................................................... 6
1. Surrender Charges.................................................................................. 6
2. Waiver of Surrender Charges........................................................................ 7
3. Market Value Adjustment............................................................................ 8
4. Interest Withdrawals............................................................................... 8
F. Premium Taxes....................................................................................... 9
G. Death Benefit....................................................................................... 9
H. Annuity Benefits.................................................................................... 9
1. Electing the Annuity Commencement Date and Form of Annuity......................................... 9
2. Change of Annuity Commencement Date, Annuity Option, or Annuitant.................................. 9
3. Annuity Options.................................................................................... 10
4. Annuity Payment.................................................................................... 10
5. Death of Annuitant or Participant After Annuity Commencement Date.................................. 10
INVESTMENTS BY PROTECTIVE..................................................................................... 11
OTHER PROVISIONS.............................................................................................. 12
A. Contract Transactions............................................................................... 12
B. Amendment of Contracts.............................................................................. 12
C. Assignment of Contracts............................................................................. 12
DISTRIBUTION OF CONTRACTS..................................................................................... 12
FEDERAL TAX MATTERS........................................................................................... 13
A. Introduction........................................................................................ 13
B. The Company's Tax Status............................................................................ 13
C. Taxation of Annuities in General --................................................................. 13
1. Tax Deferral During Accumulation Period............................................................ 13
2. Taxation of Partial and Full Withdrawals........................................................... 14
3. Taxation of Annuity Payments....................................................................... 14
4. Taxation of Death Benefit Proceeds................................................................. 15
5. Penalty Tax on Premature Distributions............................................................. 15
6. Aggregation of Contracts........................................................................... 15
7. Qualified Retirement Plans......................................................................... 15
In General......................................................................................... 15
a. Individual Retirement Annuities................................................................ 16
b. Simplified Employee Pensions (SEP-IRAs)........................................................ 16
c. Corporate and Self-Employed ("H.R. 10" and "Keogh") Pension and Profit-Sharing Plans........... 16
d. Tax-Sheltered Annuities........................................................................ 16
e. Deferred Compensation Plans of State and Local Governments and Tax-Exempt Organizations........ 17
f. Direct Rollover Rules.......................................................................... 17
8. Federal Income Tax Withholding..................................................................... 17
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MATTERS RELATING TO CONTRACTS OFFERED IN CERTAIN STATES....................................................... 17
A. Capsule Summary of the Contract..................................................................... 18
B. Glossary of Special Terms........................................................................... 18
C. Death Benefit....................................................................................... 18
D. Annuity Benefits.................................................................................... 19
E. Federal Tax Matters................................................................................. 19
PROTECTIVE LIFE INSURANCE COMPANY............................................................................. 20
A. Business............................................................................................ 20
B. Selected Financial Data............................................................................. 22
C. Management's Discussion and Analysis of Financial Condition and Results of Operations............... 23
1. Results of Operations.............................................................................. 23
a. Premiums and Policy Fees....................................................................... 23
b. Net Investment Income.......................................................................... 24
c. Realized Investment Gains (Losses)............................................................. 24
d. Other Income................................................................................... 25
e. Income (Loss) Before Income Tax................................................................ 25
f. Income Taxes................................................................................... 27
g. Net Income..................................................................................... 27
h. Recently Issued Accounting Standards........................................................... 27
2. Liquidity and Capital Resources.................................................................... 27
3. Impact of Inflation................................................................................ 30
4. Segment Information................................................................................ 30
D. Reinsurance......................................................................................... 30
E. Reserves............................................................................................ 30
F. Investments......................................................................................... 30
G. Competition......................................................................................... 31
H. Employees........................................................................................... 32
I. Properties.......................................................................................... 32
J. Regulation.......................................................................................... 32
K. Recent Developments................................................................................. 33
DIRECTORS AND EXECUTIVE OFFICERS.............................................................................. 33
EXECUTIVE COMPENSATION........................................................................................ 36
LEGAL PROCEEDINGS............................................................................................. 44
EXPERTS....................................................................................................... 44
LEGAL MATTERS................................................................................................. 44
REGISTRATION STATEMENT........................................................................................ 44
APPENDIX A.................................................................................................... A-1
FINANCIAL STATEMENTS.......................................................................................... F-1
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THAT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH
THE OFFER CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED ON AS HAVING BEEN AUTHORIZED. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF, OR SOLICITATION OF AN OFFER TO
ACQUIRE, ANY CONTRACTS OFFERED BY THIS PROSPECTUS IN ANY JURISDICTION TO ANYONE
TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION IN SUCH
JURISDICTION.
<PAGE>
GLOSSARY OF SPECIAL TERMS
"We", "Us", "Our", "Protective", and "Company" refer to Protective Life
Insurance Company. With respect to a Group Modified Guaranteed Annuity Contract,
"You", "Your", and "Participant" refer to a person/persons who has/have been
issued a Certificate. With respect to an Individual Modified Guaranteed Annuity
Contract, "You", "Your", and "Participant" refer to a person who has been issued
a Contract. The Group Modified Guaranteed Annuity Contract, Certificate, and
Individual Modified Guaranteed Annuity Contract are hereinafter referred to
collectively as "Contract".
DEFINITIONS
ACCOUNT VALUE -- The sum of all Sub-Account Values.
ADMINISTRATIVE OFFICE -- 2801 Highway 280 South, Birmingham, Alabama 35223.
ANNUITANT -- Annuity payments may depend upon the continuation of the life
of a person. That person is called an Annuitant and is named in the Certificate.
The Annuitant may be changed prior to the Annuity Commencement Date provided
such change is made in Writing on a form acceptable to us.
ANNUITY -- A series of predetermined periodic payments.
ANNUITY COMMENCEMENT DATE -- The date on which annuity payments begin.
ANNUITY DEPOSIT(S) -- The Annuity Deposit(s) made will be allocated to each
Guaranteed Period(s) selected under each Contract. Each Annuity Deposit must be
at least $5,000 unless approved by the Company.
BENEFICIARY -- PRIMARY -- The person named to receive the Death Benefit
under the Contract upon the death of any Participant. You may change the
Beneficiary at any time by sending a request in Writing to the Administrative
Office. Upon the death of any Participant, the surviving Participant, if any,
will be the Beneficiary.
CONTINGENT -- The person named to receive the Death Benefit if the
Primary Beneficiary is not living at any Participant's death.
IRREVOCABLE -- One whose consent is necessary to change the Beneficiary
or exercise certain other rights.
CERTIFICATE -- The individual Certificate issued by the Company to a
Participant or to the Contract Holder for delivery to the Participant together
with any endorsements attached, and the application information. The Certificate
summarizes the provisions of the Contract and evidences that an Annuity Deposit
has been made by or on behalf of a Participant under the Contract.
CERTIFICATE DATE OR CONTRACT DATE -- The date shown on the Certificate and
on which the Certificate takes effect. The Contract Date is the date shown on
the Contract and on which the Contract takes effect. "Certificate Years" or
"Contract Years" are measured from the Certificate Date or Contract Date.
COMPANY -- Protective Life Insurance Company.
CONTRACT -- The Certificate evidencing an interest in the Group Modified
Guaranteed Annuity Contract as set forth in this Prospectus together with any
endorsements attached, and the application information. Also, any reference in
this Prospectus to Contract includes the underlying Group Modified Guaranteed
Annuity Contract and the Individual Modified Guaranteed Annuity Contract issued
in certain states.
GUARANTEED PERIOD -- The period for which either an Initial or Subsequent
Guaranteed Interest Rate will be credited to a Sub-Account under a Contract.
Guaranteed Periods will be designated as being either "Initial" or "Subsequent".
1
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INITIAL GUARANTEED INTEREST RATE -- For each Annuity Deposit, the effective
rate of interest, calculated after daily compounding of interest has been taken
into account, which is used in determining the interest credited to a
Sub-Account during the Initial Guaranteed Period. The rate applicable to the
original Annuity Deposit is specified in each Certificate or Contract.
MARKET VALUE ADJUSTMENT -- The adjustment made to a Sub-Account Value when a
full or partial surrender is requested prior to the end of an Initial or
Subsequent Guaranteed Period.
NET ACCOUNT VALUE -- The sum of all Net Sub-Account Values.
NET SUB-ACCOUNT VALUE -- The Sub-Account Value after application of the
Market Value Adjustment and deductions for any Surrender Charges and applicable
Premium Taxes.
PARTICIPANT -- The person(s) eligible to participate pursuant to the
eligibility requirements set forth in the Contract and for whom the Company has
received an Annuity Deposit.
QUALIFIED PLAN -- Retirement plans which receive favorable tax treatment
under sections 401, 403, 408, or 457 of the Internal Revenue Code of 1986, as
amended.
SUB-ACCOUNT -- Each Annuity Deposit will be allocated to one or more
Sub-Accounts as directed by the Participant. Each Sub-Account will correspond to
a specified Guaranteed Period and Guaranteed Interest Rate.
SUB-ACCOUNT VALUES -- The amount equal to that part of each Annuity Deposit
allocated by a Participant to a Sub-Account(s), or any amount transferred to a
Sub-Account(s) at the end of a Guaranteed Period increased by all interest
credited and decreased by amounts due to previous full or partial surrenders
(including Surrender Charges, Market Value Adjustments, and Premium Taxes
thereon) and previous interest withdrawals.
SUBSEQUENT GUARANTEED INTEREST RATE -- The effective rate of interest,
calculated after daily compounding of interest has been taken into account,
which is established by Protective for any applicable Subsequent Guaranteed
Period.
SURRENDER CHARGE -- A Surrender Charge, if applicable, is deducted from any
Sub-Account Value from which a full or partial surrender is made prior to the
end of an Initial or Subsequent Guaranteed Period. The Surrender Charge is equal
to six months of interest on the amount withdrawn from a Sub-Account Value. The
Surrender Charge for all full and partial surrenders made during an Initial
Guaranteed Period shall not exceed, in the aggregate, a total of six months'
interest on the amount of the Annuity Deposit originally allocated to the
Sub-Account(s) from which the full or partial surrender is made. The Surrender
Charge for all full and partial surrenders made during a Subsequent Guaranteed
Period shall not exceed, in the aggregate, a total of six months' interest on
the amount of the Sub-Account Value(s) originally transferred to a Subsequent
Guaranteed Period from which the full or partial surrender is made.
SURRENDER DATE -- The date Protective receives the request for a surrender.
SURRENDER VALUE -- The amount available for a full or partial surrender.
WRITING -- A written form satisfactory to the Company and filed at the
Administrative Office of the Company in Birmingham, Alabama. All correspondence
should be sent to P. O. Box 2606, Birmingham, Alabama 35202.
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DESCRIPTION OF CONTRACTS
THE FOLLOWING SECTIONS DESCRIBE THE CONTRACTS CURRENTLY BEING OFFERED.
CONTRACTS WITH A CERTIFICATE DATE PRIOR TO SEPTEMBER 10, 1991, AND CERTAIN
CONTRACTS WITH A CERTIFICATE DATE AFTER THAT DATE, CONTAIN PROVISIONS THAT
DIFFER FROM THOSE DESCRIBED BELOW. IN PARTICULAR, SURRENDER CHARGE, DEATH
BENEFIT, AND CERTAIN ANNUITY BENEFIT PROVISIONS MAY BE DIFFERENT. REFER TO YOUR
CONTRACT AND MATTERS RELATING TO CONTRACTS OFFERED IN CERTAIN STATES ON P. 17
FOR THESE PROVISIONS.
A. GENERAL
The Contract is a group allocated contract pursuant to which specific
accounts are maintained for each Participant. The Contract may be issued to any
employer, entity or other organized group acceptable to Protective. The Contract
may be issued in connection with either Qualified or Nonqualified Plans.
Qualified Plans include "H.R. 10" plans, Individual Retirement Annuities or
Accounts, corporate pension and profit-sharing plans, Tax-Sheltered Annuities
and Section 457 Deferred Compensation Plans. An Individual Modified Guaranteed
Annuity Contract is offered in certain states.
An eligible member of a group to which a Contract has been issued may become
a Participant by completing application information and forwarding payment of an
Annuity Deposit to us. Protective reserves the right to accept or decline a
request to issue a Contract. The rights and benefits of a Participant under a
Contract are summarized in a Certificate issued to the Participant. Provisions
of the Contract are controlling. All such rights and benefits may be exercised
without the consent of the Contract Holder. However, provisions of any plan in
connection with which the Contract has been issued may restrict a person's
eligibility to participate under the Contract, the minimum or maximum amount of
the Annuity Deposit, and the Participant's ability to exercise the rights and/or
receive the benefits provided under the Contract.
Contracts will be issued to Protective Financial Insurance Trust (AmSouth
Bank N.A., Birmingham, Alabama, Trustee) as Contract Holder for a group
comprised of account holders of Protective Equity Services, Inc., employers, or
other entities and organized groups. Contracts covering the same group may also
be issued directly to Protective Equity Services, Inc. Participation under this
group is not permissible in some states. However, only a group contract is
offered for sale in the State of California. An Individual Modified Guaranteed
Annuity Contract may be available in certain states where participation under
this group is not permitted.
Each Annuity Deposit(s) (less applicable Premium Taxes, if any) will be
allocated at your direction to one or more Sub-Accounts corresponding to the
Guaranteed Periods chosen by you. Each Annuity Deposit will accumulate at a
specified Guaranteed Interest Rate. Your Account Value is the sum of all of your
Sub-Account Values. Each Sub-Account Value is equal to the amount you allocated
to the Sub-Account (either as an Annuity Deposit or as part of a transfer of a
Sub-Account Value at the end of the previous Guaranteed Period), plus the
interest credited thereto at the Guaranteed Interest Rate, as adjusted for any
full or partial surrenders (including Market Value Adjustments, Surrender
Charges, Premium Taxes thereon and previous interest withdrawals). We quote a
Guaranteed Interest Rate for each Sub-Account.
B. APPLICATION INFORMATION, ANNUITY DEPOSIT, AND ANNUITANT
To apply for a Contract, an Annuity Deposit must accompany application
information provided to Protective. The minimum Annuity Deposit is $5,000 unless
approved by the Company. Protective retains the right to limit the total amount
of Annuity Deposit(s) that can be made, without Administrative Office approval.
This amount currently is $1,000,000.
3
<PAGE>
You will start earning interest on the day your Contract is issued. The
effective date of your Contract will be the date we receive your Annuity Deposit
at our Administrative Office.
Additional Annuity Deposit(s) can be made to the Contract, except for
Contracts issued in the States of California, Minnesota, South Carolina and
Michigan. However, regardless of the number of Annuity Deposit(s) made, only one
Contract will be issued.
C. INITIAL AND SUBSEQUENT GUARANTEED PERIODS
You may select the duration of the Guaranteed Periods for each Annuity
Deposit from among those durations then offered by us. We currently offer
Guaranteed Periods ranging from one to fifteen years. The Guaranteed Period(s)
you select for each of your Annuity Deposit(s) will determine the Initial
Guaranteed Interest Rate applicable to each Annuity Deposit. We will establish a
Sub-Account corresponding to each specified Guaranteed Interest Rate and
Guaranteed Period. The minimum allocation to a Sub-Account is $5,000 unless
approved by us. The Sub-Account will earn interest at this Initial Guaranteed
Interest Rate which will be an effective rate per year during the entire Initial
Guaranteed Period after taking into account daily compounding of interest.
Set forth below is an illustration of how interest will be credited to your
Account Value during each Guaranteed Period. For the purpose of this example we
have made the assumptions as indicated.
NOTE: THE FOLLOWING EXAMPLE ASSUMES NO SURRENDERS OR WITHDRAWALS OF ANY AMOUNT
AND NO PREMIUM TAX DUE ON ISSUANCE. A MARKET VALUE ADJUSTMENT AND SURRENDER
CHARGE MAY APPLY TO ANY SUCH PARTIAL OR FULL SURRENDER MADE PRIOR TO THE END OF
A GUARANTEED PERIOD (SEE "SURRENDERS" COMMENCING ON PAGE 6.) THE HYPOTHETICAL
INTEREST RATES ARE ILLUSTRATIVE ONLY AND ARE NOT INTENDED TO PREDICT FUTURE
INTEREST RATES TO BE DECLARED UNDER THE CONTRACT. ACTUAL INTEREST RATES DECLARED
FOR ANY GIVEN TIME MAY BE MORE OR LESS THAN THOSE SHOWN.
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Annuity Deposit.................................................... $20,000
Sub-Account 1 (50% of Annuity Deposit)
Guaranteed Period................................................ 5 Years
Guaranteed Interest Rate......................................... 5.00%
Sub-Account 2 (50% of Annuity Deposit)
Guaranteed Period................................................ 1 Year
Guaranteed Interest Rate Year 1.................................. 3.00%
Guaranteed Interest Rate Year 2.................................. 3.00%
Guaranteed Interest Rate Year 3.................................. 3.25%
Guaranteed Interest Rate Year 4.................................. 3.75%
Guaranteed Interest Rate Year 5.................................. 3.50%
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SUB-ACCOUNT 1 SUB-ACCOUNT 2 ACCOUNT VALUE
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Beginning Value......................... $ 10,000 $ 10,000 $ 20,000
X(1+Guaranteed Interest Rate)......... 1.050 1.0300
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$ 10,500 $ 10,300
Value at end of Year 1.................. $ 10,500 $ 10,300 $ 20,800
X(1+Guaranteed Interest Rate)......... 1.050 1.0300
------------- -------------
$ 11,025 $ 10,609
Value at end of Year 2.................. $ 11,025 $ 10,609 $ 21,634
X(1+Guaranteed Interest Rate)......... 1.050 1.0325
------------- -------------
$ 11,576 $ 10,954
Value at end of Year 3.................. $ 11,576 $ 10,954 $ 22,530
X(1+Guaranteed Interest Rate)......... 1.050 1.0375
------------- -------------
$ 12,155 $ 11,365
Value at end of Year 4.................. $ 12,155 $ 11,365 $ 23,520
X(1+Guaranteed Interest Rate)......... 1.050 1.0350
------------- -------------
$ 12,763 $ 11,762
Value at end of Year 5.................. $ 12,763 $ 11,762 $ 24,525
</TABLE>
Unless you elect to make a full surrender (see "Surrenders" commencing on
page 6), for each Sub-Account a Subsequent Guaranteed Period will automatically
commence at the end of the Initial or Subsequent Guaranteed Period for each
Sub-Account. Upon notice to us, Sub-Account Values can be transferred from one
Sub-Account to a new Sub-Account at the end of a Guaranteed Period. The amount
transferred is subject to the Annuity Deposit minimums and the amount remaining
in the Sub-Account after transfer must be either (1) at least $5,000 or (2) an
amount approved by us. If we have not received notice from you during the twenty
days prior to the end of a Guaranteed Period, all Sub-Account Values will be
automatically transferred to a Subsequent Guaranteed Period of either (i) the
same duration as your previous Guaranteed Period if then offered by us; or (ii)
the shortest duration then offered by us which is closest to the same duration
as your previous Guaranteed Period provided such Subsequent Guaranteed Period
would not extend beyond the Annuity Commencement Date. If a Subsequent
Guaranteed Period determined in accordance with these guidelines would extend
beyond the Annuity Commencement Date, the Sub-Account Value will be transferred
to a one-year Guaranteed Period. On the Annuity Commencement Date, the Sub-
Account Value in the one-year Guaranteed Period will be available to you without
a Surrender Charge or Market Value Adjustment for application under the Annuity
Options selected. If you elect a different duration, a minimum of $5,000 must be
transferred to the Sub-Account with the different duration, and the amount
remaining in the Sub-Account with the same duration must be at least $5,000, or
$0.
In no event may Initial or Subsequent Guaranteed Periods extend beyond the
Annuity Commencement Date then in effect, which cannot extend beyond the
Annuitant's 85th birthday (or a date agreed upon by us and specified in your
Contract). Any request for extension of the maximum Annuity Commencement Date
must be approved by the Home Office. For example, if you are age 62 upon the
expiration of an Initial Guaranteed Period for a Sub-Account and you have chosen
age 65 as the Annuity Commencement Date, we will automatically provide a three
year Subsequent Guaranteed Period for that Sub-Account to equal the number of
years remaining before your Annuity Commencement Date (unless a shorter
Subsequent Guaranteed Period is requested or is determined in accordance with
the guidelines above). Your Sub-Account
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Value will then earn interest at the Subsequent Guaranteed Interest Rate which
we have declared for that duration. The Subsequent Guaranteed Interest Rate for
the Subsequent Guaranteed Period automatically applied in these circumstances
may be higher or lower than the Initial Guaranteed Rate for longer durations.
The Sub-Account Value at the beginning of any Subsequent Guaranteed Period
will be equal to the Sub-Account Value at the end of the previous Guaranteed
Period. This Sub-Account Value will earn interest at the Subsequent Guaranteed
Interest Rate. The minimum reinvestment of any one Sub-Account is $5,000.
At your request within 20 days prior to the end of a Guaranteed Period, we
will provide you with the then effective Subsequent Guaranteed Interest Rate for
specified Subsequent Guaranteed Periods. The actual Subsequent Guaranteed
Interest Rate will be determined at the beginning of the Subsequent Guaranteed
Period you select, or that is determined in accordance with the guidelines
above.
D. ESTABLISHMENT OF GUARANTEED INTEREST RATES
Protective has no specific formula for determining the Guaranteed Interest
Rates for the different Guaranteed Periods in the future. The determination will
be reflective of interest rates available on the types of instruments in which
Protective intends to invest the proceeds attributable to the Contracts. (See
"Investments By Protective" commencing on page 11.) In addition, Protective's
management may also consider various other factors in determining current
Guaranteed Interest Rates for a given period, including regulatory and tax
requirements; sales commissions and administrative expenses borne by Protective;
general economic trends; and competitive factors. PROTECTlVE'S MANAGEMENT WILL
MAKE THE FINAL DETERMINATION AS TO GUARANTEED INTEREST RATES TO BE DECLARED. WE
CANNOT PREDICT NOR DO WE GUARANTEE FUTURE GUARANTEED INTEREST RATES.
E. SURRENDERS
Full surrenders from the Sub-Accounts may be made at any time. Partial
surrenders may only be made if each remaining Sub-Account Value is at least
$5,000. You must specify the Sub-Accounts from which the partial surrender is to
be made. If a Sub-Account has the same Guaranteed Period as any other
Sub-Account, the partial surrender must come first from the Sub-Account with the
shortest time remaining in the Guaranteed Period.
In the case of certain Qualified Plans, Federal tax law imposes restrictions
on the form and manner in which benefits may be paid. For example, spousal
consent may be needed in certain instances before a distribution may be made.
1. SURRENDER CHARGES
A Surrender Charge, if applicable, will be applied to a full or partial
surrender from a Sub-Account requested prior to the end of a Guaranteed Period.
The Surrender Charge is equal to six months of interest on the amount
surrendered from a Sub-Account. The Surrender Charge for all full and partial
surrenders made during an Initial Guaranteed Period shall not exceed, in the
aggregate, a total of six months' interest on the amount of the Annuity
Deposit(s) originally allocated to the Sub-Account from which the full or
partial surrender is made. The Surrender Charge for all full and partial
surrenders made during a Subsequent Guaranteed Period shall not exceed, in the
aggregate, a total of six months' interest on the amount of the Sub-Account
Value originally transferred to a Subsequent Guaranteed Period from which the
full or partial surrender is made. Interest will be computed at the same
interest rate we are crediting the Sub-Account from which the withdrawal is
made. The Surrender Charge will be deducted from the remaining Sub-Account Value
from which the full or partial surrender is made. A Surrender Charge will apply
during the first seven years of all Initial Guaranteed Periods, and during the
first seven years of all Subsequent Guaranteed
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Periods. There is no Surrender Charge after the first seven years of each
Initial or Subsequent Guaranteed Periods with a duration greater than seven
years. In addition, for purposes of determining amounts subject to the Surrender
Charge, we will consider surrendered amounts first to be interest withdrawals,
to the extent interest credited to your Sub-Accounts during the prior Contract
Year has not yet been withdrawn. No Surrender Charge (or Market Value
Adjustment) is imposed on these interest withdrawal amounts. See "Interest
Withdrawals," page 8.
Surrender Charges and Market Value Adjustments will not apply to full or
partial surrenders made from Sub-Accounts at the end of an Initial or Subsequent
Guaranteed Period. The Surrender Value will equal the Sub-Account Value on this
date. A request for a surrender at the end of an Initial or Subsequent
Guaranteed Period must be received in a form acceptable to Protective within
twenty days prior to the end of such Initial or Subsequent Guaranteed Period.
If the date we receive your request for a full or partial surrender is prior
to the end of an Initial or Subsequent Guaranteed Period, the Surrender Value
will be calculated as of the Surrender Date by the Company as follows:
[(A X B) - SC] where:
<TABLE>
<C> <C> <S>
A = the Sub-Account Value of the Sub-Account from which a full or
partial surrender is requested
B = the Market Value Adjustment described on page 8
SC = the Surrender Charge plus any unpaid Premium Taxes, if applicable
</TABLE>
Protective will, upon the date of receipt of your request, inform you of the
amounts available for full or partial surrenders.
Any full or partial surrender may be subject to Federal and state income tax
(see "Federal Tax Matters" commencing on page 13) and, in some cases, Premium
Tax (see paragraph F on page 9). Under certain Qualified Plans, the consent of
your spouse may be required. Under Tax-Sheltered Annuities withdrawals
attributable to contributions made pursuant to a salary reduction agreement may
be made only in limited circumstances.
Because the Initial and Subsequent Guaranteed Periods may not extend beyond
the Annuity Commencement Date then in effect, no Surrender Charge or Market
Value Adjustment will be deducted upon the application of your Net Account Value
to purchase an Annuity on the Annuity Commencement Date. To elect an Annuity
Option you must notify us in writing within 30 days prior to the Annuity
Commencement Date.
We may defer payment of any full or partial surrender for a period not
exceeding 6 months from the date of our receipt of your notice of surrender or
the period permitted by state insurance law, if less.
2. WAIVER OF SURRENDER CHARGES
The Company will waive any applicable Surrender Charges in the event you, at
any time after Contract Year 1, (1) enter for a period of at least ninety (90)
days a facility which is licensed by the State and qualifies as a skilled
nursing home facility under Medicare or Medicaid; or (2) you are first diagnosed
as having a terminal illness by a physician that is not related to you or the
Annuitant. The term "terminal illness" is defined in the Contract. Written proof
of a terminal illness satisfactory to Protective must be submitted.
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<PAGE>
Protective reserves the right to require an examination by a physician of its
choice to verify the terminal illness. A Market Value Adjustment will be imposed
if applicable. The Waiver of Surrender Charges provision is not available in all
states due to applicable insurance laws.
3. MARKET VALUE ADJUSTMENT
The amount payable on a full or partial surrender made prior to the end of
any Guaranteed Period may be adjusted up or down by the application of the
Market Value Adjustment formula. Such a Market Value Adjustment is applied to
the Sub-Account Value, before it has been reduced by any Surrender Charge. For
purposes of determining amounts subject to the Market Value Adjustment, we will
consider surrendered amounts first to be interest withdrawals, to the extent
interest credited to your Sub-Accounts during the prior Contract Year has not
yet been withdrawn. No Market Value Adjustment (or Surrender Charge) is imposed
on these interest withdrawal amounts. See "Interest Withdrawals," page 8.
In the case of either a full or partial surrender from a Sub-Account, the
Market Value Adjustment will reflect the relationship between (i) the current
Guaranteed Interest Rate that the Company is crediting for a Guaranteed Period
equal to the time remaining in the Sub-Account's Guaranteed Period at the time
you request the surrender, and (ii) the then applicable Guaranteed Interest Rate
being applied to the Sub-Account from which you select to make a full or partial
surrender.
Generally, if your Guaranteed Interest Rate is lower than the applicable
current Guaranteed Interest Rate being credited by Protective for a Guaranteed
Period equal to the time remaining in the Sub-Account's Guaranteed Period, then
the application of the Market Value Adjustment may result in a Surrender Value
that is less than the portion of your Annuity Deposit(s) allocated to a
Sub-Account plus interest credited thereon. Similarly, if your Guaranteed
Interest Rate is higher than the applicable current Guaranteed Interest Rate,
the application of the Market Value Adjustment may result in a Surrender Value
that is greater than the portion of your Annuity Deposit(s) allocated to a
Sub-Account plus interest credited thereon.
Since current Guaranteed Interest Rates are based in part upon the
investment yields then available to Protective (see "Investments By Protective"
commencing on page 11), the effect of the Market Value Adjustment will be
related to the levels of such yields. It is possible, therefore, that, should
such yields increase from the time you purchased your Contract, the effect of
the Market Value Adjustment, coupled with the application of the Surrender
Charge and/or Premium Taxes, could result in the amount you receive upon a full
surrender of your Contract being LESS than your Annuity Deposit(s).
The formula for calculating the Market Value Adjustment is set forth in
Appendix A to this Prospectus, which also contains an illustration of the
application of the Market Value Adjustment.
4. INTEREST WITHDRAWALS
We will send you all or a portion of the interest that has been credited to
your Sub-Accounts during the prior Contract Year (to the extent not previously
withdrawn or considered part of a surrender) if you so request in a form
acceptable to Protective. On most Guaranteed Periods, you may elect to receive
automatic interest withdrawals monthly, quarterly, semi-annually or annually.
Options other than annual may total less than annual withdrawals because of the
interruption of compounding. Upon notice to you we reserve the right to limit
such withdrawals to once per contract year. No Surrender Charge or Market Value
Adjustment will be imposed on withdrawals of such interest. Any such withdrawal
may, however, be subject to tax, including the 10% penalty tax under the
Internal Revenue Code.
8
<PAGE>
F. PREMIUM TAXES
Premium Taxes (including related retaliatory taxes, if any) will be
deducted, if applicable. On any Contract subject to Premium Taxes, the tax will
be deducted, as provided under applicable law, either from Annuity Deposit(s)
when received, upon full or partial surrenders, or from the amount applied to
effect an Annuity at the time annuity payments commence. (Where applicable, the
rate of these taxes currently ranges up to 3.50%).
G. DEATH BENEFIT
If any Participant dies before the Annuity Commencement Date, a guaranteed
Death Benefit will be payable. With regard to joint Participants, at the first
death of a joint Participant prior to the Annuity Commencement Date, the
Beneficiary will be the surviving Participant, if any. If there is no surviving
Participant, the Death Benefit will be paid to the Beneficiary named by the
Participant. If no Beneficiary designation is in effect or if there is no
designated Beneficiary living, the Death Benefit will be paid to the estate of
the deceased Participant. In the case of certain Contracts issued in connection
with Qualified Plans, regulations promulgated by the Treasury Department
prescribe certain limitations on the designation of a Beneficiary.
If any Participant is not an individual, the death or change of the
Annuitant will be treated as the death of a Participant.
The guaranteed Death Benefit during an Initial or Subsequent Guaranteed
Period will equal the Account Value. The guaranteed Death Benefit is calculated
as of the date of death. If applicable, the guaranteed Death Benefit for all
Guaranteed Periods will be totalled to obtain the guaranteed Death Benefit
payable.
H. ANNUITY BENEFITS
1. ELECTING THE ANNUITY COMMENCEMENT DATE AND FORM OF ANNUITY
Upon purchasing a Contract, you select an Annuity Commencement Date. The
Annuity Commencement Date selected: (1) cannot be before the end of any
Guaranteed Period; and (2) must be on or before the Annuitant's 85th birthday or
the date shown in the Contract. Any request for extension of the maximum Annuity
Commencement Date must be approved by the Administrative Office. You may elect
to have all of your Net Account Value or a portion thereof applied on the
Annuity Commencement Date under any of the Annuity Options described below. In
the absence of such election, the Net Account Value will be applied on the
Annuity Commencement Date under Option 2-Life Income with Payments for a 10 Year
Guaranteed Period.
(For Contracts issued in connection with certain Qualified Plans, the
Annuity Commencement Date may not be later than April 1 of the year after the
year in which the Annuitant attains age 70 1/2).
2. CHANGE OF ANNUITY COMMENCEMENT DATE, ANNUITY OPTION OR ANNUITANT
You may change the Annuity Commencement Date and/or the Annuity Option from
time to time, but any such change must be made in Writing and received by us
within 30 days prior to the scheduled Annuity Commencement Date. You may change
the Annuitant prior to the Annuity Commencement Date provided the change is made
in Writing on a form acceptable to us. Once the request is received and
acknowledged at our Administrative Office, any change will relate back to and
take effect on the date the request was signed. If the Annuitant dies prior to
the Annuity Commencement Date, the Participant first named on the application
becomes the Annuitant, unless otherwise designated.
9
<PAGE>
3. ANNUITY OPTIONS
Any one of the following Annuity Options may be elected. For Qualified
Certificates, certain restrictions apply.
OPTION 1 -- PAYMENT FOR A FIXED PERIOD. Equal monthly payments will be made
for any period of not less than 5 nor more than 30 years. The amount of each
payment depends on the total amount applied, the period selected and the monthly
payment rates we are using when the first payment is due.
OPTION 2 -- LIFE INCOME WITH PAYMENTS FOR A GUARANTEED PERIOD. Equal
monthly payments are based on the life of the named Annuitant. Payments will
continue for the lifetime of that person with payments guaranteed for 10 or 20
years. Payments stop at the end of the selected guaranteed period or when the
named person dies, whichever is later.
OPTION 3 -- PAYMENTS OF A FIXED AMOUNT. Equal monthly payments will be for
an agreed fixed amount. The amount of each payment may not be less than $10 for
each $1,000 applied. Interest will be credited each month on the unpaid balance
and added to it. This interest will be at a rate set by us, but not less than an
effective interest rate of 4% per year. Payments continue until the amount we
hold runs out. The last payment will be for the balance only.
OPTION 4 -- The total amount applied may be used to purchase an annuity of
any kind issued by us on the date this option is elected.
After the death of the Annuitant, any remaining payments shall be payable to
the Beneficiary unless you specified otherwise before the Annuitant's death.
MINIMUM AMOUNTS -- We reserve the right to pay the Net Account Value of
this Contract in one lump sum, if less than $5,000. If monthly payments are less
than $100, we may make payments quarterly, semi-annually, or annually, at our
option.
If we have available, at the time an Annuity Option is elected, options or
rates on a more favorable basis than those guaranteed, the higher benefits shall
apply.
4. ANNUITY PAYMENT
The first payment under any Annuity Option will be made one month following
the Annuity Commencement Date. Subsequent payments will be made in accordance
with the manner of payment selected.
The Annuity Option elected must result in a payment of an amount at least
equal to the minimum payment amount according to Protective's rules then in
effect. If at any time payments are less than the minimum payment amount, we
have the right to change the frequency to an interval resulting in a payment at
least equal to the minimum. If any amount due is less than the minimum per year,
we may make other arrangements that are equitable to the Annuitant.
Once annuity payments have commenced, no surrender of the annuity benefit
can be made for the purpose of receiving a lump sum settlement in lieu thereof.
5. DEATH OF ANNUITANT OR PARTICIPANT AFTER ANNUITY COMMENCEMENT DATE
In the event of the death of any Participant on or after the Annuity
Commencement Date, the Beneficiary will become the new Participant. If any
Participant or Annuitant dies on or after the Annuity Commencement Date and
before all the benefits under the Annuity Option selected have been paid, any
remaining portion of such benefits will be paid out at least as rapidly as under
the Annuity Option being used when the Participant or Annuitant died.
10
<PAGE>
INVESTMENTS BY PROTECTIVE
Protective'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 may invest are governed
by state laws which prescribe qualified investment assets. Within the parameters
of these laws, Protective 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, Protective continually
balances maturity against yield and quality considerations in selecting new
investments.
In establishing Guaranteed Interest Rates, Protective intends to take into
account the yields available on the instruments in which it intends to invest
the proceeds from the Contracts. (See "Establishment of Guaranteed Interest
Rates" commencing on page 6.) Protective's investment strategy with respect to
the proceeds attributable to the Contracts will be to primarily invest in
investment-grade debt instruments having durations tending to match the
applicable Guaranteed Periods. It is anticipated that some portion of the
portfolio will be invested in mortgages. Protective may also invest in lower
than investment-grade issues, depending upon relative spreads in the capital
markets.
Investment-grade debt instruments in which Protective 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 considers bonds rated Baa or higher by Moody's or
BBB or higher by S&P to be investment grade. At December 31, 1993, 98% of
bonds in which Protective invests were considered investment grade; 17% of
these bonds were rated Baa or BBB.
Mortgaged-backed securities are based upon residential mortgages which have
been pooled into securities. Mortgage-backed securities may have greater cash
flow volatility as a result of the pass-through of prepayments of principal on
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.
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 carefully selects, and closely monitors,
such investments.
Protective may also invest in those bank loan participations that are the
most senior debt issued in highly leveraged transactions. They are generally
unrated by the credit rating agencies. In selecting bank
11
<PAGE>
participations for investment, Protective requires cash flows, without asset
sales, to cover all interest and scheduled amortization of the bank debt by 140%
and to cover total debt service by 110%. The debt is generally secured by most
of the tangible assets of the issuing company.
Protective's primary mortgage lending emphasis for the past twenty years has
been 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 noncancelable leases with Protective's borrowers. The centers provide
the basic necessities of life such as food, pharmaceuticals, and clothing, and
are relatively insensitive to changes in economic conditions. Protective also
makes loans on credit-oriented commercial properties. In the twenty years that
Protective has implemented its mortgage loan strategy, it has had no significant
loss of principal on mortgages it has originated. Protective carefully selects,
and closely monitors, such investments.
The federal government or its instrumentalities does not guarantee the
Contracts. Protective 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 Tennessee and other states.
OTHER PROVISIONS
CONTRACT TRANSACTIONS
Currently, each request for a change or transaction under your Contract
(such as making an additional Annuity Deposit, requesting a surrender or
interest withdrawal, selecting certain Guaranteed Periods, changing the Annuity
Commencement Date, Annuity Option, or Annuitant, or making a death benefit
claim) must be made in Writing on a form acceptable to Protective. The request
must provide all information that is necessary for Protective to make the change
or effect the transaction. For additional information on how to make a change or
effect a transaction, contact Protective at its Administrative Office.
AMENDMENT OF CONTRACTS
We reserve the right to amend the Contract to meet the requirements of
applicable Federal or state laws, regulations or rulings. We will notify you of
any such amendments.
ASSIGNMENT OF CONTRACTS
Your rights, as evidenced by a Contract, may be assigned as permitted by
applicable law. An assignment will not be binding upon us until we receive
notice from you in Writing. We assume no responsibility for the validity or
effect of any assignment. You should consult your tax advisor regarding the tax
consequences of an assignment.
DISTRIBUTION OF CONTRACTS
Protective Equity Services, Inc. ("PES") currently serves as principal
underwriter for the Contracts. PES has agreed to use its best efforts to sell
the Contracts. PES is a wholly-owned subsidiary of Protective Life Corporation
("PLC") and is registered with the Securities and Exchange Commission ("SEC")
under the Securities Exchange Act of 1934 as a broker-dealer and is a member of
the National Association of Securities Dealers, Inc. ("NASD").
PES has entered into Distribution Agreements with certain broker-dealers
registered under the Securities Exchange Act of 1934. Under the Distribution
Agreements such broker-dealers may offer Contracts to
12
<PAGE>
persons who have established an account with the broker-dealer. In addition, PES
may offer Contracts to members of certain other eligible groups or certain
individuals. The maximum commission Protective will pay is 7% of the Annuity
Deposit for the sale of a Contract. In addition, the maximum renewal commission
Protective will pay is 7.0% of the Sub-Account Value(s) transferred to a
Subsequent Guaranteed Period.
As of the date of this Prospectus, it is anticipated that Investment
Distributors, Inc. ("IDI"), which is also an affiliate of Protective, will
become the principal underwriter of the Contracts during 1994. IDI is registered
with the SEC under the Securities Exchange Act of 1934 as a broker-dealer and is
a member of the NASD. It is not anticipated that there will be any significant
changes in underwriting, distribution, or commission arrangements resulting from
this change in principal underwriter.
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 a Participant's
Account Value is generally not taxable to the Participant 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 Participant during the taxable year. There are several exceptions
to this general rule for Contracts held by non-natural persons. First, Contracts
will generally 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.
Thus, if a group Contract is held by a trust or other entity as an agent for
Certificate owners who are individuals, those
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<PAGE>
individuals should be treated as owning an annuity for federal income tax
purposes. However, this 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.
In addition to the foregoing, if the Contract's Annuity Commencement Date
occurs at a time when the Annuitant is at an advanced age, such as over age 85,
it is possible that the Participant will 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 PARTIAL AND FULL WITHDRAWALS
In the case of a partial withdrawal, amounts received generally are
includible in income to the extent the Participant's Account Value before the
withdrawal exceeds his or her "investment in the contract." In the case of a
full withdrawal, amounts received are includible 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 Plans) less any amounts previously received from the Contract which
were not included in income.
Other than in the case of Contracts issued in connection with certain
Qualified Plans, 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 includible 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 a
Participant transfers a Contract without adequate consideration to a person
other than the Participant's spouse (or to a former spouse incident to divorce),
the Participant will be taxed on the difference between his or her 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 includible in income as a
result of any partial withdrawal or transfer without adequate consideration.
There is legislation currently pending in Congress which would grant regulatory
authority to the Internal Revenue Service (the "IRS") to address this
uncertainty.
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).
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<PAGE>
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
Participant and the Annuitant are not the same person or are not married. For
example, where the Participant and the Annuitant are not the same person and are
not married, the Participant may be taxed on the Annuity Commencement Date on
the difference between the Account Value and the investment in the contract.
TAXATION OF DEATH BENEFIT PROCEEDS
Amounts may be distributed from a Contract because of the death of a
Participant or 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 withdrawal, as described above, or (2) if distributed under an
Annuity Option, they are taxed in the same manner as Annuity payments, as
described above.
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 Participant
reaches age 59 1/2; (b) attributable to the Participant becoming disabled (as
defined in the tax law); (c) made on or after the death of the Participant; (d)
made as a series of substantially equal periodic payments (not less frequently
than annually) for the life (or life expectancy) of the Annuitant or the joint
lives (or joint life expectancies) of the Annuitant and a designated
beneficiary; 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 generally apply in the
case of Contracts issued in connection with certain Qualified Plans.)
AGGREGATION OF CONTRACTS
In certain circumstances, the IRS may determine the amount of an Annuity
payment or a withdrawal from a Contract that is includible 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 withdrawals prior to the Annuity Commencement Date) is includible 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.
QUALIFIED RETIREMENT PLANS
IN GENERAL
The Contracts are also designed for use in connection with certain types of
qualified retirement plans which receive favorable treatment under the Code.
Numerous special tax rules apply to the Participants in Qualified Plans and to
the Contracts used in connection with Qualified Plans. These tax rules vary
according to the type of plan and the terms and conditions of the plan itself.
For example, for both withdrawals and Annuity payments under certain Contracts
issued in connection with Qualified Plans, there may be no
15
<PAGE>
"investment in the contract" and the total amount received may be taxable. Also,
special rules apply to the time at which distributions must commence and the
form in which the distributions must be paid. Therefore, no attempt is made to
provide more than general information about the use of Contracts with the
various types of Qualified Plans.
When issued in connection with a Qualified Plan, a Contract will be amended
as generally necessary to conform to the requirements of that type of plan.
However, Participants, 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 Protective 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, distributions from certain Qualified
Plans may be "rolled over" on a tax-deferred basis into an IRA.
SIMPLIFIED EMPLOYEE PENSIONS (SEP-IRAS). Section 408(k) of the Code allows
employers to establish simplified employee pension plans for their employees,
using the employees' IRAs for such purposes, if certain criteria are met. Under
these plans the employer may, within specified limits, make deductible
contributions on behalf of the employees to IRAs. Employers intending to use the
Contract in connection with such plans should seek competent advice.
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. Withdrawals
attributable to contributions made pursuant to a salary reduction agreement in a
taxable year beginning after December 31, 1988, shall 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
Account Value to the issuer of another tax-sheltered annuity or into a Section
403(b)(7) custodial account.)
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<PAGE>
DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENT AND TAX-EXEMPT
ORGANIZATIONS. Section 457 of the Code permits employees of state and local
governments and tax-exempt organizations to defer a portion of their
compensation without paying current taxes. The employees must be participants in
an eligible deferred compensation plan. To the extent the Contract is used in
connection with an eligible plan, employees are considered general creditors of
the employer and the employer as owner of the Contract has the sole right to the
proceeds of the Contract. Generally, a contract purchased by a state or local
government or a tax-exempt organization will not be treated as an annuity
contract for federal income tax purposes. Those who intend to use the Contracts
in connection with such plans should seek competent advice.
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).
Under these requirements, withholding at a rate of 20 percent will be
imposed on any eligible rollover distribution. In addition, the participant 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
participant elects to have amounts directly transferred to certain qualified
retirement plans (such as to an Individual Retirement Annuity).
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 may be required to withhold tax. The withholding rates applicable to
the taxable portion of periodic Annuity payments 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%. As described above, the withholding rate
applicable to eligible rollover distributions is 20%.
MATTERS RELATING TO CONTRACTS OFFERED IN CERTAIN STATES
As of the date of this Prospectus, the Contracts being offered in the states
of Idaho, Indiana, Maryland, Michigan, Minnesota, New Jersey, Oregon, and South
Carolina are different in certain regards including but not limited to providing
a different guaranteed Death Benefit than the guaranteed Death Benefit described
on page 9, and different procedures relating to the guaranteed Death Benefit
than those described elsewhere in this Prospectus. Purchasers of Contracts with
the different guaranteed Death Benefit must refer to the discussion below
together with the other sections of this Prospectus in order to determine their
rights and benefits under the Contract. If you are purchasing a Contract in one
of these states after the date of this Prospectus, you should check with your
agent to determine the guaranteed Death Benefit that is provided under Contracts
currently being offered in your state.
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<PAGE>
The terms defined below, and the following description of the guaranteed
Death Benefit and Annuity Benefit, should be substituted in their entirety for
the related terms and descriptions found elsewhere in this Prospectus. The page
references listed below indicate where in the Prospectus the substituted terms
and descriptions can be found.
A. CAPSULE SUMMARY OF THE CONTRACT
The paragraphs in the Capsule Summary describing the guaranteed Death
Benefit provided in the Contract should be revised to read as follows:
This Contract provides for a guaranteed Death Benefit. If the
Annuitant or Participant dies before the Annuity Commencement Date the
guaranteed Death Benefit will be payable to the Beneficiary as
determined under the provisions of the Contract. The guaranteed Death
Benefit is calculated as of the date of death.
The guaranteed Death Benefit will equal the Account Value.
If applicable, the guaranteed Death Benefit for all Guaranteed
Periods will be totalled to obtain the guaranteed Death Benefit payable.
With regard to joint Participants, at the first death of a joint
Participant prior to the Annuity Commencement Date, the Beneficiary will
be the surviving Participant. If the named Beneficiary is the spouse of
the Participant and if the Annuitant is living, the spouse may elect, in
lieu of receiving the guaranteed Death Benefit, to become the
Participant and continue the Contract.
B. GLOSSARY OF SPECIAL TERMS (PAGE 1)
ANNUITANT -- Annuity payments may depend upon the continuation of the life
of a person. That person is called an Annuitant and is named in the Contract.
The Annuitant cannot be changed.
BENEFICIARY -- PRIMARY -- The person named to receive the Death Benefit
under the Contract upon the death of either the Annuitant or the Participant, as
applicable.
CONTINGENT -- The person named to receive the Death Benefit if
the Primary Beneficiary is not living when the Annuitant or Participant dies.
IRREVOCABLE -- One whose consent is necessary to change the
Beneficiary or exercise certain other rights.
C. DEATH BENEFIT (PAGE 9)
If an Annuitant or Participant dies before the Annuity Commencement Date, a
guaranteed Death Benefit will be payable to the Beneficiary named by the
Participant or Annuitant as the case may be. With regard to joint Participants,
at the first death of a joint Participant prior to the Annuity Commencement
Date, the Beneficiary will be the surviving Participant.
The guaranteed Death Benefit during an Initial or Subsequent Guaranteed
Period will equal the Account Value. The guaranteed Death Benefit is calculated
as of the date of death. If applicable, the guaranteed Death Benefit for all
Guaranteed Periods will be totalled to obtain the guaranteed Death Benefit
payable.
If the Beneficiary is the surviving spouse of the deceased Participant or
deceased Annuitant, the guaranteed Death Benefit may be taken in one sum
immediately or it may be applied under any of the
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Annuity Options available under the Contract. However, if the Beneficiary is the
spouse of the deceased Participant, and if the Annuitant is living, such spouse
may elect, in lieu of receiving the guaranteed Death Benefit, to become the
Participant and continue the Contract.
For any Beneficiary who is not the surviving spouse of the deceased
Participant or deceased Annuitant, the guaranteed Death Benefit may be taken in
one sum immediately or it may be applied under an Annuity Option available under
the Contract which either (i) provides that all amounts will be distributed
within 5 years of the date of death or (ii) provides that amounts will be
payable over the life of the Beneficiary or over a period not extending beyond
the life expectancy of the Beneficiary, and such distribution must commence
within one year of the date of death.
D. ANNUITY BENEFITS (PAGE 9)
1. ELECTING THE ANNUITY COMMENCEMENT DATE AND FORM OF ANNUITY (PAGE 9)
Upon application for a Contract, you select an Annuity Commencement Date.
The Annuity Commencement Date you choose may never extend beyond the Contract
Year closest to the Annuitant's 85th birthday. Any request for extension of the
maximum Annuity Commencement Date must be approved by the Administrative Office.
You may elect to have all of your Net Account Value or a portion thereof applied
on the Annuity Commencement Date under any of the Annuity Options described
below. In the absence of such election, the Net Account Value will be applied on
the Annuity Commencement Date under Option 2 -- Life Income With Payments for a
10 Year Guaranteed Period.
(For Contracts issued in connection with certain Qualified Plans, the
Annuity Commencement Date may not be later than April 1 of the year after the
year in which the Annuitant attains age 70 1/2).
2. CHANGE OF ANNUITY COMMENCEMENT DATE OR ANNUITY OPTION (PAGE 9)
You may change the Annuity Commencement Date from time to time, but any such
change must be made in Writing and received by us within 30 days prior to the
scheduled Annuity Commencement Date. In no event may Initial or Subsequent
Guaranteed Periods extend beyond the Annuity Commencement Date then in effect.
5. DEATH OF ANNUITANT OR PARTICIPANT AFTER ANNUITY COMMENCEMENT DATE (PAGE
10)
In the event of the death of the Annuitant or Participant after the Annuity
Commencement Date, and before all of the benefits under the Annuity Option
selected have been paid, any remaining portion of such benefits will be paid out
at least as rapidly as under the Annuity Option in effect when the Annuitant or
Participant dies.
E. FEDERAL TAX MATTERS (PAGE 13)
The discussion in the Federal Tax Matters section (page 13) under the
caption "Tax Deferral During Accumulation Period" should be revised to read as
follows:
Under existing provisions of the Code, the Contracts should be
treated as annuities and, except as described below, any increase in a
Participant's Account Value is generally not taxable to the Participant
or Annuitant until received, either in the form of Annuity payments as
contemplated by the Contracts, or in some other form of distribution.
However, in order to be treated as an annuity contract for federal tax
purposes, section 72(s) of the Code requires that contracts that are
held by persons other than individuals (other than contracts that are
issued in connection with certain Qualified Plans) contain certain
provisions relating to distributions upon the death of an annuitant. The
Contracts do not contain these provisions. As a result, where the owner
of an
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Individual Modified Guaranteed Annuity Contract is not an individual,
such Contract (unless issued in connection with certain Qualified Plans)
will not be treated as an annuity for federal tax purposes. In addition,
where the Participant holding a Certificate under the Group Modified
Guaranteed Annuity Contract is not an individual, such Certificate
(unless issued in connection with certain Qualified Plans) will not be
treated as an annuity for federal tax purposes.
The remainder of this discussion assumes that the Contract will
constitute an annuity for federal tax purposes.
PROTECTIVE LIFE INSURANCE COMPANY
A. BUSINESS
Protective Life Insurance Company ("Protective"), a stock life insurance
company which maintains its administrative offices in Birmingham, Alabama, was
incorporated in Alabama in 1907. In 1992, Protective changed its state of
domicile from Alabama to Tennessee.
Protective is a wholly-owned subsidiary of Protective Life Corporation
("PLC"), an insurance holding company whose common stock is traded on the New
York Stock Exchange. Protective is PLC's principal operating subsidiary. Since
1983, Protective has owned 100% of American Foundation Life Insurance Company
("American Foundation"), an Alabama-domiciled life insurance company. In July
1993, Protective acquired Wisconsin National Life Insurance Company, a Wisconsin
domiciled life insurance company.
Protective writes individual life and health insurance, annuities,
guaranteed investment contracts, and group life and health insurance. Protective
markets individual life and health insurance products through independent
personal producing general agents. The individual life insurance products are
marketed primarily to individuals in the middle and upper income brackets.
Protective also serves the payroll deduction market through specialists offering
products designed for this market. Group insurance products are marketed through
full-time field representatives who market to employers and associations through
agents and brokers. Protective also markets tax-deferred annuities, securities,
and credit-related life and health insurance products primarily through the
sponsorship of financial institutions.
Protective has five marketing divisions: Agency, Group, Financial
Institutions, Investment Products, and Guaranteed Investment Contracts.
Protective has two additional segments: Acquisitions, and Corporate and Other.
AGENCY DIVISION. Since 1983, Protective has utilized a distribution system
based on experienced personal producing general agents who are recruited by
regional sales managers. The current marketing efforts in the Agency Division
are directed toward Protective's various universal life products and products
designed to compete in the term insurance market. Approximately 15.6% of
Protective's revenues were from this Division in 1993.
GROUP DIVISION. The Group Division markets Protective's group insurance
products primarily in the southeastern and southwestern United States using the
services of brokers who specialize in group products. Protective offers
substantially all forms of group insurance customary in the industry, making
available complete packages of life and accident and health insurance to
employers. Approximately 20.0% of Protective's revenues were from this Division
in 1993.
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FINANCIAL INSTITUTIONS DIVISION. The Financial Institutions Division
specializes in marketing insurance products through the sponsorship of
commercial banks, savings and loan associations, and mortgage bankers. The
division markets an array of life and health policies, the majority of which are
used to secure consumer and mortgage loans made by financial institutions which
are primarily located in the southeastern United States. In 1992, Protective
assumed all of the policy obligations associated with the credit life and credit
accident and health insurance business produced by Durham Life Insurance
Company. Approximately 13.5% of Protective's revenues were from this Division in
1993.
INVESTMENT PRODUCTS DIVISION. This division manufactures, sells, and
supports annuity products, including the ProSaver modified guaranteed annuity
contract. Approximately 9.7% of Protective's revenues were from this Division in
1993.
GUARANTEED INVESTMENT CONTRACTS DIVISION. Protective began selling
guaranteed investment contracts ("GICs") in 1989. GICs are contracts issued to a
401(k) or other retirement savings plan, which guarantee a fixed return on
deposits from the plan for a specified period and often provide flexibility for
withdrawals, in keeping with the benefits provided by the plan. Protective also
offers a related product through this division which is purchased primarily as a
temporary investment vehicle by the trustees of escrowed municipal bond
proceeds. Approximately revenues were from this Division in 1993.
ACQUISITIONS DIVISION. PLC actively seeks to acquire blocks of insurance
policies. These acquisitions may be accomplished through acquisitions of
companies or through the assumption or reinsurance of policies. Reinsurance
transactions may be made from court-administered insolvent companies or from
companies otherwise divesting themselves of blocks of business. Most
acquisitions do not include the acquisition of an active sales force, but some
do. Blocks of policies acquired through the Acquisitions Division are
administered as "closed" blocks; i.e., no new policies are being 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. More
than 30 separate transactions have been made since 1970. Many of these
transactions included Protective. In 1993, Protective acquired Wisconsin
National Life Insurance Company and coinsured a small block of universal life
policies. Approximately 17.3% of Protective's revenues were from this Division
in 1993.
CORPORATE AND OTHER. This segment consists of several small insurance lines
of business, net investment income and expenses not attributable with the other
divisions or segments, and operations of a non-insurance subsidiary.
Approximately 0.2% of Protective's revenues were from this division in 1993.
For additional financial information regarding the marketing divisions and
other segments of Protective, see Note K to Protective's financial statements
included in this prospectus.
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B. SELECTED FINANCIAL DATA
The following Selected Financial Data for Protective and its subsidiaries
should be read in conjunction with the consolidated financial statements and
notes thereto included elsewhere in this Prospectus.
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------------------------------
1993 1992 1991 1990 1989
---------------- ---------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Premiums and policy fees................ $ 351,423 $ 323,136 $ 273,975 $ 248,448 $ 236,830
Net investment income................... 354,165 274,991 222,619 132,399 81,141
Realized investment gains (losses)...... 5,054 (154) (3,085) (3,249) 202
Other income............................ 4,756 10,675 7,495 5,568 4,230
---------------- ---------------- ------------ ------------ ------------
Total revenues.................... $ 715,398 $ 608,648 $ 501,004 $ 383,166 $ 322,403
---------------- ---------------- ------------ ------------ ------------
---------------- ---------------- ------------ ------------ ------------
Benefits and expenses................... $ 629,286 $ 549,885 $ 456,039 $ 344,295 $ 289,279
Income tax expense...................... $ 29,957(1) $ 17,393 $ 12,024 $ 10,697 $ 10,885
Minority interest....................... $ 90 $ 1,437 $ 870
Net income.............................. $ 56,155 $ 40,227(2) $ 31,504 $ 27,304 $ 22,239
<CAPTION>
DECEMBER 31
----------------------------------------------------------------------------
1993 1992 1991 1990 1989
---------------- ---------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total assets............................ $ 5,307,849 $ 4,000,157 $ 3,120,354 $ 2,326,716 $ 1,225,146
Long-term debt.......................... $ 98 $ 2,014 $ 2,048 $ 2,079 $ 2,106
Total debt (3).......................... $ 49,061 $ 43,191 $ 28,022 $ 50,744 $ 2,131
Redeemable preferred stock.............. $ 2,000 $ 2,000 $ 2,000 $ 2,000 $ 2,000
Stockholder's equity.................... $ 469,990(4) $ 335,516 $ 298,468 $ 257,136 $ 233,276
<FN>
- ------------------------
(1) Increased by a one-time adjustment to income tax expense of $1.2 million
due to an increase in the corporate federal income tax rate from 34% to
35%.
(2) Includes a $1.1 million reduction to 1992 income representing the
cumulative effect of a change in accounting principle for the adoption of
SFAS No. 106.
(3) Includes indebtedness to related parties. At December 31, 1993 such
indebtedness totaled $48.9 million.
(4) Reflects the adoption of SFAS No. 115 which increased stockholder's equity
$34.6 million.
</TABLE>
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C. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
1. RESULTS OF OPERATIONS
Protective is a wholly-owned subsidiary of Protective Life Corporation
(PLC), a life insurance holding company.
A. 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:
<TABLE>
<CAPTION>
PREMIUMS AND POLICY FEES
-----------------------------
YEAR ENDED AMOUNT PERCENTAGE
DECEMBER 31 (IN THOUSANDS) INCREASE
- --------------------------------------------- -------------- ----------
<S> <C> <C>
1991......................................... $ 273,975 10.3%
1992......................................... 323,136 17.9
1993......................................... 351,423 8.8
</TABLE>
Premiums and policy fees increased $25.5 million or 10.3% in 1991 over 1990.
Two reinsurance transactions which were entered into during the 1990 fourth
quarter increased premiums and policy fees $13.9 million. In the 1991 third
quarter, Protective converted preferred stock into common stock to become the
80% owner of Southeast Health Plan, Inc. (SEHP), a Birmingham-based health
maintenance organization, in which Protective has had an investment since 1988.
Beginning in the 1991 third quarter, the results of SEHP were reported in
Protective's financial statements on a consolidated basis. The inclusion of
SEHP's premiums represents a $23.1 million increase. Increases in premiums and
policy fees from the Agency business segment represents $4.5 million of the
increase, while the Group and Financial Institutions business segments
represented decreases in premiums and policy fees of $6.0 million and $5.0
million, respectively. The decrease in Group premiums and policy fees was the
result of Group health policies terminating, although the resulting decrease in
premiums was partially offset by increased cancer and dental policy premiums.
Lower Financial Institutions premiums were due to recession-related decreases in
sales of credit-related insurance products. Decreases in older acquired blocks
of ordinary policies represented a $5.0 million decrease in premiums and policy
fees.
Premiums and policy fees increased $49.2 million or 17.9% in 1992 over 1991.
Increases in premiums and policy fees from the Agency and Financial Institutions
business segments represent $7.0 million and $25.7 million of the increase,
respectively. Effective July 1, 1992, the Financial Institutions Division
assumed Durham Life Insurance Company's (Durham) credit business representing
$15.1 million of the Division's $25.7 million increase. The inclusion of SEHP's
premiums represents a $17.3 million increase. A small acquisition in the 1992
first quarter increased premiums and policy fees $3.6 million. Decreases in
older acquired blocks of ordinary policies represent a $5.6 million decrease in
premiums and policy fees.
Premiums and policy fees increased $28.3 million or 8.8% in 1993 over 1992.
During 1993, Protective transferred its ownership interests in SEHP to PLC in
the form of a common dividend. This transfer represents a $40.5 million decrease
in premiums and policy fees. Increases in premiums and policy fees from the
Agency, Group, and Financial Institutions Divisions represent increases of $14.6
million, $13.0 million, and $30.4 million, respectively. The Durham acquisition
represents $17.8 million of the Financial Institutions Division's $30.4 million
increase. On July 30, 1993, Protective completed its acquisition of Wisconsin
National Life Insurance Company (Wisconsin National). The acquisition increased
premiums and policy
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<PAGE>
fees by $11.7 million. The reinsurance of a block of universal life policies on
July 1, 1993 resulted in a $3.2 million increase. Decreases in older acquired
blocks of policies represented a $4.5 million decrease in premiums and policy
fees.
B.__NET INVESTMENT INCOME
The following table sets forth for the periods shown the amount of net
investment income, the percentage change from the prior period, and the
percentage earned on average cash and investments:
<TABLE>
<CAPTION>
NET INVESTMENT INCOME PERCENTAGE
---------------------------------- EARNED
YEAR ENDED AMOUNT PERCENTAGE ON AVERAGE CASH
DECEMBER 31 (IN THOUSANDS) INCREASE AND INVESTMENTS
---------------------------------------- -------------- --------------- ---------------
<S> <C> <C> <C>
1991.................................... $ 222,619 68.1 % 9.2 %
1992.................................... 274,991 23.5 8.6
1993.................................... 354,165 28.8 8.4
</TABLE>
Net investment income for 1991 was $90.2 million or 68.1% higher, 1992 was
$52.4 million or 23.5% higher, and 1993 was $79.2 million or 28.8% higher, than
the previous year, primarily due to increases in the average amount of invested
assets. Invested assets have increased primarily due to receiving annuity and
guaranteed investment contract (GIC) deposits and to acquisitions. Annuity and
GIC deposits are not considered revenues in accordance with generally accepted
accounting principles. These deposits are included in the liability section of
the balance sheet. The two reinsurance transactions in late 1990 increased net
investment income $14.2 million in 1991. The Wisconsin National acquisition
resulted in an increase in 1993 net investment income of $14.5 million. Due to
the general decline in interest rates, Protective's percentage earned on average
cash and investments has decreased slightly since 1991.
C.__REALIZED INVESTMENT GAINS (LOSSES)
Protective generally purchases its investments with the intent to hold to
maturity by selecting investments that match future cash-flow needs. 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 or losses for the
periods shown:
<TABLE>
<CAPTION>
REALIZED
INVESTMENT
YEAR ENDED GAINS (LOSSES)
DECEMBER 31 (IN THOUSANDS)
- -------------------------------------------------------------- ---------------
<S> <C>
1991.......................................................... $ (3,085)
1992.......................................................... (154)
1993.......................................................... 5,054
</TABLE>
Protective maintains an allowance for uncollectible amounts on investments
based upon industry default rates for different asset types. The allowance
totaled $35.2 million at December 31, 1993. Additions to the allowance are
treated as realized investment losses. During 1991, Protective added $10.5
million to this allowance which more than offset $7.4 million of net realized
investment gains. During 1992, Protective added $9.7 million to this allowance
which more than offset the $9.5 million of net realized investment gains. During
1993, Protective added $8.7 million to this allowance which partially offset
$13.8 million of net realized investment gains.
24
<PAGE>
D.__OTHER INCOME
The following table sets forth other income for the periods shown:
<TABLE>
<CAPTION>
YEAR ENDED OTHER INCOME
DECEMBER 31 (IN THOUSANDS)
- -------------------------------------------------------------- --------------
<S> <C>
1991.......................................................... $ 7,495
1992.......................................................... 10,675
1993.......................................................... 4,756
</TABLE>
Other income consists primarily of fees from Administrative Services Only
types of group accident and health insurance contracts, and from rental of space
in Protective's administrative office building to PLC. The inclusion of SEHP
increased other income $1.1 million in 1991 and $4.0 million in 1992. The
transfer of SEHP to PLC decreased other income $5.1 million in 1993.
E.__INCOME (LOSS) BEFORE INCOME TAX
The following table sets forth income or loss before income tax by business
segment for the periods shown:
<TABLE>
<CAPTION>
INCOME (LOSS) BEFORE INCOME TAX
YEAR ENDED DECEMBER 31
(IN THOUSANDS)
---------------------------------
BUSINESS SEGMENT 1991 1992 1993
- ------------------------------------------------------------------------------- ---------- --------- ----------
<S> <C> <C> <C>
Agency......................................................................... $ 11,948 $ 12,976 $ 20,324
Group.......................................................................... 8,150 7,762 10,435
Financial Institutions......................................................... 4,283 4,669 7,220
Investment Products............................................................ 134 4,191 3,402
Guaranteed Investment Contracts*............................................... 10,887 18,266 27,218
Acquisitions................................................................... 23,493 20,031 29,845
Corporate and Other*........................................................... (11,245) (7,543) (14,208)
Unallocated Realized Investment Gains (Losses)................................. (2,685) (1,589) 1,876
---------- --------- ----------
$ 44,965 $ 58,763 $ 86,112
---------- --------- ----------
---------- --------- ----------
<FN>
- ------------------------
*Income (loss) before income tax for the Guaranteed Investment Contracts segment
has not been reduced by pretax minority interest of $1,631 in 1991. Income
before income tax for the Corporate and Other segment has not been reduced by
pretax minority interest of $90 in 1991 and 1992.
</TABLE>
In 1993 Protective changed the method used to apportion net investment
income to the various divisions. This change resulted in increased income
attributable to the Agency, Investment Products, and Acquisitions Divisions of
$3.0 million, $2.0 million, and $2.6 million, respectively, while decreasing
income of the Corporate and Other segment.
Agency pretax earnings increased $1.0 million in 1992 as compared to 1991
reflecting increased sales, better persistency, and improved mortality. Agency
1993 pretax earnings of $20.3 million were $7.3 million higher than 1992. The
improvement was due primarily to a growing block of business brought about by
sales, continued strong persistency, and favorable mortality experience.
Group pretax earnings were $0.4 million lower in 1992 as compared to 1991
due to both lower group health and group life earnings. Improved earnings in
cancer and dental products were more than offset by
25
<PAGE>
lower traditional group health earnings. Group 1993 pretax earnings of $10.4
million were $2.7 million higher than 1992. Group life and annuity earnings
improved by $1.7 million, and group health earnings improved by $1.0 million
primarily due to improved cancer and dental earnings.
Pretax earnings of the Financial Institutions Division were $0.4 million
higher in 1992 as compared to 1991. Effective July 1, 1992, Protective assumed
all of the policy obligations associated with the credit life and credit
accident and health insurance business produced by Durham. The assumption
contributed $1.6 million to the Division's 1992 results, which was partially
offset by lower credit life and health earnings because of higher mortality and
morbidity in the Division's other lines. The Financial Institutions Division's
1993 pretax earnings of $7.2 million were up $2.6 million from 1992. The Durham
acquisition represented $0.7 million of the increase. The balance of the
increase was due to premium growth and improved claims ratios in the Division's
other lines.
The Investment Products Division's pretax earnings were $4.1 million higher
in 1992, compared to 1991. The earnings improvement was primarily due to having
a greater amount of annuity deposits. Annuity deposits associated with the
Division were $648 million at December 31, 1992, compared to $395 million at
December 31, 1991. The Division's 1993 earnings of $3.4 million were $0.8
million lower than 1992. These results reflect an increase of $3.2 million of
amortization of deferred policy acquisition costs, in part to shorten the
amortization period on book-value annuities, sales of which were substantially
discontinued in 1992. Annuity deposits totaled $836 million at December 31,
1993. Average deposits for the year were $742 million, 42% higher than for 1992.
The Guaranteed Investment Contracts (GIC) Division had pretax earnings of
$18.3 million in 1992 and $27.2 million in 1993. GIC earnings have increased due
to the growth in GIC deposits placed with Protective. At December 31, 1993, GIC
deposits totaled $2.0 billion, compared to $1.7 billion one year earlier and
$1.3 billion at December 31, 1991.
A portion of the earnings of the GIC Division was earned in a majority-owned
subsidiary which became wholly owned in the 1991 third quarter. The ownership
interest of the other stockholders in the earnings of the subsidiary before it
became wholly owned was $1.3 million ($1.6 million pretax) in 1991.
Pretax earnings from the Acquisitions Division decreased $3.5 million in
1992 as compared to 1991, primarily due to higher mortality and lapses in its
various blocks of acquired policies. Earnings from the Acquisitions Division are
normally expected to decline over time (due to the lapsing of policies resulting
from deaths of insureds or terminations of coverage) unless new acquisitions are
made. The Acquisitions Division had pretax earnings of $29.8 million for 1993,
$9.8 million higher than 1992. On July 30, 1993, Protective completed its
acquisition of Wisconsin National. Protective also reinsured a block of
universal life policies during the 1993 third quarter. These two acquisitions
contributed $5.1 million to the Division's 1993 earnings. The Division also
experienced improved results in its other blocks of acquired policies.
The Corporate and Other segment consists of several small insurance lines of
business, net investment income and other operating expenses not identified with
the preceding business segments (including interest on substantially all debt),
and the operations of a small noninsurance subsidiary.
Pretax losses for this segment were $3.7 million lower in 1992 as compared
to 1991 due to SEHP having a $0.6 million profit in 1992, compared to a $3.5
million loss in 1991, the SEHP increase being largely offset by several factors
of negative effect. Pretax losses for this segment were $6.7 million higher in
1993 as compared to 1992 primarily due to the aforementioned reapportionment of
net investment income within Protective.
26
<PAGE>
F.__INCOME TAXES
The following table sets forth the effective income tax rates for the
periods shown:
<TABLE>
<CAPTION>
YEAR ENDED EFFECTIVE INCOME
DECEMBER 31 TAX RATES
- --------------------------------------------------------------------- -------------------
<S> <C>
1991................................................................. 26.7%
1992................................................................. 29.6
1993................................................................. 33.4
</TABLE>
For the year ended December 31, 1992, the effective income tax rate was
29.6%. In August 1993, the corporate income tax rate was increased from 34% to
35%, which resulted in a one-time increase to income tax expense of $1.2 million
due to a recalculation of Protective's deferred income tax liability. The
effective income tax rate for 1993, excluding the one-time increase, was 33.4%.
Management's estimate of the effective income tax rate for 1994 is 32%.
G.__NET INCOME
The following table sets forth net income for the periods shown:
<TABLE>
<CAPTION>
NET INCOME
----------------------------
YEAR ENDED AMOUNTS PERCENTAGE
DECEMBER 31 (IN THOUSANDS) INCREASE
------------- -------------- ----------
<S> <C> <C>
1991............................................. $ 31,504 15.4%
1992............................................. 40,227 27.7
1993............................................. 56,155 39.6
</TABLE>
Compared to 1991, net income in 1992 increased 27.7%, reflecting improved
earnings in the Agency, Financial Institutions, Investment Products, and GIC
Divisions, and higher realized investment gains which were partially offset by
an allowance for uncollectible amounts on investments and lower earnings in the
Group and Acquisitions Divisions. Additionally, 1992 includes a reduction to
income of $1.1 million reported as the cumulative effect of a change in
accounting principle associated with Protective's adoption of Statement of
Financial Accounting Standards (SFAS) No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." Net income in 1993 was 39.6%
higher than 1992, reflecting improved earnings in the Agency, Group, Financial
Institutions, GIC, and Acquisitions Divisions, and higher realized investment
gains which were partially offset by a higher effective tax rate and the $1.2
million one-time increase to income tax expense discussed above.
H.__RECENTLY ISSUED ACCOUNTING STANDARDS
In May 1993, the Financial Accounting Standards Board issued SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan." Protective anticipates that
the impact of adopting SFAS No. 114 on its financial condition will be
insignificant.
The American Institute of Certified Public Accountants has issued Statement
of Position 93-6, "Employers' Accounting For Employee Stock Ownership Plans"
(ESOP). Under certain "grandfathering" provisions in the Statement, employers
may elect not to apply the new accounting rules to shares acquired by ESOPs
before December 31, 1992. PLC does not plan to apply the new rules to its
existing ESOP.
2.__LIQUIDITY AND CAPITAL RESOURCES
Protective's operations normally produce a positive cash flow. This cash
flow is used to fund an investment portfolio to finance future benefit payments
including those arising from various types of deposit
27
<PAGE>
contracts. Since future benefit payments largely represent long-term obligations
reserved using certain assumed interest rates, Protective's investments are
predominantly in long-term, fixed rate investments such as bonds and mortgage
loans which provide a sufficient return to cover these obligations.
Many of Protective's products contain surrender charges and other features
which reward persistency and penalize the early withdrawal of funds. With
respect to such products, surrender charges are generally sufficient to cover
Protective's unamortized deferred policy acquisition costs with respect to the
policy being surrendered. GICs and certain annuity contracts have market-value
adjustments which protect Protective against investment losses if interest rates
are higher at the time of surrender as compared to interest rates at the time of
issue.
Protective has adopted Statement of Financial Accounting Standards No. 115,
"Accounting For Certain Investments In Debt And Equity Securities." Accordingly,
Protective's investments in debt and equity securities are reported in the 1993
financial statements at market value, and investments in mortgage loans are
reported at amortized cost. At December 31, 1993, the fixed maturity investments
(bonds, bank loan participations, and redeemable preferred stocks) had a market
value of $3,051.3 million, which is 2.2% above amortized cost of $2,985.7
million. Protective had $1,408.4 million in mortgage loans at December 31, 1993.
While Protective's mortgage loans do not have quoted market values, at December
31, 1993, Protective estimates the market value of its mortgage loans to be
$1,524.2 million (using discounted cash flows from the next call date) which is
8.2% in excess of amortized book value. Most of Protective'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.
At December 31, 1993, delinquent mortgage loans and foreclosed real estate
were 0.8% of assets. Bonds rated less than investment grade were 1.3% of assets.
Additionally, Protective had bank loan participations which were less than
investment grade representing 2.8% of assets. Protective does not expect these
investments to adversely affect its liquidity or ability to hold its other
investments to maturity. Protective's allowance for uncollectible amounts on
investments was $35.2 million at December 31, 1993.
Policy loans at December 31, 1993 were $141.1 million, an increase of $23.3
million from December 31, 1992. The acquisition of Wisconsin National increased
policy loans by $13.5 million, and the reinsurance of a block of universal life
policies added an additional $12.1 million. Otherwise, policy loans decreased
$2.3 million. 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.
Protective believes its asset/liability matching practices and certain
product features provide significant protection for Protective against the
effects of changes in interest rates. However, approximately 24% of Protective's
liabilities relate to products (primarily whole life insurance) the
profitability of which may be affected by changes in interest rates. The effect
of such changes in any one year is not expected to be material. Additionally,
Protective believes its asset/liability matching practices provide sufficient
liquidity to enable it to fulfill its obligation to pay benefits under its
various insurance and deposit contracts.
Protective's asset/liability matching practices 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 yield, risk, and cash flow characteristics.
A combination of futures contracts and options on treasury notes are
currently being used as hedges for asset/liability management of certain
investments, primarily mortgage loans on real estate, and liabilities
28
<PAGE>
arising from interest-sensitive products such as GICs and annuities. Realized
investment gains and losses of such contracts are deferred and amortized over
the life of the hedged asset. Protective also uses interest rate swap contracts
to convert certain investments from a variable to a fixed rate of interest.
In anticipation of receiving GIC and annuity deposits, Protective was
committed at December 31, 1993 to fund mortgage loans and to purchase fixed
maturity and other long-term investments in the amount of $168 million.
Protective held $103.7 million in cash and short-term investments at December
31, 1993.
While Protective generally anticipates that the cash flows of its operations
will be sufficient to meet its investment commitments and operating cash needs,
Protective recognizes that investment commitments scheduled to be funded may
from time to time exceed the funds then available. Therefore, Protective has
arranged sources of credit to utilize to fund investments in such circumstances.
Protective expects that the rate received on its investments will equal or
exceed its borrowing rate. Additionally, Protective may from time to time sell
short-duration GICs to complement its cash management practices.
At December 31, 1993, Protective had no borrowings under its credit
arrangements.
Indebtedness to related parties consists of three surplus debentures issued
by Protective to PLC to finance the assumptions of blocks of insurance and to
provide additional statutory capital. At December 31, 1993, the balance of the
three surplus debentures combined was $48.9 million.
As disclosed in the Notes to Consolidated Financial Statements, $295 million
of consolidated stockholder's equity at December 31, 1993, represented net
assets of Protective that cannot be transferred to PLC in the form of dividends,
loans, or advances. Also, as disclosed in the Notes to Consolidated Financial
Statements, distributions, including cash dividends to PLC from Protective, in
excess of approximately $184 million, would be subject to federal income tax at
rates then effective. Protective does not anticipate involuntarily paying tax on
such distributions. Due to these reasons, and due to the expected growth of
Protective's insurance sales, Protective will retain substantial portions of its
earnings primarily to support its future growth.
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 achievement of long-term
growth will require growth in the statutory capital of Protective. Protective
may secure additional statutory capital through various sources, such as
internally generated statutory earnings or equity contributions by PLC.
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 on
Protective's December 31, 1993 statutory financial report, Protective is
adequately capitalized under the formula.
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. Protective does not
believe that any such assessments will be materially different from amounts
already provided for in the financial statements.
29
<PAGE>
3. IMPACT OF INFLATION
Inflation increases the need for insurance. Many policyholders who once had
adequate insurance programs increase their life insurance coverage to provide
the same relative financial benefits and protection. The effect of inflation on
medical costs leads to accident and health policies with higher benefits. Thus,
inflation has increased the need for life and accident and health products.
The higher interest rates which have traditionally accompanied inflation
also affect Protective's investment operation. Policy loans increase as policy
loan interest rates become relatively more attractive. As interest rates
increase, disintermediation of GIC and annuity deposits and ordinary life policy
cash values may increase, the market value of Protective's fixed rate long-term
investments may decrease, and Protective may be unable to fully enforce the call
provisions of its mortgage loans. The difference between the interest rate
earned on investments and the interest rate credited to interest sensitive
products may also be adversely affected by rising interest rates.
Inflation has materially increased the cost of health care. The adequacy of
premium rates in relation to the level of accident and health claims is
constantly monitored, and where appropriate, premium rates on such policies are
increased as policy benefits increase. Failure to make such increases
commensurate with health care cost increases may result in a loss from health
insurance.
Protective does not believe the current rate of inflation will significantly
affect its operations. However, lower interest rates may reduce earnings as
older higher-yielding investments mature or repay and are reinvested at lower
current rates.
4. SEGMENT INFORMATION
For segment information, see Note K of Notes to Consolidated Financial
Statements of Protective.
D. REINSURANCE
Portions of life insurance risks are reinsured with other companies.
Protective has reinsurance agreements with a number of other insurance companies
for individual life insurance. The maximum retention on any one life is
$500,000.
E. RESERVES
In accordance with the insurance laws and regulations under which Protective
operates, it is obligated to carry on its books as liabilities, actuarially
determined reserves to meet its obligations on its outstanding insurance
contracts. The reserves for its insurance contracts are based on mortality and
morbidity tables in general use in the United States and are computed amounts
that, with additions for premiums to be received, and with interest on such
reserves compounded annually at certain assumed rates, will be sufficient to
meet Protective's policy obligations at their maturities or in the event of an
insured's death or illness. In the accompanying Consolidated Financial
Statements these insurance reserves are determined in accordance with generally
accepted accounting principles.
F. INVESTMENTS
The types of assets in which Protective may invest are governed by state
laws which prescribe qualified investment assets. Within the parameters of these
laws, Protective invests its assets giving consideration to such factors as
liquidity needs, investment quality, investment return, matching of assets and
liabilities, and the balance of the investment portfolio by asset type and
credit exposure.
30
<PAGE>
The following table shows Protective's investments at December 31, 1993,
valued on the basis of generally accepted accounting principles:
<TABLE>
<CAPTION>
PERCENT OF TOTAL
ASSET VALUE INVESTMENTS
-------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Fixed maturities:
Bonds...................................... $ 2,864,425 60.1%
Bank loan participations................... 151,278 3.2
Redeemable preferred stocks................ 35,589 0.7
-------------- -----
Total fixed maturities................. 3,051,292 64.0
-------------- -----
Equity securities:
Common stocks.............................. 36,253 0.8
Nonredeemable preferred stocks............. 4,343 0.1
-------------- -----
Total equity securities................ 40,596 0.9
-------------- -----
Mortgage loans on real estate................ 1,408,444 29.5
Investment real estate....................... 21,928 0.4
Policy loans................................. 141,136 3.0
Other long-term investments.................. 22,760 0.5
Short-term investments....................... 79,772 1.7
-------------- -----
Total investments...................... $ 4,765,928 100.0%
-------------- -----
-------------- -----
</TABLE>
While the foregoing may generally reflect our current investment strategy,
Protective is 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 Tennessee and other states.
G. COMPETITION
Protective operates in a highly competitive industry. In connection with the
development and sale of its products, Protective encounters significant
competition from other insurance companies, many of which have financial
resources greater than those of Protective, as well as from other investment
alternatives available to its customers. 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. Management
believes that Protective's ability to compete is dependent upon, among other
things, its ability to attract and retain agents to market its insurance
products, its ability to develop competitive and profitable products, and its
maintenance of a high rating from rating agencies.
Nontraditional sources of health care coverages, such as health maintenance
organizations and preferred provider organizations, are developing rapidly in
Protective's operating territory and provide competitive alternatives to
Protective's group health products.
Banks, by offering bank investment contracts currently guaranteed by the
FDIC, provide competitive alternatives to GICs. In addition, banks and other
financial institutions may be granted approval to underwrite and sell insurance
products and compete directly with Protective.
31
<PAGE>
H. EMPLOYEES
Protective had approximately 739 full-time employees, including 654 in the
administrative office in Birmingham, Alabama at December 31, 1993. Additionally,
PLC had approximately 176 full-time employees at December 31, 1993.
I. PROPERTIES
Protective's administrative office building is located at 2801 Highway 280
South, Birmingham, Alabama. This building includes the original 142,000
square-foot building which was completed in 1976 and a second contiguous 220,000
square-foot building which was completed in 1985. In addition, parking is
provided for approximately 1,000 vehicles.
Protective leases administrative space in Birmingham, Alabama; Brentwood,
Tennessee; Greenville, South Carolina; Cary, North Carolina; and Oklahoma City,
Oklahoma. Substantially all of these offices are rented on leases that run for
periods of three to five years. The aggregate monthly rent is approximately $28
thousand.
Marketing offices are leased in 15 cities, substantially all under leases
for periods of three to five years with only two leases being over five years.
The aggregate monthly rent is approximately $24 thousand.
J. REGULATION
The insurance business of Protective is subject to comprehensive and
detailed regulation and supervision throughout the United States.
The laws of the various jurisdictions establish supervisory agencies with
broad administrative powers with respect to licensing to transact business,
overseeing trade practices, licensing agents, approving policy forms,
establishing reserve requirements, fixing maximum interest rates on life
insurance policy loans and minimum rates for accumulation of surrender values,
prescribing the form and content of required financial statements and regulating
the types and amounts of investments permitted. Each insurance company is
required to file detailed annual reports with supervisory agencies in each of
the jurisdictions in which it does business and its operations and accounts are
subject to examination by such agencies at regular intervals.
Recently, the insurance regulatory framework has been placed under increased
scrutiny by various states, the federal government, and the National Association
of Insurance Commissioners ("NAIC"). Various states have considered or enacted
legislation which changes, and in many cases increases, the state's authority to
regulate insurance companies. Legislation is under consideration in Congress
which would result in the federal government assuming some role in the
regulation of insurance companies. The NAIC, in conjunction with state
regulators, has been reviewing existing insurance laws and regulations. The NAIC
recently approved and recommended to the states for adoption and implementation
several regulatory initiatives designed to reduce the risk of insurance company
insolvencies. These initiatives include a risk-based capital requirement.
A life insurance company's statutory capital is computed according to rules
prescribed by the 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. The NAIC's
risk-based capital requirements require insurance companies to calculate and
report information under a risk-based capital formula. These risk-based capital
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
32
<PAGE>
exposure, and other factors. Based upon the December 31, 1993 statutory
financial reports of Protective's insurance subsidiaries, management believes
that Protective's insurance subsidiaries are adequately capitalized under the
formula.
Under insurance guaranty fund laws, in most states, insurers doing business
therein can be assessed up to prescribed limits for policyholder losses incurred
by insolvent companies. Although Protective believes such assessments will not
be material, the amount of any future assessments on Protective under these laws
cannot be reasonably estimated. 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.
In addition, several states, including Tennessee and Alabama, regulate
affiliated groups of insurers, such as Protective and its affiliates, under
insurance holding company legislation. Under such laws, inter-company transfers
of assets and dividend payments from insurance subsidiaries may be subject to
prior notice or approval, depending on the size of such transfers and payments
in relation to the financial positions of the companies.
Due to the existence of a surplus debenture between Protective and PLC,
Protective must obtain the approval of the Commissioner of Insurance before it
may pay any dividends to PLC. Protective anticipates that it will be able to
obtain such approval.
Although the federal government generally does not directly regulate the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. Current and proposed federal measures which may
significantly affect the insurance business include the regulation of insurance
company solvency, employee benefit regulation, controls on medical care costs,
removal of barriers preventing banks from engaging in the insurance business,
tax law changes affecting the taxation of insurance companies, the tax treatment
of insurance products and its impact on the relative desirability of various
personal investment vehicles, and proposed legislation to prohibit the use of
gender in determining insurance and pension rates and benefits.
K.__RECENT DEVELOPMENTS
The Clinton Administration has advocated changes to the current health care
delivery system which will address both affordability and availability issues.
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 by Congress.
It is anticipated that these proposals may adversely affect certain products in
Protective's group health insurance business. In addition to the federal
initiatives, a number of states are considering legislative programs that are
intended to affect the accessibility and affordability of health care. Some
states have recently enacted health care reform legislation. These various state
programs (which could be preempted by any federal program) may also adversely
affect Protective's group health insurance business. However, in light of the
small relative proportion of Protective's earnings attributable to group health
insurance, management does not expect that either the federal or state proposals
will have a material adverse effect on Protective's earnings.
DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of Protective are as follows:
<TABLE>
<S> <C> <C>
Drayton Nabers, Jr. 53 President and a Director
R. Stephen Briggs 44 Executive Vice President and a Director
</TABLE>
33
<PAGE>
<TABLE>
<S> <C> <C>
John D. Johns 41 Executive Vice President and Chief Financial Officer
and a Director
Ormond L. Bentley 58 Senior Vice President, Group and a Director
Deborah J. Long 40 Senior Vice President and General Counsel
Jim E. Massengale 51 Senior Vice President and a Director
Steven A. Schultz 40 Senior Vice President, Financial Institutions and a
Director
Wayne E. Stuenkel 40 Senior Vice President and Chief Actuary and a
Director
A. S. Williams III 57 Senior Vice President, Investments and Treasurer and
a Director
Jerry W. DeFoor 41 Vice President and Controller, and Chief Accounting
Officer
</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 PLC at the annual meeting of shareholders of Protective. None of the
individuals listed above is related to any director of PLC or Protective or to
any executive officer.
Since May 1992, Mr. Nabers has been President and Chief Executive Officer of
PLC. Mr. Nabers had been President of Protective and PLC since August 1982, and
had been Senior Vice President of each from September 1981 to August 1982. From
February 1980 to September 1981, he served as Senior Vice President, Operations
of Protective. From 1979 to February 1980, he was Senior Vice President,
Operations and General Counsel of Protective. He is a director of Energen
Corporation, and National Bank of Commerce of Birmingham.
Mr. Briggs has been Executive Vice President of PLC and Protective since
October 1993. From January 1993 to October 1993 he was Senior Vice President,
Life Insurance and Investment Products of Protective and PLC. Mr. Briggs had
been Senior Vice President, Ordinary Marketing of PLC since August 1988 and of
Protective since April 1986. From July 1983 to April 1986, he was President of
First Protective Insurance Group, Inc.
Mr. Johns has been Executive Vice President and Chief Financial Officer of
PLC and Protective since October 1993. 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 Parisian Services, Inc.
Mr. Bentley has been Senior Vice President, Group of Protective since
December 1978. He has also served as Senior Vice President, Group of PLC since
August 1988. Mr. Bentley has been employed by Protective since October 1965.
Ms. Long has been Senior Vice President and General Counsel of PLC and
Protective since February 1, 1994. From August 2, 1993 to January 31, 1994, Ms.
Long served as General Counsel of PLC and from February 1984 to January 31, 1994
she practiced law with the law firm of Maynard, Cooper & Gale, P.C.
Mr. Massengale has been Senior Vice President of Protective and PLC since
June 1992. From May 1989 to June 1992 Mr. Massengale was Senior Vice President,
Operations and Systems of Protective and PLC. From January 1983 to May 1989, he
was Senior Vice President, Corporate Systems of Protective and PLC.
Mr. Schultz has been Senior Vice President, Financial Institutions of
Protective and PLC since March 1993. Mr. Schultz served as Vice President,
Financial Institutions of Protective from February 1989 to
34
<PAGE>
March 1993 and of PLC from February 1993 to March 1993. From June 1977 through
January 1989, he was employed by and served in a number of capacities with The
Minnesota Mutual Life Insurance Company, finally serving as Director, Group
Sales.
Mr. Stuenkel has been Senior Vice President and Chief Actuary of Protective
and PLC since March 1987. From June 1986 to March 1987, he was Vice President
and Chief Actuary of Protective and PLC. From January 1982 to June 1986, he
served as Vice President and Ordinary Actuary of Protective. Mr. Stuenkel is a
Fellow in the Society of Actuaries and has been employed by Protective since
September 1978.
Mr. Williams has been Senior Vice President, Investments and Treasurer of
PLC since July 1981. Mr. Williams also serves as Senior Vice President,
Investments and Treasurer of Protective. Mr. Williams has been employed by
Protective since November 1964.
Mr. DeFoor has been Vice President and Controller, and Chief Accounting
Officer of Protective and PLC since April 1989. Mr. DeFoor is a certified public
accountant and has been employed by Protective since August 1982.
35
<PAGE>
EXECUTIVE COMPENSATION
Executive officers of Protective also serve as executive officers and/or
directors of one or more affiliated companies of PLC. Compensation expense
allocations are made as to each individual's time devoted to his duties as an
executive officer of Protective and its affiliates. The following table shows
the total compensation paid to the named executive officers of Protective by
Protective or any of its affiliates including PLC. Of the amounts of total
compensation shown in the Summary Compensation Table and other executive
compensation information below, approximately 100% of Mr. Nabers', Mr.
Williams', Mr. Bentley's Mr. Briggs', Mr. Massengale's total compensation, and
50% of Mr. Glass' total compensation is attributable to services performed for
or on behalf of Protective.
Directors of Protective who are also employees receive no compensation in
addition to their compensation as employees of Protective. Mr. Rushton receives
$200,000 per year for his service as Chairman of the Board of PLC. Mr. Rushton
is also eligible to receive payment of any Performance Share Plan awards, if
earned, that were awarded to him during his tenure as Chief Executive Officer of
PLC.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
OTHER LONG-TERM ALL
ANNUAL INCENTIVE PLAN OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION PAYOUTS(2) COMPENSATION(3)
(A) (B) (C) (D) (E) (H) (I)
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DRAYTON NABERS, JR. 1993 $ 398,583 $ 365,700 $ 2,238 $ 413,654 $ 6,746
President and Chief Executive 1992 339,769 226,800 7,488 77,439 6,546
Officer since May 1992 1991 295,000 193,800 140,790
President and Chief Operating
Officer from August 1982 to May
1992
- ------------------------------------------------------------------------------------------------------------------
A. S. WILLIAMS 1993 227,008 137,800 4,020 172,641 6,746
Senior Vice President, 1992 208,333 126,000 9,270 39,022 6,546
Investments and Treasurer 1991 195,833 108,500 71,865
- ------------------------------------------------------------------------------------------------------------------
ORMOND L. BENTLEY 1993 200,217 115,800 3,886 164,094 6,746
Senior Vice President, Group 1992 185,250 89,000 8,395 39,022 6,546
1991 172,500 90,600 71,865
- ------------------------------------------------------------------------------------------------------------------
R. STEPHEN BRIGGS 1993 222,392 149,100 4,218 152,129 6,746
Executive Vice President 1992 185,250 71,900 9,468 40,262 6,546
1991 172,833 144,900 74,165
- ------------------------------------------------------------------------------------------------------------------
JIM E. MASSENGALE 1993 184,417 97,800 1,249 158,966 5,991
Senior Vice President 1992 173,833 61,300 3,989 39,022 6,546
1991 166,167 81,400 71,865
- ------------------------------------------------------------------------------------------------------------------
DENNIS R. GLASS 1993 218,279 -0- 1,050 -0- -0-
Executive Vice President and
Chief 1992 246,667 104,200 6,300 -0- 6,546
Financial Officer from September
1991 1991 80,000 114,000
to October 1993
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE>
Footnotes:
(1) AIP bonuses are earned based upon PLC's Company-wide performance, and may
also be based upon divisional and/or individual performance. The chief
executive officer's AIP bonus is based entirely on PLC's net income,
specifically, return on equity and earnings per share growth.
(2) See also the Long-Term Incentive Plan -- Awards in Last Fiscal Year table.
(3) Matching contributions to PLC's 401(k) and Stock Ownership Plan.
The above table sets forth certain information for the year ended December
31, 1993 relating to the Chief Executive Officer and the four most highly
compensated executive officers of PLC whose total remuneration from PLC and all
subsidiaries exceeded $100,000. The above table also includes information
concerning Mr. Glass, who resigned as Executive Vice President and Chief
Financial Officer in October 1993.
PLC has established a Deferred Compensation Plan for Officers (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. Bonuses so deferred are credited to the officers
in cash or PLC stock equivalents or a combination thereof. The cash equivalent
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 as specified by the
officers in accordance with the Officers' Plan unless accelerated under certain
provisions, including upon a change in control of PLC.
LONG-TERM INCENTIVE PLAN -- AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS UNDER
NON-STOCK PRICE-BASED PLANS (IN SHARES)
NUMBER OF PERFORMANCE OR
SHARES, OTHER PERIOD
UNITS OR UNTIL
OTHER RIGHTS MATURATION OR
NAME (#) PAYOUT THRESHOLD TARGET MAXIMUM
(A) (H) (C) (D) (E) (F)
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Drayton Nabers, Jr. 7,300 shares December 31, 1996 3,650 7,300 9,125
- ------------------------------------------------------------------------------------------------------------------
R. Stephen Briggs 2,400 shares December 31, 1996 1,200 2,400 3,000
- ------------------------------------------------------------------------------------------------------------------
Ormond L. Bentley 2,400 shares December 31, 1996 1,200 2,400 3,000
- ------------------------------------------------------------------------------------------------------------------
Jim E. Massengale 2,250 shares December 31, 1996 1,125 2,250 2,813
- ------------------------------------------------------------------------------------------------------------------
A. S. Williams III 2,700 shares December 31, 1996 1,350 2,700 3,375
- ------------------------------------------------------------------------------------------------------------------
Dennis R. Glass 3,150 shares December 31, 1996 1,575 3,150 3,938
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Executive officers are eligible for awards under PLC's long-range
Performance Share Plan ("Plan"). Under the Plan, the criterion for payment of
performance share awards is made in accordance with PLC's average return on
average equity for a four-year period compared with that of a comparison group
of publicly held life insurance companies, multi-line insurers and insurance
holding companies during the award period. With respect to 1993 awards, the
entire award is earned only if PLC's average return on average equity for the
four-year period ranks in the top 25% of the comparison group. If PLC ranks in
the top 10% of the comparison group, 125% 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 Plan provides for interpolation between thresholds to determine the
exact percentage to be paid.
37
<PAGE>
In 1993, the Compensation and Management Succession Committee of PLC's Board
of Directors awarded performance shares, as indicated, to the above named
executives, which are not payable, if at all, until the results of the
comparison group of companies for the four-year period ending December 31, 1997
are known.
Executive officers and key employees of Protective are eligible for awards
under the Performance Share Plan. Under the Performance Share Plan, the
criterion for payment of performance share awards is made in accordance with
PLC's average return on average equity for an award period (up to five years)
compared with that of a comparison group of publicly held life insurance
companies, multiline insurers and insurance holding companies during the award
period. The comparison group of companies consists of the 40 largest publicly
held stock life and multiline insurance companies as listed in the NATIONAL
UNDERWRITER, "INSURANCE STOCK RESULTS", each having net worth in excess of $100
million, ranked according to net worth at January 1, 1993.
With respect to 1993 awards, the entire award is earned only if PLC's
average return on average equity 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,
125% 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.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
REMUNERATION YEARS OF SERVICE
15 20 25 30 35
<S> <C> <C> <C> <C> <C>
$ 125,000 $28,177 $37,569 $46,961 $56,353 $65,745
150,000 34,177 45,569 56,961 68,353 79,745
175,000* 40,177 53,569 66,961 80,353 93,745
200,000* 46,177 61,569 76,961 92,353 107,745
225,000* 58,177 77,569 96,961 104,353 121,745*
250,000* 52,177 69,569 86,961 116,353 135,745*
300,000* 70,177 93,569 116,961 140,353* 163,745*
400,000* 94,177 125,569* 156,961* 188,353* 219,745*
500,000* 118,177 157,569* 196,961* 236,353* 275,745*
600,000* 142,177* 189,569* 236,961* 284,353* 331,745*
700,000* 166,177* 221,569* 276,961* 332,353* 387,745*
800,000* 190,177* 253,569* 316,961* 380,353* 443,745*
900,000* 214,177* 285,569* 356,961* 428,353* 499,745*
1,000,000* 238,177* 317,569* 396,961* 476,353* 555,745*
<FN>
- ------------------------------
* Current pension law limits the maximum annual benefit payable at normal
retirement age under a defined benefit plan to $118,800 for 1994 and is
subject to increase in later years. In addition, in 1994, such a plan may
not take into account annual compensation in excess of $150,000, which
amount is similarly subject to increase in later years. PLC's Benefit
Plan, adopted effective September 1, 1984, and
</TABLE>
38
<PAGE>
<TABLE>
<S> <C>
amended and restated as of January 1, 1989, provides for payment, outside
of the Pension Plan, of the difference between (1) the fully accrued
benefits which would be due under the Pension Plan absent both of the
aforesaid limitations and (2) the amount actually payable under the
Pension Plan as so limited.
</TABLE>
All officers, as well as the other salaried employees of PLC and its
wholly-owned subsidiaries, after completion of one year of service and
attainment of age 21, are covered by the Protective Life Corporation Pension
Plan ("Pension Plan'), which is a qualified defined benefit pension plan
generally providing an annual pension beginning at normal retirement age (or
later retirement) and continuing for life.
The above table illustrates estimated gross annual benefits which would be
payable for life at normal retirement age by the Pension Plan for employees with
average compensation (remuneration under the table above) and years of service.
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 under a Deferred
Compensation Plan maintained by PLC) may be included in obtaining the average
compensation.
The annual benefit at normal retirement age will be equal to (i) 1.1% of the
employee's average compensation multiplied by years of service up to 35 years,
plus (ii) 0.5% of the employee's average compensation in excess of covered
compensation, for purposes of social security, multiplied by years of service up
to 35 years, plus (iii) 0.55% of the employee's average compensation multiplied
by years of service in excess of 35 years. Benefits in the above table are not
reduced by social security or other offset amounts.
The named executives and their estimated length of service as of December
31, 1993 are provided in the following table.
<TABLE>
<CAPTION>
- ------------------------------------------------
NAME YEARS OF SERVICE
<S> <C>
Drayton Nabers, Jr. 15
R. Stephen Briggs 22
Ormond L. Bentley 28
Jim E. Massengale 11
A. S. Williams III 29
Dennis R. Glass 2
- ------------------------------------------------
</TABLE>
A straight life annuity is the normal benefit form, but actuarially
equivalent options are available. Participants age 55 and older who have 10 or
more years of vested service may retire before normal retirement age 65 with
reduced benefits. After three years of service, participants will be 20% vested
and an additional 20% interest will be vested for each succeeding year of
service in excess of three. Eligible spouses will receive survivor benefits
following the death of the participant.
SEVERANCE COMPENSATION AGREEMENTS
PLC has entered into Severance Compensation Agreements with all named
executive officers and several other officers. These agreements provide for
certain payments upon termination of employment or reduction in duties or
compensation following certain events constituting a "change in control". The
agreements may be terminated or modified by PLC's Board of Directors at any time
prior to a change in control. The benefits granted upon termination of
employment are (i) continuation (for up to twenty four
39
<PAGE>
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 and (ii) a plan distribution. The distribution shall
consist of (1) the payment in full of all pending Performance Share Awards as if
fully earned, using the higher of the market price or price of PLC's stock in
the transaction effecting the change in control, and (2) delivery of an annuity
to equal increased benefits under the Pension Plan resulting from an additional
three years of credited service (subject to the Pension Plan's maximum on
crediting service).
By an amendment to the Severance Compensation Agreements adopted in March
1992, the maximum benefits are limited to two times the sum of the executive's
most recent annualized base salary plus the last earned bonus under PLC's Annual
Incentive Plan (not to exceed certain tax limitations). The amendment also
provides that if the Performance Share Plan had terminated before the time of
payment of benefits, the amount of benefits under the Severance Compensation
Agreements would be reduced by the amount of the payment due the executive under
the terms of the Performance Share Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation and Management Succession Committee of PLC ("Committee")
has oversight and ultimate control of the compensation paid to the Chief
Executive Officer and other officers and employees of PLC and its subsidiaries,
whether by salary or under any other compensation plan, including PLC's Annual
Incentive Plan and its Performance Share Plan. The members of the Committee are
John J. McMahon, Jr. (Chairman), John W. Woods, Edward L. Addison, Ronald L.
Kuehn, Jr., and Herbert A. Sklenar. Messrs. McMahon, Woods, Addison, Kuehn, and
Sklenar are executive officers of McWane, Inc., AmSouth Bancorporation, The
Southern Company, Sonat Inc., and Vulcan Materials Company, respectively.
No member of the Committee was an officer or employee of PLC or any of its
subsidiaries at any time during 1993. Also, no member of the Committee was
formerly an officer of PLC or any of its subsidiaries.
During 1993, McWane, Inc., Sonat Inc. and Vulcan Materials Company, with
which Committee members Messrs. McMahon, Kuehn, and Sklenar, respectively, were
affiliated, paid Protective premiums, fees, or investment product deposits for
various types of insurance in the amount of $99,706, $546,000 and $4,098,077,
respectively.
Mr. Rushton, PLC's Chairman of the Board, and prior to May 1992, also its
Chief Executive Officer, serves as a director of AmSouth Bancorporation and
through April 1993, served as a member of its Compensation Committee. Mr. Woods,
the Chairman of the Board and Chief Executive Officer of AmSouth Bancorporation,
serves as a director of PLC and as a member of PLC's Committee. AmSouth
Bancorporation and subsidiaries maintain a group life insurance program with
Protective (which through reinsurance is shared with two other companies).
AmSouth Bank N.A. serves as Trustee for Protective's retired lives reserve
program. In 1993, Protective and PLC paid $1,300,421 in credit and mortgage
insurance and annuity commissions and $2,418,996 in interest, mortgage loan
service fees, and other charges to AmSouth Bank N.A. and other subsidiaries of
AmSouth Bancorporation. Additionally, during 1993 AmSouth Bancorporation and
certain of its subsidiaries paid Protective premiums, fees, or investment
product deposits for various types of insurance in the amount of $4,353,541.
Mr. Rushton also serves as a director of The Southern Company. Mr. Addison,
the Chairman of the Board and Chief Executive Officer of The Southern Company,
serves as a director of PLC and on PLC's
40
<PAGE>
Committee. During 1993, the following subsidiaries of The Southern Company,
Southern Company Services, Inc. and affiliates and Alabama Power Company paid
Protective premiums, fees, or investment product deposits for various types of
insurance in the amount of $862,533.
MANAGEMENT OWNERSHIP OF PLC STOCK
No director or named executive officer of Protective owns any stock of
Protective or of any affiliated corporation except for the shares of PLC common
stock which are shown as owned as of March 1993:
<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>
William J. Rushton III 353,278(3) 5,547(4) 2.6%
Drayton Nabers, Jr. 28,511(5) 3,692 *
R. Stephen Briggs 16,439(7) -0- *
John D. Johns 1,000 -0- *
Ormond L. Bentley 9,260(6) -0- *
Deborah J. Long -0- -0- *
Jim E. Massengale 17,679(8) -0- *
Wayne E. Stuenkel 3,668(9) -0- *
A. S. Williams III 15,478(10) -0- *
Steven A. Schultz 1,132(11)
All directors and executive officers
as a group (10 persons) 446,445(12) 9,239(2) 3.2%
<FN>
- ------------------------
* denotes 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, arrangement, undertaking 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.
(3) Includes 14,745 shares held in PLC's 401(k) and Stock Ownership Plan for
which Mr. Rushton has sole voting power.
(4) Shares owned by the wife of Mr. Rushton.
(5) Includes 2,600 shares held in PLC's 401(k) and Stock Ownership Plan for
which Mr. Nabers has sole voting power.
</TABLE>
41
<PAGE>
<TABLE>
<S> <C>
(6) Includes 1,275 shares held in PLC's 401(k) and Stock Ownership Plan for
which Mr. Bentley has sole voting power.
(7) Includes 5,246 shares held in PLC's 401(k) and Stock Ownership Plan for
which Mr. Briggs has sole voting power.
(8) Includes 6,673 shares held in PLC's 401(k) and Stock Ownership Plan for
which Mr. Massengale has sole voting power.
(9) Includes 1,284 shares held in PLC's 401(k) and Stock Ownership Plan for
which Mr. Stuenkel has sole voting power.
(10) Includes 5,108 shares held in PLC's 401(k) and Stock Ownership Plan for
which Mr. Williams has sole voting power.
(11) Includes 561 shares held in PLC's 401(k) and Stock Ownership Plan for which
Mr. Schultz has sole voting power.
(12) Included are the interests of the persons as of December 31, 1993 in 37,492
shares held in PLC's 401(k) and Stock Ownership Plan, which owned a total
of 616,201 shares on such date. Each 401(k) and Stock Ownership Plan
participant has voting power with respect to the shares held in the
participant's accounts. The 442,073 shares held in PLC's 401(k) Stock
Ownership Plan Trust which have not been allocated to participants will be
voted by the Trustees in accordance with the majority vote of all
participants.
</TABLE>
CERTAIN TRANSACTIONS
Protective leases furnished office space, and computers to affiliates of
PLC. Lease revenues were $2.8 million in 1993, $2.6 million in 1992, and $2.8
million in 1991. Protective purchases data processing, legal, investment and
management services from affiliates. The costs of such services were $20.4
million, $27.5 million, and $24.7 million in 1993, 1992, and 1991, respectively.
Commissions paid to affiliated marketing organizations of $5.8 million, $4.8
million, and $2.8 million in 1993, 1992, and 1991, respectively, were included
in deferred policy acquisition costs.
In 1990, PLC's Board of Directors approved the formation of an Employee
Stock Ownership Plan (ESOP). On December 1, 1990, Protective transferred to the
ESOP 520,000 shares of PLC's common stock held by it in exchange for a $6.3
million note. The outstanding balance of the note at December 31, 1993 was $6.0
million. Protective contributed 2,137 shares of PLC common stock in 1991, 728
shares in 1992 and 103 shares in 1993 to the ESOP to fulfill its portion of
PLC's 1991, 1992, and 1993 matching obligation.
Indebtedness of related parties are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Subordinated debenture of PLC, at outstanding balance.............. -- $ 3,678
Term note of PLC, at outstanding balance........................... -- 5,318
Receivables from (payables to) affiliates under control of PLC..... $ 279 1,898
</TABLE>
In 1991, Protective sold $5.3 million of assets at book value to PLC in
exchange for a term note. At December 31, 1991 and 1990, Protective owned
248,781 and 250,918, unregistered shares of PLC, respectively. In December 1992,
PLC purchased its shares owned by Protective at statutory book value, and repaid
its subordinated debenture and term notes.
42
<PAGE>
In 1990, Protective issued to PLC a $26.9 million surplus debenture to
finance the assumption of a block of insurance. During 1992, Protective issued
to PLC a second surplus debenture in the amount of $15 million to finance the
assumption of another block of insurance. In 1993, Protective issued to PLC two
surplus notes totaling $35 million to finance acquisitions and provide
additional statutory capital. The outstanding balances of the surplus debentures
combined was $48.9 million at December 31, 1993.
Certain corporations with which PLC's directors were affiliated paid
Protective premiums, fees, or investment product deposits for various types of
group insurance as follows:
<TABLE>
<CAPTION>
1993 1992 1991
------------ ------------ ------------
<S> <C> <C> <C>
Alabama Power Company................................................... $ 696,421 $ 624,408 $ 715,866
AmSouth Bancorporation and subsidiaries................................. 4,353,541 4,718,562 4,069,419
Coca-Cola Bottling Company United, Inc.................................. 133,544 154,896 146,773
McWane, Inc. and affiliates............................................. 99,706 105,111 109,752
National Bank of Commerce............................................... 96,852 60,855 74,424
Pattillo Construction Company, Inc...................................... 44,555 44,555 41,114
Sonat Inc. and subsidiaries............................................. 546,000 726,000 792,000
Southern Company Services, Inc. and affiliates.......................... 166,112 171,481 108,731
Southern Research Institute............................................. 71,017 74,991 74,761
SunTrust Banks, Inc..................................................... -- 52,880 67,594
Vulcan Materials Company................................................ 4,098,077 4,151,050 4,209,743
</TABLE>
Other transactions between Protective and companies with which PLC's
directors were affiliated during 1993, 1992, or 1991 follow.
AmSouth Bancorporation and subsidiaries maintain a group life insurance
program with Protective (which through reinsurance is shared with two other
companies). AmSouth Bank N.A. serves as Trustee for Protective Life's retired
lives reserve program. In 1993, Protective Life and the Company paid $1,300,421
in credit and mortgage insurance and annuity commissions and $2,418,996 in
interest, mortgage loan service fees, and other charges to AmSouth Bank N.A. and
other subsidiaries of AmSouth Bancorporation.
Protective and PLC paid $30,817, $196,416, and $308,359, in interest,
mortgage loan service fees, credit insurance commissions, and other charges to
National Bank of Commerce in 1993, 1992, and 1991, respectively. Protective also
sold $15,000,000 of participations in mortgage loans originated by Protective to
National Bank of Commerce in 1991.
In 1993, PLC paid $1,932,833, paid $1,683,925 in 1992, and in 1991 paid
$1,303,645 in accident and health insurance premiums to Southeast Health Plan,
Inc.
During 1993, PLC paid $409,878 in fees to Equifax, Inc. which has one
director in common with the Company.
43
<PAGE>
LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary routine
litigation incidental to the business of PLC and Protective, to which PLC or
Protective or any of its subsidiaries is a party or of which any of PLC or
Protective's properties is the subject.
EXPERTS
The consolidated balance sheets of Protective Life Insurance Company and
subsidiaries as of December 31, 1993 and 1992 and the consolidated statements of
income, stockholder's equity, and cash flows for each of the three years in the
period ended December 31, 1993 and the related financial statement schedules, in
this Prospectus, have been included herein in reliance on the report, which
includes an explanatory paragraph with respect to changes in the Company's
method of accounting for certain investments in debt and equity securities in
1993 and postretirement benefits other than pensions in 1992, of Coopers &
Lybrand, independent certified public accountants, given on the authority of
that firm as experts in auditing and accounting.
The financial statements of Wisconsin National Life Insurance Company as of
December 31, 1992 and 1991, and for each of the years in the two year period
ended December 31, 1992, included herein and elsewhere in the Registration
Statement have been included herein and in the Registration Statement in
reliance upon the report of KPMG Peat Marwick, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
LEGAL MATTERS
Sutherland, Asbill & Brennan 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 Protective 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.
44
<PAGE>
APPENDIX A
MARKET VALUE ADJUSTMENT
The formula which will be used to determine the Market Value Adjustment is:
( (1+g)/(1+c)) TO THE POWER OF (N/12)
g = The Guaranteed Interest Rate in effect for the current Guaranteed Period
(expressed as a decimal, e.g., 1% = .01).
c = The current Guaranteed Interest Rate that the Company is offering for a
Guaranteed Period of a duration measured in months as represented by N
(expressed as a decimal, e.g., 1% = .01).
N = The number of months from the Surrender Date to the end of the current
Guaranteed Period.
Surrender Charge ("SC") equals six months interest on the amount surrendered
from the Sub-Account Value. The Surrender Charge for all full and partial
surrenders made during an initial Guaranteed Period shall not exceed, in the
aggregate, a total of six months' interest on the amount of the Annuity Deposit
originally allocated to the Sub-Account(s) from which the full or partial
surrender is made. The Surrender Charge for all full and partial surrenders made
during a Subsequent Guaranteed Period shall not exceed, in the aggregate, a
total of six months' interest on the amount of the Sub-Account Value(s)
originally transferred to a Subsequent Guaranteed Period from which the full or
partial surrender is made. The SC will apply in every year if the Guaranteed
Period is less than or equals 7, or for the first 7 years if the Guaranteed
Period is greater than 7 years.
MARKET VALUE ADJUSTMENT AND SURRENDER CHARGE EXAMPLE I
FULL SURRENDER AFTER COMPLETION OF YEAR 3
<TABLE>
<S> <C>
Annuity Deposit........................................................... $50,000
Sub-Account 1 (50% of Deposit)............................................ $25,000
Guaranteed Period....................................................... 5 Years
Guaranteed Interest Rate (g1)........................................... 5.00%
Sub-Account 2 (50% of Deposit)............................................ $25,000
Guaranteed Period....................................................... 7 Years
Guaranteed Interest Rate (g2)........................................... 5.50%
Current Rates at Surrender Date (3 years after deposit on day 1 of year 4)
Guaranteed Period....................................................... 2 Years
Guaranteed Periods X 12 (n1)............................................ 24
Guaranteed Interest Rate (c1)........................................... 4.00%
Guaranteed Period....................................................... 4 Years
Guaranteed Period X 12 (n2)............................................. 48
Guaranteed Interest Rate (c2)........................................... 4.50%
</TABLE>
A-1
<PAGE>
Surrender Charge ("SC") equals six months interest on the amount surrendered
from the Sub-Account Value. The SC will apply in every year if the Guaranteed
Period is less than or equals 7, or for the first 7 years if the Guaranteed
Period is greater than 7 years.
<TABLE>
<CAPTION>
SUB-ACCOUNT 1 SUB-ACCOUNT 2 ACCOUNT VALUE
---------------- ---------------- -------------
<S> <C> <C> <C>
Beginning Value..................... $ 25,000 $25,000 $50,000
X (1+Guaranteed Interest Rate).... 1.05 1.055
-------- --------
$ 26,250 $26,375
Value at end of Year 1.............. $ 26,250 $26,375 $52,625
X (1+Guaranteed Interest Rate).... 1.05 1.055
-------- --------
$ 27,563 $27,826
Value at end of Year 2.............. $ 27,563 $27,826 $55,389
X (1+Guaranteed Interest Rate).... 1.05 1.055
-------- --------
$ 28,941 $29,356
Value at end of Year 3 (V).......... $ 28,941 $29,356 $58,297
Prior Year's Interest (PYI)
Value Yr 3 - Yr 2................... $ 1,378 $ 1,530
Market Value Adjustment (MVA) =..... ( (1+g1)/ (1+c1)) TO THE POWER OF ( (1+g2)/ (1+c2)) TO THE POWER OF
(N1/12) (N2/12)
(MVA) =........................... ( (1+0.05)/ (1+0.04)) TO THE POWER OF ( (1+0.055)/ (1+0.045)) TO THE POWER
(24/12) OF (48/12)
(MVA) =........................... 1.01932322 1.03883046
Value after Market Value
Adjustment (VMVA)
(V - PYI) X MVA =................. $ 28,096 $28,906 $57,002
Surrender Charge % of Account Value
at end of previous year (SC%)
SC% =............................... ( (1+0.05) TO THE POWER OF 1/2) -1 ( (1+0.055) TO THE POWER OF 1/2) -1
SC% =............................... 2.47% 2.71%
Surrender Charge (SC)*
(V-PYI) X SC% =................... (28,941-1,378) X 2.47% (29356-1,530) X 2.71%
SC =.............................. $ 617 $ 678 $ 1,295
Net Value (VMVA-SC + PYI)......... $ 28,857 $29,758 $58,615
</TABLE>
<TABLE>
<S> <C> <C> <C>
MARKET VALUE ADJUSTMENT EXAMPLE II --
FULL SURRENDER AFTER COMPLETION OF 5 YEARS
Annuity Deposit..................... $100,000
Sub-Account 1 (50% of Deposit)...... $ 50,000
Guaranteed Period................. 10 Years
Guaranteed Interest Rate.......... 5.75%
Sub-Account 2 (50% of Deposit)...... $ 50,000
Guaranteed Period................. 15 Years
Guaranteed Interest Rate.......... 6.00%
Current Rates at Surrender Date
(5 years after Deposit on day 1
of year 6)
Guaranteed Period................. 5 Years
Guaranteed Interest Rate.......... 5.50%
Guaranteed Period................. 10 Years
Guaranteed Interest Rate.......... 6.25%
<FN>
- ------------------------
*Not to exceed six months interest on the Deposit.
</TABLE>
A-2
<PAGE>
<TABLE>
<CAPTION>
SUB-ACCOUNT 1 SUB-ACCOUNT 2 ACCOUNT VALUE
------------------------- ------------------------- -------------
<S> <C> <C> <C>
Beginning Value................................... $ 50,000 $ 50,000 $ 100,000
X (1+Guaranteed Interest Rate).................. 1.0575 1.06
-------- -------
$ 52,875 $ 53,000
Value at end of Year 1............................ $ 52,875 $ 53,000 $ 105,875
X (1+Guaranteed Interest Rate).................. 1.0575 1.06
-------- -------
$ 55,915 $ 56,180
Value at end of Year 2............................ $ 55,915 $ 56,180 $ 112,095
X (1+Guaranteed Interest Rate).................. 1.0575 1.06
-------- -------
$ 59,130 $ 59,551
Value at end of Year 3............................ $ 59,130 $ 59,551 $ 118,681
X (1+Guaranteed Interest Rate).................. 1.0575 1.06
-------- -------
$ 62,530 $ 63,124
Value at end of Year 4............................ $ 62,530 $ 63,124 $ 125,654
X (1+Guaranteed Interest Rate).................. 1.0575 1.06
-------- -------
$ 66,125 $ 66,911
Value at end of Year 5 (V)........................ $ 66,125 $ 66,911 $ 133,036
Prior Year's Interest (PYI)
(Value Yr5 - Value Y4)............................ $ 3,595 $ 3,787
Market Value Adjustment (MVA) =................... ( (1+0.0575)/ (1+0.055)) ( (1+0.06)/ (1+0.0625))
TO THE POWER OF (60/12) TO THE POWER OF (120/12)
Market Value Adjustment (MVA) =................... 1.01190463 0.97671817
Value after Market Value
Adjustment (VMVA)
(V-PYI) X MVA =................................. $ 63,274 $ 61,654 $ 124,928
Surrender Charge % (SC%)
SC% =............................................. ( (1+0.0575) TO THE POWER ( (1+ 0.06) TO THE POWER
OF 1/2) -1 OF 1/2) -1
SC% =............................................. 2.83% 2.96%
Surrender Charge (SC)*
(V-PYI) X SC %.................................. (66,125-3,595) X 2.83% (66,911-3,787) X 2.96%
SC =............................................ $ 1,417 $ 1,478 $ 2,895
Net Value
VMVA-SC + PYI..................................... $ 65,452 $ 63,963 $ 129,415
<FN>
- ------------------------
*Not to exceed six months interest on the Deposit.
</TABLE>
A-3
<PAGE>
( THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
PROTECTIVE LIFE INSURANCE COMPANY
Report of Independent Accountants.................................................... F-2
Consolidated Statements of Income for the years ended December 31, 1993, 1992, and
1991................................................................................ F-3
Consolidated Balance Sheets as of December 31, 1993 and 1992......................... F-4
Consolidated Statements of Stockholder's Equity for the years ended December 31,
1993, 1992, and 1991................................................................ F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1992,
and 1991............................................................................ F-6
Notes to Consolidated Financial Statements........................................... F-7
WISCONSIN NATIONAL LIFE INSURANCE COMPANY
Independent Auditors' Report......................................................... F-26
Balance Sheets as of December 31, 1992 and 1991...................................... F-27
Statements of Income for the years ended December 31, 1992 and 1991.................. F-28
Statements of Stockholder's Equity for the years ended December 31, 1992 and 1991.... F-29
Statements of Cash Flows for the years ended December 31, 1992 and 1991.............. F-30
Notes to Financial Statements........................................................ F-31
Condensed Balance Sheet as of July 30, 1993 (unaudited).............................. F-42
Condensed Statement of Income for the period January 1, 1993 through July 30, 1993
(unaudited)......................................................................... F-43
Condensed Statement of Cash Flows for the period January 1, 1993 through July 30,
1993 (unaudited).................................................................... F-44
Notes to Condensed Financial Statements (unaudited).................................. F-45
PRO FORMA STATEMENTS OF PROTECTIVE LIFE INSURANCE COMPANY
Pro Forma Consolidated Condensed Statement of Income for the year ended December 31,
1993 (unaudited).................................................................... F-46
Notes to Pro Forma Consolidated Condensed Statement of Income (unaudited)............ F-47
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Stockholder
Protective Life Insurance Company
Birmingham, Alabama
We have audited the consolidated financial statements and the financial
statement schedules of Protective Life Insurance Company and Subsidiaries,
included on pages F-3 through F-25 and S-1 through S-6, respectively, of this
Registration Statement on Form S-1. These financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Protective Life
Insurance Company and Subsidiaries as of December 31, 1993 and 1992, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1993, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedules referred to above, when considered in relation to the basic
financial statements take as a whole, present fairly, in all material respects,
the information required to be included therein.
As discussed in Note A to the consolidated financial statements, the Company
changed its method of accounting for certain investments in debt and equity
securities in 1993. Also as discussed in Note L to the consolidated financial
statements, the Company changed its method of accounting for postretirement
benefits other than pensions in 1992.
COOPERS & LYBRAND
COOPERS & LYBRAND
February 14, 1994
F-2
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1993 1992 1991
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES
Premiums and policy fees (net of premiums ceded: 1993 - $126,912; 1992 -
$109,355; 1991 - $89,927)................................................. $ 351,423 $ 323,136 $ 273,975
Net investment income...................................................... 354,165 274,991 222,619
Realized investment gains (losses)......................................... 5,054 (154) (3,085)
Other income............................................................... 4,756 10,675 7,495
---------- ---------- ----------
715,398 608,648 501,004
---------- ---------- ----------
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance: 1993 - $95,708; 1992
- $74,904; 1991 - $68,070)................................................ 461,636 409,557 346,591
Amortization of deferred policy acquisition costs.......................... 73,335 48,403 39,831
Other operating expenses................................................... 94,315 91,925 69,617
---------- ---------- ----------
629,286 549,885 456,039
---------- ---------- ----------
INCOME BEFORE INCOME TAX..................................................... 86,112 58,763 44,965
INCOME TAX EXPENSE
Current.................................................................... 33,039 19,475 11,699
Deferred................................................................... (3,082) (2,082) 325
---------- ---------- ----------
29,957 17,393 12,024
---------- ---------- ----------
INCOME BEFORE MINORITY INTEREST.............................................. 56,155 41,370 32,941
MINORITY INTEREST IN NET INCOME OF CONSOLIDATED SUBSIDIARIES................. 90 1,437
---------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE............ 56,155 41,280 31,504
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (NET OF INCOME TAX:
$542)....................................................................... 1,053
---------- ---------- ----------
NET INCOME................................................................... $ 56,155 $ 40,227 $ 31,504
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1993 1992
---------- ----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, 1993 at market (amortized cost: $2,985,670); 1992 at
amortized cost (market: $2,247,828).......................................... $3,051,292 $2,185,015
Equity securities, at market (cost: 1993-$33,331; 1992-$21,804)............... 40,596 26,588
Mortgage loans on real estate................................................. 1,408,444 1,178,864
Investment real estate, net of accumulated depreciation (1993-$3,126;
1992-$1,229)................................................................. 21,928 16,887
Policy loans.................................................................. 141,136 117,873
Other long-term investments................................................... 22,760 21,183
Short-term investments........................................................ 79,772 50,500
---------- ----------
Total investments........................................................... 4,765,928 3,596,910
Cash............................................................................ 23,951 11,567
Accrued investment income....................................................... 51,330 41,547
Accounts and premiums receivable, net of allowance for uncollectible
amounts (1993-$5,024; 1992-$1,108)............................................. 20,473 27,461
Reinsurance receivables......................................................... 102,559 4,406
Deferred policy acquisition costs............................................... 299,307 274,923
Property and equipment, net..................................................... 33,046 32,029
Receivables from related parties................................................ 382 279
Other assets.................................................................... 7,473 7,629
Assets held in separate accounts................................................ 3,400 3,406
---------- ----------
$5,307,849 $4,000,157
---------- ----------
---------- ----------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits and claims............................................. $1,380,845 $ 929,592
Unearned premiums............................................................. 88,785 75,177
---------- ----------
1,469,630 1,004,769
Guaranteed investment contract deposits......................................... 2,015,075 1,694,530
Annuity deposits................................................................ 1,005,742 674,062
Other policyholders' funds...................................................... 141,975 122,770
Other liabilities............................................................... 74,375 64,350
Accrued income taxes............................................................ 7,483 2,410
Deferred income taxes........................................................... 69,118 51,842
Short-term debt................................................................. 20 34
Long-term debt.................................................................. 98 2,014
Indebtedness to related parties................................................. 48,943 41,143
Liabilities related to separate accounts........................................ 3,400 3,406
Minority interest in consolidated subsidiaries.................................. 1,311
---------- ----------
Total liabilities......................................................... 4,835,859 3,662,641
---------- ----------
COMMITMENTS AND CONTINGENCIES -- NOTE G
REDEEMABLE PREFERRED STOCK, $1.00 par value, at redemption value
Shares authorized and issued: 2,000............................................ 2,000 2,000
---------- ----------
STOCKHOLDER'S EQUITY
Common Stock, $1.00 par value................................................... 5,000 5,000
Shares authorized and issued: 5,000,000
Additional paid-in capital...................................................... 126,494 85,494
Net unrealized gains on investments (Net of income tax: 1993-$19,774;
1992-$1,628)................................................................... 39,284 3,156
Retained earnings............................................................... 305,176 247,986
Note receivable from PLC Employee Stock Ownership Plan.......................... (5,964) (6,120)
---------- ----------
Total stockholder's equity................................................ 469,990 335,516
---------- ----------
$5,307,849 $4,000,157
---------- ----------
---------- ----------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NET NOTE
ADDITIONAL UNREALIZED RECEIVABLE TOTAL
COMMON PAID-IN GAINS (LOSSES) RETAINED FROM PLC STOCKHOLDER'S
STOCK CAPITAL ON INVESTMENTS EARNINGS ESOP EQUITY
------ ---------- --------------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1990................... $5,000 $ 74,011 $ (486) $185,501 $ (6,890) $ 257,136
Net income for 1991........................ 31,504 31,504
Common dividends ($.70 per share).......... (3,492) (3,492)
Preferred dividends ($1,250 per share)..... (2,500) (2,500)
Decrease in net unrealized losses on
investments............................... 4,467 4,467
Sale of PLC Stock to PLC ESOP (2,137
shares)................................... 28 28
Decrease in note receivable from PLC
ESOP...................................... 627 627
Purchase of minority interest of National
Deposit................................... 10,698 10,698
------ ---------- ------- -------- ---------- -------------
Balance, December 31, 1991................... 5,000 84,737 3,981 211,013 (6,263) 298,468
Net income for 1992........................ 40,227 40,227
Common dividends ($.38 per share).......... (1,904) (1,904)
Preferred dividends ($675 per share)....... (1,350) (1,350)
Decrease in net unrealized gains on
investments............................... (825) (825)
Sale of PLC Stock to PLC ESOP (728
shares)................................... 16 16
Sale of PLC Stock to PLC (39,688 shares)... 643 643
Transfer of assets from PLC................ 98 98
Decrease in note receivable from PLC
ESOP...................................... 143 143
------ ---------- ------- -------- ---------- -------------
Balance, December 31, 1992................... 5,000 85,494 3,156 247,986 (6,120) 335,516
Net income for 1993........................ 56,155 56,155
Preferred dividends ($750 per share)....... (1,500) (1,500)
Transfer of Southeast Health Plan, Inc.
common stock to PLC....................... 2,535 2,535
Increase in net unrealized gains on
investments............................... 36,128 36,128
Capital contribution from PLC.............. 41,000 41,000
Decrease in note receivable from PLC
ESOP...................................... 156 156
------ ---------- ------- -------- ---------- -------------
Balance, December 31, 1993 -- Note H......... $5,000 $ 126,494 $ 39,284 $305,176 $ (5,964) $ 469,990
------ ---------- ------- -------- ---------- -------------
------ ---------- ------- -------- ---------- -------------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES 1993 1992 1991
---------- ---------- ----------
<S> <C> <C> <C>
Net income.................................................................................. $ 56,155 $ 40,227 $ 31,504
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred policy acquisition costs......................................... 73,335 48,403 39,831
Capitalization of deferred policy acquisition costs....................................... (92,935) (81,160) (62,711)
Depreciation expense...................................................................... 2,660 2,974 2,803
Deferred income taxes..................................................................... 16,987 (3,280) 1,077
Accrued income taxes...................................................................... 5,040 2,368 (743)
Interest credited to universal life and investment products............................... 220,772 173,658 132,533
Policy fees assessed on universal life and investment products............................ (67,314) (46,383) (37,546)
Change in accrued investment income and other receivables................................. (91,864) (2,135) (32,082)
Change in policy liabilities and other policyholder funds of traditional life and health
products................................................................................. 47,212 4,307 (8,003)
Change in other liabilities............................................................... 11,970 6,230 5,682
Other (net)............................................................................... 10,517 (3,377) 8,236
---------- ---------- ----------
Net cash provided by operating activities..................................................... 192,535 141,832 80,581
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cost of investments acquired................................................................ (2,320,628) (1,997,470) (1,521,244)
Maturities and principal reductions of investments.......................................... 1,319,590 881,795 574,018
Sale of investments......................................................................... 244,683 338,850 191,896
Acquisitions and bulk reinsurance assumptions............................................... 14,170 23,274
Principal payments on subordinated debenture of PLC......................................... 3,678 282
Purchase of property and equipment.......................................................... (3,451) (2,679) (3,857)
Sale of property and equipment.............................................................. 1,817 181 392
---------- ---------- ----------
Net cash used in investing activities......................................................... (743,819) (752,371) (758,513)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowing under line of credit arrangements and long-term debt................ 574,423 297,300 132,465
Proceeds from borrowing from PLC............................................................ 4,700
Proceeds from surplus note to PLC........................................................... 35,000 15,000
Capital contribution from PLC............................................................... 41,000
Principal payments on line of credit arrangements and long-term debt........................ (577,767) (297,331) (154,188)
Principal payment on surplus note to PLC.................................................... (22,500) (4,500) (1,000)
Dividends to stockholder.................................................................... (1,500) (3,254) (5,992)
Change in universal life and investment product deposits.................................... 515,012 607,721 686,458
---------- ---------- ----------
Net cash provided by financing activities..................................................... 563,668 619,636 657,743
---------- ---------- ----------
INCREASE(DECREASE) IN CASH.................................................................... 12,384 9,097 (20,189)
CASH AT BEGINNING OF YEAR..................................................................... 11,567 2,470 22,659
---------- ---------- ----------
CASH AT END OF YEAR........................................................................... $ 23,951 $ 11,567 $ 2,470
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year:
Interest on notes and mortgages payable................................................... $ 3,803 $ 326 $ 1,026
Income taxes.............................................................................. $ 27,432 $ 17,278 $ 10,495
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Minority interest in consolidated subsidiary................................................ $ (1,311) $ 90 $ (4,549)
Merger of subsidiary........................................................................ $ 10,698
Sale of PLC stock to PLC.................................................................... $ 643
Sale of PLC stock to ESOP................................................................... $ 16 $ 28
Reduction of principal on note from ESOP.................................................... $ 156 $ 143 $ 627
Acquisitions and bulk reinsurance assumptions
Assets acquired........................................................................... $ 423,140 $ 103,557
Liabilities assumed....................................................................... (429,580) (130,008)
---------- ----------
Net....................................................................................... $ (6,440) $ (26,451)
---------- ----------
---------- ----------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE_A_--_SIGNIFICANT ACCOUNTING POLICIES
____BASIS OF PRESENTATION
____The accompanying consolidated financial statements of Protective Life
Insurance Company and subsidiaries ("Protective") are prepared on the basis of
generally accepted accounting principles. Such accounting principles differ from
statutory reporting practices used by insurance companies in reporting to state
regulatory authorities. See also Note B.
____ENTITIES INCLUDED
____The consolidated financial statements include the accounts, after
intercompany eliminations, of Protective Life Insurance Company and its
wholly-owned subsidiaries including Wisconsin National Life Insurance Company
("Wisconsin National") and American Foundation Life Insurance Company ("American
Foundation"). Protective is a wholly-owned subsidiary of Protective Life
Corporation ("PLC"), an insurance holding company.
____Additionally, the financial statements include the accounts of
majority-owned subsidiaries. The ownership interest of the other stockholders of
these subsidiaries is called a minority interest and is reported as a liability
of Protective and as an adjustment to income.
____PLC has from time to time merged other life insurance companies it has
acquired (or formed) into Protective. Acquisitions have been accounted for as
purchases by PLC. The results of such mergers have been included in the
accompanying financial statements as if the mergers into Protective had occurred
on the dates the merged companies were acquired (or formed) by PLC. Such mergers
into Protective have been accounted for in a manner similar to that in
pooling-of-interests accounting.
____RECENTLY ISSUED ACCOUNTING STANDARDS
____In 1992, Protective adopted Statement of Financial Accounting Standards
("SFAS") No. 106, "Employers' Accounting For Postretirement Benefits Other Than
Pensions." SFAS No. 106 was accounted for as a change in accounting principle
with the cumulative effect reported as a reduction to income.
____In 1993, Protective adopted SFAS No. 109, "Accounting for Income Taxes."
Adoption of this accounting standard did not have a material effect on
Protective's financial statements.
____Protective also adopted in 1993 SFAS No. 113, "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts." This statement
eliminates the reporting of insurance activities net of the effects of
reinsurance ceded. The adoption of this statement increased reported assets and
liabilities by approximately $97.9 million at December 31, 1993. Protective has
not restated any previously reported financial statements as a result of
adopting this statement.
____At December 31, 1993, Protective adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." For purposes of adopting
SFAS No. 115 Protective has classified all of its investments in fixed
maturities, equity securities, and short-term investments as "available for
sale." As prescribed by SFAS No. 115, these investments are recorded at their
market values at December 31, 1993 with the resulting net unrealized gain
recorded as an increase in stockholder's equity. The effect of adopting SFAS No.
115 at December 31, 1993 was to increase fixed maturities by $65.6 million,
decrease deferred policy acquisition
F-7
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE_A_--_SIGNIFICANT ACCOUNTING POLICIES_(CONTINUED)
costs by $12.4 million, increase the liability for deferred income taxes by
$18.6 million, and increase stockholder's equity by $34.6 million. In accordance
with the provisions of SFAS No. 115, 1992 amounts have not been restated.
____INVESTMENTS
____Investments are reported on the following bases less allowances for
uncollectible amounts on investments, if applicable:
________-_ Fixed maturities (bonds, bank loan participations, and
redeemable preferred stocks) -- 1993: at current market value;
1992: at cost, adjusted for amortization of premium or
discount and other than temporary market value declines.
________-_ Equity securities (common and nonredeemable preferred stocks)
-- at current market value.
________-_ Mortgage loans on real estate -- at unpaid balances, adjusted
for loan origination costs, net of fees, and amortization of
premium or discount.
________-_ Investment real estate -- at cost, less allowances for
depreciation computed on the straight-line method. With
respect to real estate acquired through foreclosure, cost is
the lesser of the loan balance plus foreclosure costs or
appraised value.
________-_ Policy loans -- at unpaid balances.
________-_ Other long-term investments -- at a variety of methods similar
to those listed above, as deemed appropriate for the specific
investment.
________-_ Short-term investments -- at cost, which approximates current
market value.
____Substantially all short-term investments have maturities of three months or
less at the time of acquisition and include approximately $11 million in bank
deposits voluntarily restricted as to withdrawal.
____Realized gains and losses on sales of investments are recognized in net
income using the specific identification basis. Temporary changes in market
values of certain investments are reflected as unrealized gains or losses
directly in stockholder's equity (net of income tax) and accordingly have no
effect on net income.
____A combination of futures contracts and options on treasury notes are
currently being used as hedges for asset/liability management of certain
investments, primarily mortgage loans on real estate, and liabilities arising
from interest sensitive products such as guaranteed investment contracts and
individual annuities. Realized investment gains and losses on such contracts are
deferred and amortized over the life of the hedged asset. Protective also uses
interest rate swap contracts to convert certain investments from a variable to a
fixed rate of interest. At December 31, 1993, open interest rate swap contracts
were in a $9.0 million unrealized gain position.
F-8
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE_A_--_SIGNIFICANT ACCOUNTING POLICIES_(CONTINUED)
____CASH
____Cash includes all demand deposits reduced by the amount of outstanding
checks and drafts.
____PROPERTY AND EQUIPMENT
____Property and equipment are reported at cost. Protective uses both
accelerated and straight-line methods of depreciation based upon the estimated
useful lives of the assets. Major repairs or improvements are capitalized and
depreciated over the estimated useful lives of the assets. Other repairs are
expensed as incurred. The cost and related accumulated depreciation of property
and equipment sold or retired are removed from the accounts, and resulting gains
or losses are included in income.
____Property and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1993 1992
--------- ---------
<S> <C> <C>
Administrative office building.......................................... $ 35,284 $ 35,267
Other, principally furniture and equipment.............................. 21,576 19,901
--------- ---------
56,860 55,168
Accumulated depreciation................................................ 23,814 23,139
--------- ---------
$ 33,046 $ 32,029
--------- ---------
--------- ---------
</TABLE>
REVENUES, BENEFITS, CLAIMS, AND EXPENSES
________-_ Traditional Life and Health Insurance Products -- Traditional
life insurance products consist principally of those products
with fixed and guaranteed premiums and benefits, and include
whole life insurance policies, term life insurance policies,
limited-payment life insurance policies, and certain annuities
with life contingencies. Life insurance and immediate annuity
premiums are recognized as revenue when due. Health insurance
premiums are recognized as revenue over the terms of the
policies. Benefits and expenses are associated with earned
premiums so that profits are recognized over the life of the
contracts. This is accomplished by means of the provision for
liabilities for future policy benefits and the amortization of
deferred policy acquisition costs.
Liabilities for future policy benefits on traditional life
insurance products have been computed using a net level method
including assumptions as to investment yields, mortality,
persistency, and other assumptions based on Protective's
experience modified as necessary to reflect anticipated trends
and to include provisions for possible adverse deviation.
Reserve investment yield assumptions are graded and range from
2.5% to 7.0%. The liability for future policy benefits and
claims on traditional life and health insurance products
includes estimated unpaid claims that have been reported to
Protective and claims incurred but not yet reported. Policy
claims are charged to expense in the period that the claims
are incurred.
F-9
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE_A_--_SIGNIFICANT ACCOUNTING POLICIES_(CONTINUED)
________-_ Universal Life and Investment Products -- Universal life and
investment products include universal life insurance,
guaranteed investment contracts, deferred annuities, and
annuities without life contingencies. Revenues for universal
life and investment products consist of policy fees that have
been assessed against policy account balances for the costs of
insurance, policy administration, and surrenders. That is,
universal life and investment product deposits are not
considered revenues in accordance with generally accepted
accounting principles. Benefit reserves for universal life and
investment products represent policy account balances before
applicable surrender charges plus certain deferred policy
initiation fees that are recognized in income over the term of
the policies. Policy benefits and claims that are charged to
expense include benefit claims incurred in the period in
excess of related policy account balances and interest
credited to policy account balances. Interest credit rates for
universal life and investment products ranged from 3.0% to
9.4% in 1993.
At December 31, 1993, Protective estimates the fair value of
its guaranteed investment contracts to be $2,105 million using
discounted cash flows. The surrender value of Protective's
annuities which approximates fair value was $1,003 million.
________-_ Policy Acquisition Costs -- Commissions and other costs of
acquiring traditional life and health insurance, universal
life insurance, and investment products that vary with and are
primarily related to the production of new business have been
deferred. Traditional life and health insurance acquisition
costs are amortized over the premium-payment period of the
related policies in proportion to the ratio of annual premium
income to total anticipated premium income. Acquisition costs
for universal life and annuities are being amortized over the
lives of the policies in relation to the present value of
estimated gross profits from surrender charges and investment,
mortality, and expense margins. For 1993, these costs have
been reduced by an amount equal to the amortization that would
have been recorded if unrealized gains or losses on
investments associated with Protective's universal life and
investment products had been realized.
At the time it adopted SFAS No. 97, "Accounting and Reporting
by Insurance Enterprises for Certain Long-Duration Contracts
and for Realized Gains and Losses from the Sale of
Investments," Protective made certain assumptions regarding
the mortality, persistency, expenses, and interest rates it
expected to experience in future periods. Under SFAS No. 97,
these assumptions are to be best estimates and are to be
periodically updated whenever actual experience and/or
expectations for the future change from initial assumptions.
Accordingly, Protective has substituted its actual experience
to date for that previously 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,
F-10
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE_A_--_SIGNIFICANT ACCOUNTING POLICIES_(CONTINUED)
discounted at interest rates averaging 15%. For acquisitions
occurring after 1988, Protective amortizes the present value
of future profits over the premium-payment period including
accrued interest at 8%. The unamortized present value of
future profits for such acquisitions was approximately $39.4
million and $29.9 million at December 31, 1993 and 1992,
respectively. During 1993 $12.4 million of present value of
future profits on acquisitions made during the year was
capitalized, and $0.4 million was amortized. The unamortized
present value of future profits for all acquisitions was $69.9
million at December 31, 1993 and $65.4 million at December 31,
1992.
____PARTICIPATING POLICIES
____Participating business comprises approximately 4% of the ordinary life
insurance in force and 4% of the ordinary life insurance premium income.
Policyholder dividends totaled $2.6 million in 1993, $2.6 million in 1992, and
$2.8 million in 1991, respectively.
____INCOME TAXES
____Protective uses the 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 income determined for financial reporting purposes and
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 to make the prior year amounts comparable to those of the
current year. Such reclassifications had no effect on the previously reported
net income, total assets, or stockholder's equity.
NOTE_B_--_RECONCILIATION WITH STATUTORY REPORTING PRACTICES
____Financial statements prepared in conformity with generally accepted
accounting principals ("GAAP") differ in some respects from the statutory
accounting practices prescribed or permitted by insurance regulatory
authorities. The most significant differences are: (a) acquisition costs of
obtaining new business are deferred and amortized over the approximate life of
the policies rather than charged to operations as incurred, (b) benefit
liabilities are computed using a net level method and are based on realistic
estimates of expected mortality, interest, and withdrawals as adjusted to
provide for possible unfavorable deviation from such assumptions, (c) deferred
income taxes are provided for significant temporary differences between
financial and taxable earnings, (d) the Asset Valuation Reserve and Interest
Maintenance Reserve are restored to stockholder's equity, (e) furniture and
equipment, agents' debit balances, and prepaid expenses are reported as assets
rather than being charged directly to surplus (referred to as nonadmitted
items), (f) certain items of interest income, principally accrual of mortgage
and bond discounts are amortized differently, and (g) bonds are stated at market
instead of amortized cost.
F-11
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE_B_--_RECONCILIATION WITH STATUTORY REPORTING PRACTICES_(CONTINUED)
____The reconciliations of net income and stockholder's equity prepared in
conformity with statutory reporting practices to that reported in the
accompanying consolidated financial statements are as follows:
<TABLE>
<CAPTION>
NET INCOME STOCKHOLDER'S EQUITY
------------------------------- -------------------------------
1993 1992 1991 1993 1992 1991
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
In conformity with statutory reporting practices:
Protective Life Insurance Company................... $ 41,471 $ 25,138 $ 28,071 $ 263,075 $ 206,476 $ 177,285
Wisconsin National Life Insurance Company........... 9,591 50,885
American Foundation Life Insurance Company.......... 1,415 2,155 2,401 18,290 18,394 17,717
Empire General Life Assurance Corporation........... 408 (201) 10,588 5,178
Capital Investors Life Insurance Company............ 228 879
Protective Life Insurance Corporation of Alabama.... 25 2,073
National Deposit Life Insurance Company(1).......... 5,386 5,730 10,188
Protective Life Insurance Acquisition
Corporation(2)..................................... 22 (6) 2,009
Consolidation elimination........................... (74) (1,000) (80,715) (21,572) (17,726)
--------- --------- --------- --------- --------- ---------
53,138 32,426 35,196 265,075 208,476 189,473
Additions (deductions) by adjustment:
Deferred policy acquisition costs, net of
amortization....................................... 25,686 33,476 22,908 299,307 274,923 214,895
Policy liabilities and accruals..................... (15,586) (26,486) (16,474) (69,844) (45,583) (16,215)
Deferred income tax................................. 3,081 2,082 (325) (69,118) (51,842) (55,121)
Asset Valuation Reserve............................. 43,398 25,341 27,821
Interest Maintenance Reserve........................ (1,432) (93) 10,489 1,634
Nonadmitted items................................... 1,190 685 (27) 7,742 (10,178) (1,521)
Timing differences on mortgage loans on real estate
and fixed maturity investments..................... 1,645 1,296 3,297 7,350 (11,608) (16,131)
Net unrealized losses on investments................ (334) (378) (1,648)
Realized investment losses.......................... (7,860) (2,565) (8,741)
Noninsurance affiliates............................. (12) 934 (1,606) 31 (2,535) 16,171
Consolidation elimination........................... (2,107) (5,310) (1,492) (26,002) (49,916) (56,791)
Minority interest in consolidated subsidiaries...... (90) (1,437) (1,311) (1,221)
Other adjustments, net.............................. (1,588) 3,872 205 1,896 (1,507) (1,244)
--------- --------- --------- --------- --------- ---------
In conformity with generally accepted accounting
principles......................................... $ 56,155 $ 40,227 $ 31,504 $ 469,990 $ 335,516 $ 298,468
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
<FN>
- ------------------------------
(1) Merged into Protective in September 1992.
(2) Formed to facilitate Protective's acquisition of Employers National Life
Insurance Company. See Note F.
</TABLE>
F-12
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE_C_--_INVESTMENT OPERATIONS
____Major categories of investment income for the years ended December 31 are
summarized as follows:
<TABLE>
<CAPTION>
1993 1992 1991
---------- ---------- ----------
<S> <C> <C> <C>
Fixed maturities......................................... $ 211,566 $ 174,051 $ 132,206
Equity securities........................................ 1,519 939 2,573
Mortgage loans on real estate............................ 130,262 108,128 88,664
Investment real estate................................... 2,119 1,848 1,095
Policy loans............................................. 7,558 6,781 6,395
Other, principally short-term investments................ 18,779 3,799 9,615
---------- ---------- ----------
371,803 295,546 240,548
Investment expenses...................................... 17,638 20,555 17,929
---------- ---------- ----------
$ 354,165 $ 274,991 $ 222,619
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Realized investment gains (losses) for the years ended December 31 are
summarized as follows:
<TABLE>
<CAPTION>
1993 1992 1991
--------- ---------- ---------
<S> <C> <C> <C>
Fixed maturities............................................ $ 10,508 $ 8,163 $ 2,547
Equity securities........................................... 2,230 3,688 763
Other investments........................................... (7,684) (12,005) (6,395)
--------- ---------- ---------
$ 5,054 $ (154) $ (3,085)
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
Protective has established an allowance for uncollectible amounts on
investments. The allowance totaled $35.2, $26.5 million, and $16.8 million at
December 31, 1993, 1992, and 1991, respectively. Additions to the allowance are
included in realized investment losses. Without such additions, Protective had
realized investment gains of $13.8 million, $9.5 million, and $7.4 million in
1993, 1992, and 1991, respectively.
____In 1993, gross gains on the sale of investments available for sale (fixed
maturities, equity securities and short-term investments) were $8.3 million and
gross losses were less than $0.4 million. In 1992, gross gains on the sale of
fixed maturities were $12.8 million and gross losses were $1.7 million. In 1991,
gross gains were $4.8 million and gross losses were $1.9 million.
F-13
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE_C_--_INVESTMENT OPERATIONS_(CONTINUED)
____The amortized cost and estimated market value of Protective's investments
classified as available for sale at December 31, 1993 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
1993 COST GAINS LOSSES VALUES
- ----------------------------------------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
Fixed maturities:
Bonds:
Mortgage-backed securities........... $ 1,531,012 $ 31,532 $ 957 $ 1,561,587
United States Government and
authorities......................... 89,372 2,818 0 92,190
States, municipalities, and political
subdivisions........................ 15,024 133 2 15,155
Public utilities..................... 339,613 4,262 252 343,623
Convertibles and bonds with
warrants............................ 1,421 0 167 1,254
All other corporate bonds............ 822,505 28,799 688 850,616
Bank loan participations............... 151,278 0 0 151,278
Redeemable preferred stocks............ 35,445 226 82 35,589
------------ ---------- ---------- ------------
2,985,670 67,770 2,148 3,051,292
Equity securities........................ 33,331 8,560 1,295 40,596
Short-term investments................... 79,772 0 0 79,772
------------ ---------- ---------- ------------
$ 3,098,773 $ 76,330 $ 3,443 $ 3,171,660
------------ ---------- ---------- ------------
------------ ---------- ---------- ------------
</TABLE>
F-14
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE_C_--_INVESTMENT OPERATIONS_(CONTINUED)
The amortized cost and estimated market values of Protective's investments
in fixed maturities at December 31, 1992 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
1992 COST GAINS LOSSES VALUES
- ----------------------------------------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Bonds:
Mortgage-backed securities............. $ 1,269,620 $ 35,637 $ 0 $ 1,305,257
United States Government and
authorities........................... 21,307 2,595 0 23,902
States, municipalities, and political
subdivisions.......................... 935 228 0 1,163
Public utilities....................... 260,590 7,787 0 268,377
Convertibles and bonds with warrants... 5,224 193 0 5,417
All other corporate bonds.............. 473,536 15,883 0 489,419
Bank loan participations................. 148,683 0 0 148,683
Redeemable preferred stocks.............. 5,120 490 0 5,610
------------ ----------- ----------- ------------
$ 2,185,015 $ 62,813 $ 0 $ 2,247,828
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
The amortized cost and estimated market value of fixed maturities at
December 31, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay certain of these obligations.
<TABLE>
<CAPTION>
ESTIMATED ESTIMATED
AMORTIZED MARKET
COST VALUES
------------ ------------
<S> <C> <C>
1993
Due in one year or less.............................................. $ 24,667 $ 24,755
Due after one year through five years................................ 359,545 367,836
Due after five years through ten years............................... 550,773 567,778
Due after ten years.................................................. 2,050,685 2,090,923
------------ ------------
$ 2,985,670 $ 3,051,292
------------ ------------
------------ ------------
1992
Due in one year or less.............................................. $ 26,474 $ 26,790
Due after one year through five years................................ 305,732 310,355
Due after five years through ten years............................... 271,307 281,648
Due after ten years.................................................. 1,581,502 1,629,035
------------ ------------
$ 2,185,015 $ 2,247,828
------------ ------------
------------ ------------
</TABLE>
F-15
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE_C_--_INVESTMENT OPERATIONS_(CONTINUED)
The approximate percentage distribution of Protective's fixed maturity
investments by quality rating at December 31 is as follows:
<TABLE>
<CAPTION>
RATING 1993 1992
- ------------------------------------------------------------ ------ ------
<S> <C> <C>
AAA......................................................... 52.5% 51.7%
AA.......................................................... 7.8 10.0
A........................................................... 15.1 15.8
BBB
Bonds..................................................... 16.2 12.9
Bank loan participations.................................. 1.0 2.7
BB or Less
Bonds..................................................... 2.2 2.5
Bank loan participations.................................. 4.0 4.1
Redeemable preferred stocks................................. 1.2 0.3
------ ------
100.0% 100.0%
------ ------
------ ------
</TABLE>
At December 31, 1993, Protective had bonds which were rated less than
investment grade of $67.3 million having an amortized cost of $66.7 million.
Additionally, Protective had bank loan participations which were rated less than
investment grade of $121.7 million, having an amortized cost of $121.7 million.
____The change in unrealized gains (losses) on fixed maturity and equity
securities for the years ended December 31 is summarized as follows:
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Fixed maturities................................................. $ 1,198 $ 76 $ 65,955
Equity securities................................................ $ 1,565 $ (825) $ 4,467
</TABLE>
At December 31, 1993, all of Protective's mortgage loans were commercial
loans of which 79% were retail, 9% were warehouses, and 8% were office
buildings. Protective specializes in making mortgage loans on either
credit-oriented or credit-anchored commercial properties, most of which are
strip shopping centers in smaller towns and cities. No single tenant's leased
space represents more than 7% of mortgage loans. Approximately 85% of the
mortgage loans are on properties located in the following states listed in
decreasing order of significance: Alabama, North Carolina, Tennessee, Georgia,
South Carolina, Texas, Florida, Mississippi, Virginia, Colorado, California,
Ohio, Wisconsin, Illinois, Indiana, and Michigan.
____Many of the mortgage loans have call provisions after five to seven years.
Assuming the loans are called at their next call dates, approximately $50.2
million would become due in 1994, $480.1 million in 1995 to 1998, and $218.7
million in 1999 to 2003.
At December 31, 1993, the average mortgage loan was $1.4 million, and the
weighted average interest rate was 9.6%. The largest mortgage loan was $9.3
million. While Protective's $1,408.4 million of mortgage loans do not have
quoted market values, at December 31, 1993, Protective estimates the market
value of its mortgage loans to be $1,524.2 million using discounted cash flows
from the next call date.
F-16
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE_C_--_INVESTMENT OPERATIONS_(CONTINUED)
____At December 31, 1993 and 1992, Protective's problem mortgage loans and
foreclosed properties totaled $27.1 million and $16.4 million, respectively.
Protective expects no significant loss of principal.
____Certain investments, principally real estate, with a carrying value of $9.9
million were nonincome producing for the twelve months ended December 31, 1993.
____Mortgage loans to Fletcher Bright and Kenneth Karl totaling $92.1 million
and $48.5 million, respectively, exceeded 10% of stockholder's equity at
December 31, 1993.
____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. Policy loan interest rates generally
range from 4.5% to 8.0% The fair values of Protective's other long-term
investments approximate cost.
NOTE_D_--_FEDERAL INCOME TAXES
____Protective's effective income tax rate varied from the maximum federal
income tax rate as follows:
<TABLE>
<CAPTION>
1993 1992 1991
------ ------ ------
<S> <C> <C> <C>
Statutory federal income tax rate applied to pretax
income..................................................... 35.0% 34.0% 34.0%
Amortization of nondeductible goodwill...................... 0.4 0.1
Dividends received deduction and tax-exempt interest........ (0.5) (1.0) (1.1)
Tax benefits arising from prior acquisitions and other
adjustments................................................ (1.1) (3.8) (5.5)
Special deduction for life insurance companies.............. (.8)
------ ------ ------
Effective income tax rate................................... 33.4% 29.6% 26.7%
------ ------ ------
------ ------ ------
</TABLE>
In August 1993, the corporate income tax rate was increased from 34% to 35%
which resulted in a one-time increase to income tax expense of $1.2 million due
to a recalculation of Protective's deferred income tax liability. The effective
income tax rate for 1993 of 33.4% excludes the one-time increase.
____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.
F-17
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE_D_--_FEDERAL INCOME TAXES_(CONTINUED)
____Details of the deferred income tax provision for the years ended December 31
are as follows:
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Deferred policy acquisition costs............................. $ 8,861 $ 7,351 $ 3,033
Benefit and other policy liability changes.................... (10,416) (9,005) (5,601)
Temporary differences of investment income.................... 336 1,366
Effect of operating loss carryforward......................... 0 4,841
Other items................................................... (1,527) (764) (3,314)
--------- --------- ---------
$ (3,082) $ (2,082) $ 325
--------- --------- ---------
--------- --------- ---------
</TABLE>
The components of Protective's net deferred income tax liability as of
December 31, 1993 were as follows:
<TABLE>
<CAPTION>
1993
---------
<S> <C>
Deferred income tax assets:
Policy and policyholder liability reserves....................................... $ 25,123
Other............................................................................ 4,484
---------
29,607
---------
Deferred income tax liabilities:
Deferred policy acquisition costs................................................ 79,199
Unrealized gain on investments................................................... 19,526
---------
98,725
---------
Net deferred income tax liability................................................ $ 69,118
---------
---------
</TABLE>
Under pre-1984 life insurance company income tax laws, a portion of
Protective's gain from operations which was not subject to current income
taxation was accumulated for income tax purposes in a memorandum account
designated as Policyholders' Surplus. The aggregate accumulation in this account
at December 31, 1993 was approximately $50.7 million. Should the accumulation in
the Policyholders' Surplus account exceed certain stated maximums, or should
distributions including cash dividends be made to PLC in excess of approximately
$184 million, such excess would be subject to federal income taxes at rates then
effective. Deferred income taxes have not been provided on amounts designated as
Policyholders' Surplus. Protective does not anticipate involuntarily paying
income tax on amounts in the Policyholders' Surplus accounts.
____At December 31, 1993 Protective has no unused income tax loss carryforwards.
____Protective's income tax returns are included in the consolidated income tax
returns of PLC. The allocation of income tax liabilities among affiliates is
based upon separate income tax return calculations.
F-18
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE_E_--_DEBT
____Short-term and long-term debt at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1993 1992 1991
---- ------ ------
<S> <C> <C> <C>
Short-term debt:
Current portion of mortgage and other notes
payable.......................................... $20 $ 34 $ 31
---- ------ ------
---- ------ ------
Long-term debt:
Mortgage and other notes payable less current
portion.......................................... $98 $2,014 $2,048
---- ------ ------
---- ------ ------
</TABLE>
At December 31, 1993, PLC had borrowed under a term note that contains,
among other provisions, requirements for maintaining certain financial ratios,
and restrictions on indebtedness incurred by PLC's subsidiaries including
Protective. Additionally, PLC, on a consolidated basis, cannot incur debt in
excess of 40% of its total capital.
____Included in indebtedness to related parties are three surplus debentures
issued by Protective to PLC. At December 31, 1993, the balance of the three
surplus debentures combined was $48.9 million.
____Interest expense totaled $5.0 million, $3.3 million, and $3.5 million in
1993, 1992, and 1991, respectively.
NOTE_F_--_ACQUISITIONS
____In March 1992, regulatory approval was received to merge Employers National
Life Insurance Company into Protective. Additionally, effective July 1, 1992,
Protective assumed all of the policy obligations associated with the credit life
and credit accident and health insurance business produced by Durham Life
Insurance Company.
____In July 1993, Protective acquired Wisconsin National Life Insurance Company
("Wisconsin National"). In addition, Protective reinsured a block of universal
life policies.
____These transactions have been accounted for as purchases, and the results of
the transactions have been included in the accompanying financial statements
since the effective dates of the agreements.
____Summarized below are the consolidated results of operations for 1993 and
1992, on an unaudited pro forma basis, as if the Wisconsin National acquisition
had occurred as of January 1, 1992. The pro forma information is based on
Protective's consolidated results of operations for 1993 and 1992 and on data
provided by Wisconsin National, after giving effect to certain pro forma
adjustments. The pro forma financial information does not purport to be
indicative of results of operations that would have occurred had the transaction
occurred on the basis assumed above nor are they indicative of results of the
future operations of the combined enterprises.
<TABLE>
<CAPTION>
1993 1992
---------- ----------
(UNAUDITED)
<S> <C> <C>
Total revenues.................................................................. $ 747,157 $ 676,572
Net income...................................................................... $ 58,033 $ 44,109
</TABLE>
F-19
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE_G_--_COMMITMENTS AND CONTINGENT LIABILITIES
____At December 31, 1993, Protective was committed to fund mortgage loans and to
purchase fixed maturity and other long-term investments in the amount of
approximately $168.0 million. Also, Protective has issued a guarantee in
connection with the sale of certain tax-exempt mortgage loans which may be put
to Protective in the event of default. At December 31, 1993, the loans totaled
$25.8 million.
____Under insurance guaranty fund laws, in most states, insurance companies
doing business therein can be assessed up to prescribed limits for policyholder
losses incurred by insolvent companies. Protective does not believe such
assessments will be materially different from amounts already provided for in
the financial statements. Most of these laws do provide, however, that an
assessment may be excused or deferred if it would threaten an insurer's own
financial strength.
NOTE_H_--_STOCKHOLDER'S EQUITY AND RESTRICTIONS
____At December 31, 1993, approximately $295 million of consolidated
stockholder's equity represented net assets of Protective that cannot be
transferred in the form of dividends, loans, or advances to PLC. Generally, the
net assets of Protective available for transfer to PLC are limited to the
amounts that Protective's net assets, as determined in accordance with statutory
accounting practices, exceed certain minimum amounts. However, payments of such
amounts as dividends may be subject to approval by regulatory authorities.
NOTE_I_--_REDEEMABLE PREFERRED STOCK
____PLC owns all of the 2,000 shares of redeemable preferred stock issued by
Protective's subsidiary, American Foundation. The entire issue was reissued in
1991 and will be redeemed September 30, 1996 for $1 thousand per share, or $2
million. The stock pays, when and if declared, annual minimum cumulative
dividends of $50 per share, and noncumulative participating dividends to the
extent American Foundation's statutory earnings for the immediately preceding
fiscal year exceed $1 million. Dividends of $1.5 million, $1.4 million, and $2.5
million were paid to PLC in 1993, 1992, and 1991, respectively.
NOTE_J_--_RELATED PARTY MATTERS
____Receivables from related parties consisted of receivables from affiliates
under control of PLC in the amounts of $382 thousand and $279 thousand at
December 31, 1993 and 1992, respectively. Protective routinely receives from or
pays to affiliates under the control of PLC reimbursements for expenses incurred
on one another's behalf. Receivables and payables among affiliates are generally
settled monthly.
____On August 6, 1990, PLC announced that its Board of Directors approved the
formation of an Employee Stock Ownership Plan ("ESOP"). On December 1, 1990,
Protective transferred to the ESOP 520,000 shares of PLC's common stock held by
it in exchange for a note. The outstanding balance of the note, $6.0 million at
December 31, 1993, is accounted for as a reduction to stockholder's equity. The
stock will be used to match employee contributions to PLC's existing 401(k)
Plan. The ESOP shares are dividend paying. Dividends on the shares are used to
pay the ESOP's note to Protective.
____Protective leases furnished office space and computers to affiliates. Lease
revenues were $2.8 million in 1993, $2.6 million in 1992, and $2.8 million in
1991. Protective purchases data processing, legal, investment
F-20
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE_J_--_RELATED PARTY MATTERS_(CONTINUED)
and management services from affiliates. The costs of such services were $20.4
million, $27.5 million, and $24.7 million in 1993, 1992, and 1991, respectively.
Commissions paid to affiliated marketing organizations of $5.8 million, $4.8
million, and $2.8 million in 1993, 1992, and 1991, respectively, were included
in deferred policy acquisition costs.
____Certain corporations with which PLC's directors were affiliated paid
Protective premiums and policy fees for various types of group insurance. Such
premiums and policy fees amounted to $10.3 million, $10.9 million, and $10.4
million in 1993, 1992, and 1991, respectively.
____For a discussion of indebtedness to related parties, see Note E.
NOTE_K_--_BUSINESS SEGMENTS
____Protective operates predominantly in the life and accident and health
insurance industry. The following table sets forth total revenues, income before
income tax, and identifiable assets of Protective's business segments. The
primary components of revenues are premiums and policy fees, net investment
income, and realized investment gains and losses. Premiums and policy fees are
attributed directly to each business segment. Net investment income is allocated
based on directly related assets required for transacting that segment of
business.
____Realized investment gains (losses) and expenses are allocated to the
segments in a manner which most appropriately reflects the operations of that
segment. Unallocated realized investment gains (losses) are deemed not to be
associated with any specific segment.
____Assets are allocated based on policy liabilities and deferred policy
acquisition costs directly attributable to each segment.
____There are no significant intersegment transactions.
F-21
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE_K_--_BUSINESS SEGMENTS_(CONTINUED)
<TABLE>
<CAPTION>
1993 1992 1991
------------ ------------ ------------
<S> <C> <C> <C>
TOTAL REVENUES
Agency........................................................ $ 111,497 $ 90,516 $ 80,381
Group......................................................... 143,423 129,778 129,576
Financial Institutions........................................ 96,443 63,041 35,419
Investment Products........................................... 69,550 47,678 31,000
Guaranteed Investment Contracts............................... 167,233 138,617 104,803
Acquisitions.................................................. 123,855 93,634 95,847
Corporate and Other........................................... 1,521 46,973 26,663
Unallocated Realized Investment Gains (Losses)................ 1,876 (1,589) (2,685)
------------ ------------ ------------
$ 715,398 $ 608,648 $ 501,004
------------ ------------ ------------
------------ ------------ ------------
Agency........................................................ 15.6% 14.9% 16.0%
Group......................................................... 20.0 21.3 25.9
Financial Institutions........................................ 13.5 10.4 7.1
Investment Products........................................... 9.7 7.8 6.2
Guaranteed Investment Contracts............................... 23.4 22.8 20.9
Acquisitions.................................................. 17.3 15.4 19.1
Corporate and Other........................................... 0.2 7.7 5.3
Unallocated Realized Investment Gains (Losses)................ 0.3 (0.3) (0.5)
------------ ------------ ------------
100.0% 100.0% 100.0%
------------ ------------ ------------
------------ ------------ ------------
INCOME BEFORE INCOME TAX
Agency........................................................ $ 20,324 $ 12,976 $ 11,948
Group......................................................... 10,435 7,762 8,150
Financial Institutions........................................ 7,220 4,669 4,283
Investment Products........................................... 3,402 4,191 134
Guaranteed Investment Contracts*.............................. 27,218 18,266 10,887
Acquisitions.................................................. 29,845 20,031 23,493
Corporate and Other*.......................................... (14,208) (7,543) (11,245)
Unallocated Realized Investment Gains (Losses)................ 1,876 (1,589) (2,685)
------------ ------------ ------------
$ 86,112 $ 58,763 $ 44,965
------------ ------------ ------------
------------ ------------ ------------
Agency........................................................ 23.6% 22.1% 26.6%
Group......................................................... 12.1 13.2 18.1
Financial Institutions........................................ 8.4 7.9 9.5
Investment Products........................................... 4.0 7.1 0.3
Guaranteed Investment Contracts............................... 31.6 31.1 24.2
Acquisitions.................................................. 34.6 34.1 52.2
Corporate and Other........................................... (16.5) (12.8) (25.0)
Unallocated Realized Investment Gains (Losses)................ 2.2 (2.7) (5.9)
------------ ------------ ------------
100.0% 100.0% 100.0%
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-22
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE_K_--_BUSINESS SEGMENTS_(CONTINUED)
<TABLE>
<CAPTION>
1993 1992 1991
------------ ------------ ------------
<S> <C> <C> <C>
IDENTIFIABLE ASSETS
Agency........................................................ $ 641,992 $ 507,449 $ 411,955
Group......................................................... 208,790 161,445 149,090
Financial Institutions........................................ 189,943 145,014 65,785
Investment Products........................................... 876,691 683,450 430,286
Guaranteed Investment Contracts*.............................. 2,041,463 1,696,786 1,291,743
Acquisitions.................................................. 1,145,357 599,022 576,550
Corporate and Other........................................... 203,613 206,991 194,945
------------ ------------ ------------
$ 5,307,849 $ 4,000,157 $ 3,120,354
------------ ------------ ------------
------------ ------------ ------------
Agency........................................................ 12.1% 12.7% 13.2%
Group......................................................... 3.9 4.0 4.8
Financial Institutions........................................ 3.6 3.6 2.1
Investment Products........................................... 16.5 17.1 13.8
Guaranteed Investment Contracts............................... 38.5 42.4 41.4
Acquisitions.................................................. 21.6 15.0 18.5
Corporate and Other........................................... 3.8 5.2 6.2
------------ ------------ ------------
100.0% 100.0% 100.0%
------------ ------------ ------------
------------ ------------ ------------
<FN>
- ------------------------
* Income before income tax for the Guaranteed Investment Contracts Division has
not been reduced for pretax minority interest of $1,631 in 1991. Income before
income tax for the Corporate and Other segment has not been reduced by pretax
minority interest of $90 in 1992 and 1991.
</TABLE>
NOTE L -- EMPLOYEE BENEFIT PLANS
PLC has a defined benefit pension plan covering substantially all of its
employees. The plan is not separable by affiliates participating in the plan.
However, approximately 76% of the participants in the plan are employees of
Protective. The benefits are based on years of service and the employee's
highest thirty-six consecutive months of compensation. PLC's funding policy is
to contribute amounts to the plan sufficient to meet the minimum funding
requirements of ERISA plus such additional amounts as PLC may determine to be
appropriate from time to time. Contributions are intended to provide not only
for benefits attributed to service to date but also for those expected to be
earned in the future.
F-23
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE L -- EMPLOYEE BENEFIT PLANS (CONTINUED)
The actuarial present value of benefit obligations and the funded status of
the plan taken as a whole at December 31 is as follows:
<TABLE>
<CAPTION>
1993 1992
--------- ---------
<S> <C> <C>
Accumulated benefit obligation, including vested benefits of $12,406 in 1993 and
$10,306 in 1992.................................................................. $ 12,692 $ 10,537
--------- ---------
Projected benefit obligation for service rendered to date......................... $ 20,480 $ 16,999
Plan assets at fair value (group annuity contract with Protective)................ 15,217 13,608
--------- ---------
Plan assets less than the projected benefit obligation............................ (5,263) (3,391)
Unrecognized net loss from past experience different from that assumed............ 2,244 550
Unrecognized prior service cost................................................... 2,069 2,256
Unrecognized net transition asset................................................. (118) (135)
--------- ---------
Net pension liability recognized in balance sheet................................. $ (1,068) $ (720)
--------- ---------
--------- ---------
</TABLE>
Net pension cost includes the following components for the years ended
December 31:
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Service cost -- benefits earned during the year............... $ 1,191 $ 970 $ 690
Interest cost on projected benefit obligation................. 1,396 1,257 956
Actual return on plan assets.................................. (1,270) (1,172) (1,102)
Net amortization and deferral................................. 704 130 113
--------- --------- ---------
Net pension cost.............................................. $ 2,021 $ 1,185 $ 657
--------- --------- ---------
--------- --------- ---------
</TABLE>
Protective's share of the net pension cost was $1,543 thousand, $816
thousand, and $315 thousand, in 1993, 1992, and 1991, respectively.
Assumptions used to determine the benefit obligations as of December 31 were
as follows:
<TABLE>
<CAPTION>
1993 1992 1991
----------- ----------- -----------
<S> <C> <C> <C>
Weighted average discount rate....................................... 7.5% 8.0% 8.0%
Rates of increase in compensation level.............................. 5.5% 6.0% 6.0%
Expected long-term rate of return on assets.......................... 8.5% 8.5% 8.5%
</TABLE>
Assets of the pension plan are included in the general assets of Protective.
Upon retirement, the amount of pension plan assets vested in the retiree is used
to purchase a single premium annuity from Protective in the retiree's name.
Therefore, amounts presented above as plan assets exclude assets relating to
retirees.
PLC also sponsors an unfunded Excess Benefits Plan, which is a nonqualified
plan that provides defined pension benefits in excess of limits imposed by
federal tax law. At December 31, 1993, the projected benefit obligation of this
plan totaled $2.6 million.
F-24
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE L -- EMPLOYEE BENEFIT PLANS (CONTINUED)
In addition to pension benefits, PLC provides limited health care benefits
to eligible retired employees until age 65. PLC and Protective have adopted
Statement of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions."
At January 1, 1992, PLC recognized a $1.6 million accumulated postretirement
benefit obligation, of which $0.9 million relates to current retirees and $0.7
million relates to active employees. The $1.6 million (representing Protective's
entire liability for such benefits), net of $0.5 million tax, was accounted for
as a cumulative effect of a change in accounting principle and shown as a
reduction to income. The postretirement benefit is provided by an unfunded plan.
At December 31, 1993, the liability for such benefits totaled $1.6 million. The
expense recorded by Protective was $0.2 million in 1993 and 1992. PLC's
obligation is not materially affected by a 1% change in the health care cost
trend assumptions used in the calculation of the obligation.
Life insurance benefits for retirees are provided through the purchase of
life insurance policies upon retirement equal to the employees' annual
compensation. This plan is partially funded at a maximum of $50 thousand face
amount of insurance.
In 1990, PLC established an Employee Stock Ownership Plan to match employee
contributions to PLC's existing 401(k) Plan. Previously, PLC matched employee
contributions in cash. The expense recorded by PLC for this employee benefit was
$249 thousand, $412 thousand and $451 thousand in 1993, 1992, and 1991,
respectively.
NOTE M -- REINSURANCE
Protective assumes risks from and reinsures certain parts of its risks with
other insurers under yearly renewable term, coinsurance, and modified
coinsurance agreements. Yearly renewable term and coinsurance agreements are
accounted for by passing a portion of the risk to the reinsurer. Generally, the
reinsurer receives a proportionate part of the premiums less commissions and is
liable for a corresponding part of all benefit payments. Modified coinsurance is
accounted for similarly to coinsurance except that the liability for future
policy benefits is held by the original company, and settlements are made on a
net basis between the companies. While the amount retained on an individual life
will vary based upon age and mortality prospects of the risk, Protective will
not carry more than $500 thousand individual life insurance on a single risk.
Protective has reinsured approximately $7.5 billion, $7.0 billion, and $5.3
billion in face amount of life insurance risks with other insurers representing
$37.9 million, $34.8 million, and $28.3 million of premium income for 1993,
1992, and 1991, respectively. Protective has also reinsured accident and health
risks representing $88.9 million, $74.6 million, and $61.6 million of premium
income for 1993, 1992, and 1991, respectively. In 1992, policy liabilities and
accruals are shown net of policy and claim reserves relating to insurance ceded
of $90.1 million. In 1993, policy and claim reserves relating to insurance ceded
of $97.8 million are included in reinsurance receivables. Should any of the
reinsurers be unable to meet its obligation at the time of the claim, obligation
to pay such claim would remain with Protective. At December 31, 1993 and 1992,
Protective had paid $4.8 million and $4.4 million, respectively, of ceded
benefits which are recoverable from reinsurers.
F-25
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Wisconsin National Life Insurance Company:
We have audited the accompanying balance sheets of Wisconsin National Life
Insurance Company (wholly owned subsidiary of Internationale Nederlanden Group)
as of December 31, 1992 and 1991, and the related statements of income,
stockholder's equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Wisconsin National Life
Insurance Company at December 31, 1992 and 1991, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK
Milwaukee, Wisconsin
February 26, 1993,
except Note 11, which
is as of May 4, 1993
F-26
<PAGE>
WISCONSIN NATIONAL LIFE INSURANCE COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1992 1991
------------- -------------
<S> <C> <C>
ASSETS
Bonds, at amortized cost (note 3).................................................. $ 256,406,806 $ 213,822,515
Redeemable preferred stocks, at amortized cost
(market $76,891 in 1992 and $449,398 in 1991)..................................... 133,000 478,000
Other stocks, at market (cost $2,281,694 in 1992 and $2,340,457
in 1991).......................................................................... 2,419,013 2,461,495
Mortgage loans on real estate, primarily first lien................................ 56,356,317 59,630,688
Loans to policyowners.............................................................. 12,531,242 11,311,473
Home office building and equipment, at cost of $9,970,440
in 1992 and $9,383,365 in 1991, less accumulated depreciation..................... 4,476,670 4,376,211
Investment real estate, at cost of $3,102,710 in 1992 and
$3,102,710 in 1991, less accumulated depreciation................................. 2,432,813 2,579,718
Interest and dividends due and accrued............................................. 5,861,442 5,310,758
Cash and cash equivalents.......................................................... 5,534,300
Deferred acquisition costs......................................................... 53,695,555 49,662,989
Amounts due from agents, net of allowance for uncollectible accounts of $3,547,000
in 1992 and $1,589,000 in 1991.................................................... 2,427,138 5,623,472
Due from affiliates................................................................ 165,212 389,939
Other assets....................................................................... 934,225 532,785
------------- -------------
$ 397,839,433 $ 361,714,343
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Policy reserves (note 4)......................................................... $ 139,168,377 $ 127,015,535
Funds on deposit (note 1d)....................................................... 152,691,446 134,896,341
Claim reserves................................................................... 2,752,672 2,356,433
Liability for Federal income taxes (note 6):
Current........................................................................ 1,210,308 1,209,509
Deferred....................................................................... 10,871,087 11,848,555
Liability to participating policyholders......................................... 2,097,018 2,163,818
Other liabilities................................................................ 3,356,590 2,604,523
------------- -------------
Total liabilities............................................................ 312,147,498 282,094,714
------------- -------------
Stockholder's equity (notes 2, 6, 7 and 10):
Common stock, par value $25,000 a share. Authorized 300 shares; issued 120
shares.......................................................................... 3,000,000 3,000,000
Additional paid-in capital....................................................... 736,252 736,252
Unrealized gain on investments................................................... 87,728 94,258
Retained earnings................................................................ 83,970,564 77,891,728
------------- -------------
87,794,544 81,722,238
Less cost of treasury stock (16 shares).......................................... 2,102,609 2,102,609
------------- -------------
Total stockholder's equity................................................... 85,691,935 79,619,629
------------- -------------
$ 397,839,433 $ 361,714,343
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-27
<PAGE>
WISCONSIN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1992 AND 1991
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1992 1991
------------- -------------
<S> <C> <C>
INCOME:
Premiums......................................................................... $ 45,139,686 $ 39,901,369
Net investment income............................................................ 27,340,908 25,890,956
Net realized gains on investments................................................ 2,574,349 1,940,664
------------- -------------
75,054,943 67,732,989
------------- -------------
BENEFITS AND EXPENSES:
Death benefits paid to beneficiaries............................................. 6,022,533 6,346,559
Payments to living policyowners.................................................. 15,062,139 13,553,261
Installment payments under matured policies...................................... 2,797,180 2,813,156
Policy reserves increase......................................................... 12,189,211 10,647,710
Net interest credited for funds on deposit....................................... 9,591,478 9,047,236
Commissions to agents............................................................ 1,237,567 1,195,316
Operating expenses............................................................... 8,460,721 6,702,873
Taxes, excluding Federal income taxes............................................ 1,241,851 1,132,185
Amortization of deferred acquisition costs....................................... 9,325,781 6,750,675
Participating policyholders' interest............................................ (66,800) (3,510)
------------- -------------
65,861,661 58,185,461
------------- -------------
INCOME BEFORE FEDERAL INCOME TAXES................................................. 9,193,282 9,547,528
FEDERAL INCOME TAXES (NOTE 6):
Current.......................................................................... 4,096,107 2,010,225
Deferred......................................................................... (981,661) 1,233,502
------------- -------------
3,114,446 3,243,727
------------- -------------
NET INCOME......................................................................... $ 6,078,836 $ 6,303,801
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-28
<PAGE>
WISCONSIN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1992 AND 1991
<TABLE>
<CAPTION>
COMMON STOCK
($25,000 PAR ADDITIONAL UNREALIZED TOTAL
VALUE PER PAID-IN GAIN ON RETAINED TREASURY STOCKHOLDER'S
SHARE) CAPITAL INVESTMENTS EARNINGS STOCK EQUITY
--------------- ---------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1990...... $ 3,000,000 $ 736,252 $ 103,641 $ 72,987,927 $ (2,102,609) $ 74,725,211
Net income...................... 6,303,801 6,303,801
Net unrealized loss on
investments during
the year....................... (16,683) (16,683)
Deferred Federal income tax
benefit
on net unrealized loss
on investments................. 7,300 7,300
Cash dividend to stockholder.... (1,400,000) (1,400,000)
--------------- ---------- ----------- ------------- ------------- -------------
Balance at December 31, 1991...... 3,000,000 736,252 94,258 77,891,728 (2,102,609) 79,619,629
Net income...................... 6,078,836 6,078,836
Net unrealized loss on
investments during
the year (net of deferred
Federal income taxes).......... (6,530) (6,530)
--------------- ---------- ----------- ------------- ------------- -------------
Balance at December 31, 1992...... $ 3,000,000 $ 736,252 $ 87,728 $ 83,970,564 $ (2,102,609) $ 85,691,935
--------------- ---------- ----------- ------------- ------------- -------------
--------------- ---------- ----------- ------------- ------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-29
<PAGE>
WISCONSIN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------
1992 1991
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................................ $ 6,078,836 $ 6,303,801
Adjustments to reconcile net income to net cash provided from operating
activities:
Provision for other than temporary decline in investments....................... (425,000) 175,000
Provision for uncollectible amounts due from agents............................. 1,958,000 1,026,000
Increase in policy reserves..................................................... 12,152,842 10,721,169
Interest credited to funds on deposit........................................... 9,591,478 9,047,236
Additions to deferred acquisition costs......................................... (13,358,347) (11,830,588)
Amortization of deferred acquisition costs...................................... 9,325,781 6,750,675
Federal income tax (benefit).................................................... (980,865) 522,499
Increase in claim reserves...................................................... 396,239 492,074
Depreciation.................................................................... 638,919 657,469
Increase in interest and dividends due and accrued.............................. (550,684) (451,907)
Accretion of discount, net...................................................... (263,408) (158,036)
Decrease (increase) in amounts due from agents.................................. 1,238,334 (2,790,254)
Other, net...................................................................... 575,354 (130,072)
------------- -------------
Net cash provided from operating activities......................................... 26,377,479 20,335,066
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of:
Bonds........................................................................... (94,628,656) (97,989,944)
Stocks.......................................................................... (3,201,371)
Mortgage loans.................................................................. (1,601,434) (9,300,000)
Real estate..................................................................... (182,571)
Additions to home office building and equipment................................... (665,064) (449,320)
Sale or maturity of:
Bonds........................................................................... 52,757,773 71,889,082
Stocks.......................................................................... 385,148 6,303,356
Mortgage loans.................................................................. 4,850,805 5,984,924
Real estate..................................................................... 165,365
Increase in loans to policyowners................................................. (1,219,769) (1,685,054)
Sale of property and equipment.................................................... 77,989 57,402
------------- -------------
Net cash used in investing activities............................................... (40,043,208) (28,408,131)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid............................................................... (1,400,000)
Increase in funds on deposit...................................................... 8,203,627 12,737,045
Other financing activities........................................................ (72,198) (3,510)
------------- -------------
Net cash provided from financing activities......................................... 8,131,429 11,333,535
------------- -------------
Net (decrease) increase in cash and cash equivalents................................ (5,534,300) 3,260,470
CASH AND CASH EQUIVALENTS:
Beginning of the year............................................................. 5,534,300 2,273,830
------------- -------------
End of the year................................................................... $ 0 $ 5,534,300
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-30
<PAGE>
WISCONSIN NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1992 AND 1991
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles (which vary in certain respects from
reporting practices prescribed or permitted by the Wisconsin Insurance
Department as reconciled in note 10) and include the following significant
accounting policies:
(A) INVESTMENTS
Bonds and redeemable preferred stocks are generally stated at amortized
cost; other stocks are stated at market.
Mortgage loans, the majority of which are first lien, are stated at the
aggregate unpaid balances thereon, less allowance for possible losses.
Real estate is generally carried at cost less accumulated depreciation.
Depreciation is provided on the straight-line basis over the estimated lives
of the properties (10 to 35 years).
No provision has been made for possible losses resulting from the
temporary decline in current market value in the marketable securities
carried at amortized cost as the Company intends to hold them to maturity or
until the amortized cost is recoverable and, therefore, does not expect to
realize any significant loss. Unrealized investment gains or losses on other
stocks are accounted for net of deferred Federal income taxes as direct
increases or decreases in stockholder's equity.
Realized gains or losses on the sale of investments are calculated on
the basis of specific identification.
(B) DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new business, principally commissions and certain
variable underwriting, agency and policy issue expenses have been deferred
and are being amortized to income, with interest, over the premium-paying
period of the related policies in proportion to the ratio of the actual
annual premium revenue to the expected total premium revenue. Such expected
premium revenue was estimated using assumptions as to mortality and
withdrawals consistent with those used in calculating the policy benefit
reserves and is adjusted to actual premiums in force at the end of each
year. Acquisition costs for universal life and annuities are being amortized
over the life of the policies in relation to the present value of estimated
gross profits from surrender charges and investment, mortality, and expense
margins.
(C) RECOGNITION OF TRADITIONAL ORDINARY LIFE PREMIUM REVENUE AND POLICY
BENEFITS
Premiums are reported as earned when due, and benefits and expenses are
associated with premium income so as to result in the recognition of profits
over the premium-paying period of the contracts by means of the provision
for future policy benefits and the deferral and subsequent amortization of
policy acquisition costs.
F-31
<PAGE>
WISCONSIN NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Liabilities for policy benefit reserves have generally been computed on
the net level premium method based upon assumptions as to the investment
yield, mortality and withdrawals consistent with those used to develop the
gross premiums on the policies in force. See note 4 for the composition of
policy liabilities and the significant assumptions pertinent thereto.
(D) FUNDS ON DEPOSIT
The retrospective deposit method is used to account for universal life
type contracts whereby a liability is established for policy benefits at an
amount equal to the balance that accrues to the policyholder. Similar
accounting standards are established for flexible premium and single premium
deferred annuity contracts. Additionally, premium receipts are not recorded
as revenues and the related changes in funds on deposit are not recorded as
charges to income. Withdrawals are recorded directly as a reduction of
respective policyholders' funds on deposit. Amounts on deposit are currently
credited interest at annual rates from 6 1/2% to 9%. Life insurance in force
related to funds on deposit was $1,587,923,000 and $1,532,770,000 at
December 31, 1992 and 1991, respectively.
(E) FEDERAL INCOME TAXES
Deferred Federal income taxes are provided for timing differences
between financial statement earnings and earnings reported for tax purposes.
Such timing differences are principally related to the deferral of
acquisition costs and the provision for future policy benefit reserves.
Additionally, deferred taxes are recognized to the extent that benefit
has been provided in current tax expense for the provisions in the tax
sharing agreement which allow the Company to use net operating losses of its
affiliates if such net operating losses cannot be used by the affiliate.
Deferred taxes are provided because the benefit is ultimately to be repaid
to the affiliate. When the benefit is repaid, the deferred taxes are
reversed.
(F) PROPERTY AND EQUIPMENT
Depreciation on the home office building and equipment has been provided
on the straight-line method over the estimated useful lives of the
respective assets. Maintenance and repairs which do not materially extend
the useful lives are charged to earnings as incurred.
(G) PENSION PLAN
Pension costs are funded and include amortization of the unrecognized
net transition asset over a fifteen-year period.
(H) STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, the Company considers the
amounts representing cash and highly liquid debt instruments with a maturity
of three months or less as of the purchase date to be cash and cash
equivalents.
Cash flows related to deposits and withdrawals of interest sensitive
life products have been reclassified in the accompanying financial
statements from cash flows from operating activities as previously recorded
to cash flows from financing activities.
F-32
<PAGE>
WISCONSIN NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(I) RECLASSIFICATION
Certain amounts previously reported in 1991 have been reclassified to
conform with their 1992 presentation.
(2) AFFILIATION
The Company is a wholly owned subsidiary of Nationale-Nederlanden, U.S.
Holdings, Inc. which is a subsidiary of Internationale Nederlanden Group.
(3) INVESTMENTS
The Company's investments in bonds at December 31, 1992 and 1991, consist of
the following:
<TABLE>
<CAPTION>
1992
------------------------------------------------------------------
GROSS
GROSS UNREALIZED ESTIMATED
BONDS AMORTIZED COST UNREALIZED GAINS LOSSES MARKET VALUE
- ---------------------------------- -------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C>
U.S. Treasury or government agency
securities....................... $ 28,345,793 $ 1,209,959 $ (105,798) $ 29,449,954
Mortgage-backed securities........ 63,117,218 819,105 (6,335) 63,929,988
Corporate securities.............. 164,943,795 9,694,190 (691,316) 173,946,669
-------------- ---------------- ---------------- --------------
$ 256,406,806 $ 11,723,254 $ (803,449) $ 267,326,611
-------------- ---------------- ---------------- --------------
-------------- ---------------- ---------------- --------------
<CAPTION>
1991
------------------------------------------------------------------
GROSS
GROSS UNREALIZED ESTIMATED
BONDS AMORTIZED COST UNREALIZED GAINS LOSSES MARKET VALUE
- ---------------------------------- -------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C>
U.S. Treasury or government agency
securities....................... $ 35,277,654 $ 3,020,336 $ $ 38,297,990
Mortgage-backed securities........ 39,864,258 2,021,544 (343) 41,885,459
Corporate securities.............. 138,680,603 10,616,020 (17,688) 149,278,935
-------------- ---------------- ---------------- --------------
$ 213,822,515 $ 15,657,900 $ (18,031) $ 229,462,384
-------------- ---------------- ---------------- --------------
-------------- ---------------- ---------------- --------------
</TABLE>
Maturities of the Company's investment in bonds at December 31, 1992
consists of the following:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED COST MARKET VALUE
-------------- --------------
<S> <C> <C>
Due in one year or less................................................ $ 2,331,541 $ 2,417,140
Due one through five years............................................. 11,162,733 11,943,584
Due after five years through 10 years.................................. 94,757,657 99,587,778
Due after 10 years..................................................... 85,037,657 89,448,121
-------------- --------------
193,289,588 203,396,623
Mortgage-backed........................................................ 63,117,218 63,929,988
-------------- --------------
$ 256,406,806 $ 267,326,611
-------------- --------------
-------------- --------------
</TABLE>
F-33
<PAGE>
WISCONSIN NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(3) INVESTMENTS (CONTINUED)
Net investment income consists of the following:
<TABLE>
<CAPTION>
1992 1991
------------- -------------
<S> <C> <C>
Interest earned on:
Bonds.................................................................. $ 21,397,761 $ 19,300,695
Mortgage loans......................................................... 6,149,167 6,110,603
Policy loans........................................................... 779,957 668,088
Short-term investments................................................. 26,949 143,554
Dividends on stocks...................................................... 243,702 268,930
Lease and rental income.................................................. 381,498 384,265
Income (loss) from partnership units..................................... 4,518 (10,442)
Other income............................................................. 61,603 394,946
------------- -------------
29,045,155 27,260,639
Investment expenses...................................................... 1,704,247 1,369,683
------------- -------------
Net investment income.................................................... $ 27,340,908 $ 25,890,956
------------- -------------
------------- -------------
</TABLE>
The following is a summary of realized gains (losses) from the disposal of
investments for the years ended December 31, 1992 and 1991:
<TABLE>
<CAPTION>
1992 1991
------------ -------------
<S> <C> <C>
Realized gains............................................................. $ 3,225,111 $ 3,146,116
Realized losses............................................................ (650,762) (1,205,452)
------------ -------------
Net realized gain from sale of investments................................. $ 2,574,349 $ 1,940,664
------------ -------------
------------ -------------
Net realized gains (losses) consists of:
<CAPTION>
1992 1991
------------ -------------
<S> <C> <C>
Fixed maturities........................................................... $ 2,619,327 $ 1,166,241
Equity securities.......................................................... 6,190 966,452
Mortgages.................................................................. (51,168) (175,000)
Real estate................................................................ (14,616)
Other...................................................................... (2,413)
------------ -------------
Net realized gain from sale of investments................................. $ 2,574,349 $ 1,940,664
------------ -------------
------------ -------------
</TABLE>
Gross unrealized gains and gross unrealized losses on other stocks were
approximately $194,000 and $57,000, respectively, at December 31, 1992. Gross
unrealized loss on a limited partnership included in other assets was
approximately $4,000 at December 31, 1992.
Investment services are provided to the Company by an affiliated entity.
Total amounts paid for investment services were approximately $260,000 and
$180,000 in 1992 and 1991, respectively.
F-34
<PAGE>
WISCONSIN NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(4) FUTURE POLICY BENEFITS
Future policy benefits have been calculated using assumptions (which
contemplate the risk of adverse deviation) for interest, mortality, expense and
withdrawal appropriate at the time the policies were issued. Withdrawals are
based on Company experience. The composition of the liability and the more
material assumptions at December 31, 1992 and 1991 are as follows:
<TABLE>
<CAPTION>
LIFE INSURANCE AMOUNT OF
IN FORCE (000'S) POLICY RESERVES
---------------------- -------------------------- YEARS OF
LINE OF BUSINESS 1992 1991 1992 1991 ISSUE INTEREST RATES MORTALITY
- -------------------- ---------- ---------- ------------ ------------ --------- -------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Ordinary life....... $ 6,271 $ 6,447 $ 3,519,810 $ 3,682,109 1948-1954 3% 1955-1960 select and ultimate
mortality rates based on
industry experience (modified)
Ordinary life....... 7,481 8,442 4,513,709 4,861,420 1955-1959 3 1/2% 1955-1960 select and ultimate
mortality rates based on
industry experience (modified)
Ordinary life....... 19,290 21,138 6,536,074 6,873,556 1960-1966 4% 1955-1960 select and ultimate
mortality rates based on
industry experience (modified)
Ordinary life....... 45,653 50,153 8,441,241 8,668,677 1967-1977 6% for 5 years 1955-1960 select and ultimate
graded mortality rates based on
uniformly to industry experience (modified)
4 1/2% at end
of 20th year.
Ordinary life....... 554,494 655,665 9,121,384 9,330,400 1978-1989 6 1/2% graded 1965-1970 select and ultimate
uniformly to mortality rates based on
5% at end of industry experience (modified)
20th year.
Ordinary life....... 1,060,655 965,186 22,986,516 20,825,899 1983-1992 8% to 12% 1965-1970 select and ultimate
first year to mortality rates based on
be adjusted to industry experience (modified)
Company
experience for
subsequent
years.
Ordinary life 134,812 113,880 5,474,669 3,362,116
(note)...........
Other insurance... 513,732 530,178
Supplementary 10,997,466 9,947,016
contracts and
other funds at
interest.........
Annuities......... 67,293,227 59,222,621
Accident and 284,281 241,721
health...........
---------- ---------- ------------ ------------
Total............... $2,342,388 $2,351,089 $139,168,377 $127,015,535
---------- ---------- ------------ ------------
---------- ---------- ------------ ------------
<FN>
- ------------------------------
Note: The benefit reserves for policies issued prior to 1948 are adjusted by
substituting cash values for statutory reserves.
</TABLE>
F-35
<PAGE>
WISCONSIN NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(5) REINSURANCE
The Company entered into a reinsurance agreement whereby the Company ceded
and the reinsurer assumed certain individual accident, health and disability
income insurance policies.
A contingent liability exists with respect to a portion of the reinsurance
agreement which may become a liability of the Company in the event the reinsurer
is unable to meet certain obligations assumed by them under the agreement. At
December 31, 1992, the Company is beneficiary to collateral held in trust of
approximately $271,000 from its reinsurer to cover certain liabilities ceded
under the agreement.
(6) FEDERAL INCOME TAXES
The Company files a consolidated U.S. Federal income tax return with its
U.S. parent and affiliates.
Under terms of a tax-sharing agreement with certain of its affiliates, the
Company computes its Federal income tax liability as though it was filing a
separate tax return, except that the Company's current obligation will be
reduced for the effect of net operating losses of affiliates which cannot be
utilized by the affiliate up to 50% of the Company's current obligation or
increased by an amount determined by the tax sharing agreement when the usage of
these losses is paid back to the group members that previously generated the
losses.
The Company is subject to Federal taxation as a life insurance company. Life
insurance companies are taxed at standard corporate tax rates.
Prior to 1984, life insurance companies were allowed certain special
deductions in computing taxable income. These special deductions were set aside
in a special memorandum tax account designated "policyholders' surplus account."
The accumulated amount of income subject to current taxation, less the tax
thereon, was set aside in another special memorandum tax account designated
"shareholders' surplus account."
Under the Tax Reform Act of 1984, the "policyholders' surplus account"
balance was "frozen" at the December 31, 1983 amount. At December 31, 1983, the
Company had accumulated approximately $9,300,000 in its "policyholders' surplus
account." Federal income taxes will become payable thereon at the then current
tax rate when and if certain events occur. The Company does not anticipate any
transactions that would cause any part of this amount to become taxable.
However, should the balance at December 31, 1983 become taxable, the tax
computed at present rates would be approximately $3,162,000. The "shareholders'
surplus account" balance was not frozen at its December 31, 1983 amount. At
December 31, 1992, the Company had a "shareholders' surplus account" balance of
approximately $36,100,000, from which it could pay dividends to stockholders
without incurring any Federal income tax liability.
F-36
<PAGE>
WISCONSIN NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(6) FEDERAL INCOME TAXES (CONTINUED)
Deferred Federal income taxes (benefit) result from timing differences in
the recognition of certain items for tax and financial statement purposes. The
sources of these differences and the approximate tax effect of each are as shown
below.
<TABLE>
<CAPTION>
1992 1991
------------ ------------
<S> <C> <C>
Adjustments to statutory financial statements for deferred acquisition costs
and policy liabilities..................................................... $ 1,168,320 $ 1,954,019
Statutory financial statement policy reserves in excess of (less than)
required tax reserves...................................................... 309,812 (695,755)
Consolidated return effect.................................................. (427,084) 425,574
Allowance for uncollectible amounts due from agents......................... (665,720) (34,340)
Capitalization of tax policy acquisition expenses........................... (811,241) (814,995)
Other, net.................................................................. (555,748) 398,999
------------ ------------
$ (981,661) $ 1,233,502
------------ ------------
------------ ------------
</TABLE>
Total Federal income tax expense amounted to $3,114,446 in 1992 and
$3,243,727 in 1991. The primary reason these amounts vary from amounts computed
by applying the Federal Corporate income tax rate of 34% to income before
Federal income taxes is the dividends received deduction.
Federal income taxes paid were approximately $4,095,000 in 1992 and
$2,721,000 in 1991.
In February, 1992 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES, which
will supersede the similarly titled Statement No. 96. The Company currently
accounts for income taxes under APB 11, having elected not to adopt Statement
No. 96 or Statement No. 109 prior to their required effective dates. Statement
No. 109 will require that income taxes be accounted for by the "liability
method" rather than the "deferred method" mandated by APB 11. Under the deferred
method, annual income tax is matched with pretax accounting income by providing
deferred taxes at current tax rates for timing differences between the
determination of net income for financial reporting and tax purposes. The
objective of the liability method is to establish deferred tax assets and
liabilities for the differences between the financial reporting basis and tax
basis of the Company's assets and liabilities at enacted tax rates expected to
be in effect when such amounts are realized or settled. The Company will adopt
this new accounting method effective January 1, 1993. The effect of this change
in method will be reported as a cumulative effect of a change in accounting
principle. The Company estimates that the amount of the cumulative adjustment
will not materially impact the financial statements.
(7) DIVIDEND RESTRICTION
Retained earnings available for distribution as dividends to the stockholder
are limited to the statutory unassigned surplus of the Company as determined in
accordance with accounting practices prescribed by insurance regulatory
authorities, less the portion of the cost of treasury stock allocable to
unassigned surplus. At December 31, 1992, $31,100,000 was available for
distribution subject to the tax effects of distributions from the
"policyholders' surplus account" described in note 6. Dividends are subject to
the approval of the
F-37
<PAGE>
WISCONSIN NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(7) DIVIDEND RESTRICTION (CONTINUED)
Commissioner of Insurance of the State of Wisconsin if such dividend
distribution exceeds 115% of the distribution for the corresponding period of
the previous year, or if such dividends exceed the lesser of net gain from
operations for the preceding calendar year or 10% of policyholders' surplus as
of December 31 of the preceding year.
(8) BENEFIT PLANS
(A) PENSION PLAN
The Company provides, on a noncontributory basis, retirement benefits
for substantially all of its employees by means of group annuity contracts.
Pension expense comprises service cost (value of benefits earned during the
year), net interest cost applicable to plan assets and pension liabilities
and amortization of certain charges and credits including prior service
costs.
The pension plan cost includes the following components:
<TABLE>
<CAPTION>
1992 1991
----------- -----------
<S> <C> <C>
Service cost........................................................ $ 221,000 $ 204,000
Interest cost....................................................... 407,000 373,000
Actual return on plan assets........................................ (481,000) (453,000)
Net amortization.................................................... (25,000) 8,000
----------- -----------
Pension plan expense................................................ $ 122,000 $ 132,000
----------- -----------
----------- -----------
</TABLE>
The following sets forth the funded status of the plan and the amount of
prepaid pension cost included in the Company's balance sheets:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1992 1991
------------ ------------
<S> <C> <C>
Pension benefit obligation:
Vested benefit obligation....................................... $ 4,348,000 $ 3,463,000
Nonvested benefit obligation.................................... 21,000 20,000
------------ ------------
Accumulated benefit obligation.................................... 4,369,000 3,483,000
Additional benefits based upon estimated future salary levels..... 1,904,000 1,393,000
------------ ------------
Projected benefit obligation...................................... 6,273,000 4,876,000
Plan assets at fair value......................................... 5,959,000 5,313,000
------------ ------------
Plan assets over (under) projected benefit obligation............. (314,000) 437,000
Unrecognized prior service cost................................... 45,000 49,000
Unrecognized net loss............................................. 1,091,000 160,000
Unrecognized net transition asset................................. (294,000) (325,000)
------------ ------------
Prepaid pension cost.............................................. $ 528,000 $ 321,000
------------ ------------
------------ ------------
</TABLE>
F-38
<PAGE>
WISCONSIN NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(8) BENEFIT PLANS (CONTINUED)
The weighted average discount rates used to measure the projected
benefit obligation were 7.5% and 8.5% in 1992 and 1991, respectively. The
weighted average rate of compensation increase assumed in measuring the
projected benefit obligation was 7% in 1991 and 1992, respectively. The
assumed weighted average long-term rate of return on plan assets was 9.0% in
1992 and 1991.
(B) PROFIT SHARING PLAN
The Company has a noncontributory, trusteed profit sharing plan for all
full time employees who have attained the age of eighteen and have completed
one calendar year of employment. The annual contributions to the profit
sharing plan are based upon operating results. The plan provides that at
least 50% of the annual contribution shall be invested in a diversified fund
or used to purchase a group annuity contract. The remaining 50% of the
annual contribution, at the prior election of the participant, may be
invested or withdrawn in cash. The profit sharing contribution was
approximately $113,000 and $175,000 for 1992 and 1991, respectively.
(C) OTHER
In addition to pension benefits certain health care and life insurance
benefits are made available to active and retired employees. The cost of
these benefits is expensed as incurred. The Company will adopt Statement of
Financial Accounting Standards No. 106, ACCOUNTING FOR POST-RETIREMENT
BENEFITS OTHER THAN PENSIONS effective January 1, 1993. The Statement
requires employers to recognize post-retirement benefits on an accrual basis
over employee service periods as contrasted with the expensed-as-incurred
method of accounting. The effect of implementation of this Statement will be
to increase annual costs; however, due to recent plan amendments, the
magnitude of the increase has not been determined.
(9) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, DISCLOSURES ABOUT FAIR
VALUE OF FINANCIAL INSTRUMENTS, requires that the Company disclose estimated
fair values for its financial instruments. Fair value estimates were based on
relevant market information and other information about the various financial
instruments as of December 31, 1992. These estimates do not reflect any premium
or discount that could result from offering for sale at one time the entire
holdings of a particular financial instrument. Because no market exists for a
significant portion of the Company's financial instruments, fair value estimates
are based on judgments regarding current economic conditions, risk
characteristics of various financial instruments, future expected loss
experience, and other factors. These estimates are subjective and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly affect the
estimates.
Fair value estimates are based on existing financial instruments without
attempting to estimate the value of anticipated future business and the value of
assets and liabilities which are not considered financial instruments.
Significant assets that are not considered financial instruments include amounts
due from
F-39
<PAGE>
WISCONSIN NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(9) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
agents, home office and investment real estate, deferred acquisition costs, and
fixed assets. In addition, the tax ramifications related to the realization of
the unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered.
Fair value estimates, methods, and assumptions are set forth below for the
Company's financial instruments.
INVESTMENT SECURITIES -- Estimated fair values for bonds, redeemable
preferred stocks, and other stocks are based primarily on quoted market prices.
REAL ESTATE LOANS -- Estimated fair values for mortgage loans and commercial
real estate loans were generated using a discounted cash flow approach. Loans in
good standing were discounted using interest rates determined by U.S. Treasury
yields on December 31, 1992, and yields required on new loans with similar
characteristics. The amortizing features of all loans were incorporated into the
valuation.
Loans in foreclosure are valued at the lower of cost or market, where market
values are determined by real estate appraisals.
POLICY LOANS -- The current rate of interest on new policy loans varies from
5% to 8% depending on the plan of insurance. The interest rate is fixed for each
plan at the time of issue and does not vary during the life of the contract. The
average interest rate on new policy loans is approximately 6.5%, and during the
current year, the estimated rate of return on all policy loans approximated
6.5%. Because the average interest rate on new policy loans approximates the
total return on policy loans, the fair value of policy loans is estimated at the
book value of such loans.
FUNDS ON DEPOSIT -- At December 31, 1992 the surrender value of funds on
deposit approximates $139 million.
The estimated fair values of the Company's financial instruments at December
31, 1992 are as follows:
<TABLE>
<CAPTION>
ESTIMATED
BOOK VALUE FAIR VALUE
-------------- --------------
<S> <C> <C>
Bonds.................................................................. $ 256,406,806 $ 267,326,611
Redeemable Preferred Stocks............................................ 133,000 76,891
Other stocks........................................................... 2,419,013 2,419,013
Mortgage loans on real estate.......................................... 56,356,317 61,362,543
Policy loans........................................................... 12,531,242 12,531,242
-------------- --------------
$ 327,846,378 $ 343,716,300
-------------- --------------
-------------- --------------
</TABLE>
F-40
<PAGE>
WISCONSIN NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(10) RECONCILIATION WITH STATUTORY FINANCIAL STATEMENTS
Reconciliation of net income, stockholder's equity, assets and liabilities
as determined using statutory accounting practices to the amounts included in
the accompanying financial statements follows:
<TABLE>
<CAPTION>
NET INCOME YEAR ENDED STOCKHOLDER'S EQUITY ASSETS
DECEMBER 31 DECEMBER 31 DECEMBER 31
-------------------------- -------------------------- --------------------------
1992 1991 1992 1991 1992 1991
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
As reported to regulatory
authorities..................... $ 1,028,632 $ 1,417,726 $ 34,164,799 $ 29,723,273 $344,293,829 $310,571,812
Adjustment for policy reserves,
funds on deposit and deferred
premiums........................ (1,568,459) 980,378 2,679,690 4,248,149 (4,709,901) (5,043,778)
Deferred acquisition costs....... 4,032,566 5,079,913 53,695,555 49,662,989 53,695,555 49,662,989
Recognition of nonadmitted
assets.......................... 497,173 (936,996) 3,369,356 6,776,512 3,369,356 6,776,512
Adjustment of other stocks to
market value.................... 137,319 121,038 137,319 121,038
Provision for other than
temporary decline in
investments..................... 425,000 (175,000) (300,000) (725,000) (300,000) (725,000)
Asset valuation reserve.......... 2,575,971 2,510,761
Interest maintenance reserve..... 1,190,413 1,190,413
Prepaid pension cost............. 207,106 218,959 528,423 321,317 528,423 321,317
Participating policyholders'
dividend provisions............. (22,694) (3,281) 190,153 212,847
Participating policyholders'
interest........................ 66,800 3,510 (2,097,018) (2,163,818)
Deferred Federal income taxes.... 981,661 (1,233,502) (10,871,087) (11,848,555)
Current Federal income taxes..... (282,799) 536,003 (19,308) 263,491
Prior years' Federal income
taxes........................... (407,607) 424,772
Reclassify bank overdraft........ 824,852
Other............................ (68,956) (8,681) 447,669 516,625 29,453
------------ ------------ ------------ ------------ ------------ ------------
Per accompanying financial
statements...................... $ 6,078,836 $ 6,303,801 $ 85,691,935 $ 79,619,629 $397,839,433 $361,714,343
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
<CAPTION>
LIABILITIES
DECEMBER 31
--------------------------
1992 1991
------------ ------------
<S> <C> <C>
As reported to regulatory
authorities..................... $310,129,030 $280,848,539
Adjustment for policy reserves,
funds on deposit and deferred
premiums........................ (7,389,591) (9,291,927)
Deferred acquisition costs.......
Recognition of nonadmitted
assets..........................
Adjustment of other stocks to
market value....................
Provision for other than
temporary decline in
investments.....................
Asset valuation reserve.......... (2,575,971)
Interest maintenance reserve..... (1,190,413) (2,510,761)
Prepaid pension cost.............
Participating policyholders'
dividend provisions............. (190,153) (212,847)
Participating policyholders'
interest........................ 2,097,018 2,163,818
Deferred Federal income taxes.... 10,871,087 11,848,555
Current Federal income taxes..... 19,308 (263,491)
Prior years' Federal income
taxes...........................
Reclassify bank overdraft........ 824,852
Other............................ (447,669) (487,172)
------------ ------------
Per accompanying financial
statements...................... $312,147,498 $282,094,714
------------ ------------
------------ ------------
</TABLE>
(11) SUBSEQUENT EVENT
On May 4, 1993 the Company and Protective Life Insurance Company
("Protective") announced that they had entered into an agreement calling for the
acquisition of the Company by Protective. The terms of the transaction provide
for a payment by Protective of $551,000 per share of the Company's stock,
subject to certain adjustments, payable in cash.
F-41
<PAGE>
WISCONSIN NATIONAL LIFE INSURANCE COMPANY
CONDENSED BALANCE SHEET
JULY 30, 1993
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Investments:
Fixed maturities................................................................ $ 269,392
Equity securities............................................................... 2,360
Mortgage loans on real estate................................................... 54,508
Investment real estate.......................................................... 5,445
Policy loans.................................................................... 13,137
Other long-term investments..................................................... 143
Short-term investments.......................................................... 7,998
---------
Total investments............................................................. 352,983
Accrued investment income......................................................... 5,855
Accounts and premiums receivable, net............................................. 1,611
Reinsurance recoverable on paid claims............................................ 99
Deferred policy acquisition costs................................................. 53,751
Property and equipment, net....................................................... 1,521
Other assets...................................................................... 925
---------
$ 416,745
---------
---------
LIABILITIES
Policy liabilities and accruals................................................... $ 309,280
Other policyholders' funds........................................................ 3,747
Other liabilities................................................................. 5,416
Accrued income taxes.............................................................. 339
Deferred income taxes............................................................. 10,932
---------
329,714
---------
---------
STOCKHOLDER'S EQUITY
Common Stock...................................................................... 3,000
Additional paid-in capital........................................................ 736
Net unrealized gains on equity securities......................................... 173
Retained earnings................................................................. 85,224
Treasury stock.................................................................... (2,102)
---------
87,031
---------
$ 416,745
---------
---------
</TABLE>
See notes to condensed financial statements.
F-42
<PAGE>
WISCONSIN NATIONAL LIFE INSURANCE COMPANY
CONDENSED STATEMENT OF INCOME FOR THE PERIOD
JANUARY 1, 1993 THROUGH JULY 30, 1993
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<S> <C>
REVENUES
Premiums and policy fees......................................................... $ 19,789
Net investment income............................................................ 14,248
Realized investment gains........................................................ 275
Other income..................................................................... 20
---------
34,332
---------
BENEFITS AND EXPENSES
Benefits and settlement expenses................................................. 22,705
Amortization of deferred policy acquisition costs................................ 4,593
Other operating expenses......................................................... 5,106
---------
32,404
---------
INCOME BEFORE INCOME TAX........................................................... 1,928
INCOME TAX EXPENSE................................................................. 770
---------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE......................................................................... 1,158
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE................................ 95
---------
NET INCOME......................................................................... $ 1,253
---------
---------
</TABLE>
See notes to condensed financial statements.
F-43
<PAGE>
WISCONSIN NATIONAL LIFE INSURANCE COMPANY
CONDENSED STATEMENT OF CASH FLOWS FOR THE PERIOD
JANUARY 1, 1993 THROUGH JULY 30, 1993
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C>
Net income....................................................................... $ 1,253
Adjustments to reconcile net income to net cash provided by operating activities:
Net change in deferred policy acquisition costs................................ (55)
Depreciation expense........................................................... 178
Deferred income taxes.......................................................... 61
Accrued income taxes........................................................... (871)
Interest credited to universal life products................................... 1,564
Policy fees assessed on universal life products................................ (3,648)
Change in accrued investment income and other receivables...................... 888
Change in policy liabilities and other policyholders funds..................... 18,401
Change in other liabilities.................................................... 2,060
Other (net).................................................................... 95
---------
Net cash provided by operating activities.......................................... 19,926
---------
CASH FLOWS FROM INVESTING ACTIVITIES
Cost of investments acquired..................................................... (43,184)
Sale of investments.............................................................. 20,480
Sale of property and equipment................................................... 2,778
---------
Net cash used in investing activities.............................................. (19,926)
---------
INCREASE (DECREASE) IN CASH........................................................ 0
CASH AT BEGINNING OF YEAR.......................................................... 0
---------
CASH AT END OF YEAR................................................................ $ 0
---------
---------
</TABLE>
See notes to condensed financial statements.
F-44
<PAGE>
WISCONSIN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
Effective July 30, 1993, Wisconsin National was acquired by Protective Life
Insurance Company ("Protective") (a wholly-owned subsidiary of Protective Life
Corporation ("PLC"). This transaction was accounted for as a purchase.
The accompanying unaudited condensed financial statements of Wisconsin
National Life Insurance Company ("Wisconsin National") have been prepared by PLC
based on data provided by Wisconsin National, using financial statement
classifications consistent with those used by PLC. These financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and in accordance with Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the disclosures required
by generally accepted accounting principles for complete financial statements.
In the opinion of PLC's management, all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation have been included.
NOTE B -- RECENTLY ADOPTED ACCOUNTING STANDARDS
In the 1993 first quarter, Wisconsin National adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Statement No. 109
is accounted for as a change in accounting principle with the cumulative effect
reported as an addition to 1993 first quarter income.
F-45
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1993
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
WISCONSIN
NATIONAL LIFE
INSURANCE
COMPANY
(FOR THE PROTECTIVE
PROTECTIVE PERIOD LIFE
LIFE JANUARY 1 INSURANCE
INSURANCE THROUGH COMPANY
COMPANY JULY 30, PRO FORMA PRO FORMA
CONSOLIDATED 1993) ADJUSTMENTS CONSOLIDATED
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
Premiums and policy fees......................... $ 351,423 $ 19,789 $ 371,212
Net investment income............................ 354,165 14,248 $ (550)(4) 366,115
(1,748)(5)
Realized investment gains........................ 5,054 275 (275)(2) 5,054
Other income..................................... 4,756 20 4,776
------------ ------------- ------------ ------------
715,398 34,332 (2,573) 747,157
------------ ------------- ------------ ------------
BENEFITS AND EXPENSES
Benefits and settlement expenses................. 461,636 22,705 (504)(7) 486,197
2,360(8)
Amortization of deferred policy acquisition 73,335 4,593 (4,593)(6) 73,705
costs........................................... 370(6)
Other operating expenses......................... 94,315 5,106 500(1) 98,254
(1,167)(3)
(500)(9)
------------ ------------- ------------ ------------
629,286 32,404 (3,534) 658,156
------------ ------------- ------------ ------------
INCOME BEFORE INCOME TAX........................... 86,112 1,928 961 89,001
INCOME TAX EXPENSE................................. 29,957 770 336(10) 31,063
------------ ------------- ------------ ------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE.............................. 56,155 1,158 625 57,938
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE......................................... 95 95
------------ ------------- ------------ ------------
NET INCOME......................................... $ 56,155 $ 1,253 $ 625 $ 58,033
------------ ------------- ------------ ------------
------------ ------------- ------------ ------------
</TABLE>
See notes to pro forma consolidated condensed financial statement of income.
F-46
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO PRO FORMA CONSOLIDATED CONDENSED
STATEMENT OF INCOME
(UNAUDITED)
NOTE A -- PRO FORMA ASSUMPTIONS
On July 30, 1993, Protective Life Insurance Company ("Protective") acquired
Wisconsin National Life Insurance Company ("Wisconsin National"). This
transaction was accounted for as a purchase. Protective is a wholly-owned
subsidiary of Protective Life Corporation.
The accompanying unaudited pro forma consolidated condensed statement of
income for the year ended December 31, 1993, gives effect to the Wisconsin
National acquisition and related transactions. Pro forma adjustments represent
only those elements of the purchase and related transactions which are a part of
continuing operations. Items of a nonrecurring nature which are a result of the
purchase or related transactions are not included in this financial statement.
The above mentioned statement has been prepared in accordance with generally
accepted accounting principles for pro forma financial information and Article
11 of Regulation S-X. In the opinion of management, all significant adjustments
required for an appropriate pro forma presentation have been included.
At July 30, 1993, Wisconsin National had not determined its obligation for
post-retirement benefits other than pensions as contemplated in Statement of
Financial Accounting Standards No. 106, "Accounting for Post-Retirement Benefits
Other than Pensions." In as much as the seller has agreed to retain any such
obligation, no pro forma adjustment was made.
NOTE B -- PRO FORMA ADJUSTMENTS
The following pro forma adjustments are made to the unaudited consolidated
condensed statement of income as if the Wisconsin National acquisition and
related transactions occurred at the beginning of the period presented.
Reference numbers correspond to those presented on the statement.
1. To reflect Protective's interest expense on the $25 million borrowed
from PLC to partially finance the Wisconsin National acquisition.
2. To eliminate Wisconsin National's realized investment gains.
3. To reflect excess payroll and severance pay related to Wisconsin
National employees.
4. To reflect the amortization of premiums and accretion of discounts on
investments based on purchase values.
5. To reflect investment income lost on the $41.1 million of investments
sold by Protective to finance the acquisition of Wisconsin National.
6. To eliminate Wisconsin National's amortization of deferred policy
acquisition costs and reflect the amortization of the new deferred policy
acquisition costs established by Protective.
7. To reflect benefit and settlement expense difference due to revaluation
of policy liabilities and accruals.
F-47
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO PRO FORMA CONSOLIDATED CONDENSED
STATEMENT OF INCOME
(UNAUDITED) (CONTINUED)
NOTE B -- PRO FORMA ADJUSTMENTS (CONTINUED)
8. To reflect the increase in Wisconsin National's benefits and settlement
expenses from higher surrenders and mortality experience associated with
moving Wisconsin National's administrative functions to Protective and
the cessation of new sales through Wisconsin National based on
Protective's experience with similar prior acquisitions.
9. To reflect decreases in other operating expenses due to moving Wisconsin
National's administrative functions to Protective.
10. To reflect the net tax effect of Wisconsin National's income and pro
forma adjustments at marginal rates estimated to exist during the period.
F-48
